Chapter 7 Bankruptcy Checklist
Step 1: Evaluate the Advantages and Disadvantages
Before filing for Chapter 7, consider some important advantages and disadvantages.
The advantages include:
- Eliminates debt eligible for discharge (exceptions include most tax debts, child support payments, alimony, and student loans)
- No debt limit
- Future income will belong to the debtor, except when the debtor receives an inheritance, proceeds from an insurance settlement, or proceeds from a divorce settlement within 180 days after filing for bankruptcy
- No repayment plan
- Bankruptcy is completed in about three months
The disadvantages include:
- Trustee may sell the debtors nonexempt property and distribute the proceeds to creditors
- Not all debts are discharged
- A cosigner of a loan may become liable for the debt
- A bankruptcy stays on a credit report for up to 10 years
Step 2: Examine Bankruptcy Alternatives
Sometimes filing for Chapter 7 may not be the best choice. Consider the following:
- Are you judgment proof? In some cases, if a debtor is judgment proof -- a person with very little money or nonexempt property that creditors can take to satisfy a court judgment -- taking no action may be the best option.
- Can you negotiate with creditors? A debtor can ask creditors to forgive the debt or to agree to a repayment plan.
- Can you sell valuable property? Instead of filing for bankruptcy, it may be easier to sell property to pay creditors.
- Is Chapter 13 bankruptcy a better option? Chapter 13 allows a debtor to repay debts over time in a court-approved repayment plan. In general, the debtor may also keep their property.
Step 3: Determine Eligibility
To qualify for Chapter 7, the filer must pass the means test. If the filer's average monthly income for the six months preceding filing for bankruptcy is less than or equal to the median income in their state, then the debtor can file for Chapter 7. If the filer's income is too high, they must pass the second part of the test, which assesses whether the debtor has enough disposable income to pay some creditors.
Step 4: Assess Property
When a person files for Chapter 7 bankruptcy, the bankruptcy court obtains jurisdiction over almost all property the debtor owns and possesses. Consequently, in exchange for discharging some debts, a bankruptcy court may sell the debtor's nonexempt property to pay creditors. In most states, nonexempt property typically includes cameras, stamp collections, family heirlooms, cash, bank accounts, and stocks.
Step 5: Decide Whether to Reaffirm, Redeem, or Surrender Secured Debt
Secured debts, debts secured by collateral, give a creditor the right to take the property if the debtor does not pay the debt. In bankruptcy, the debtor can choose to do any of the following: reaffirm, redeem, or surrender the property. If the debtor chooses reaffirm the debt, the debtor can keep the property by entering into a new agreement with the creditor to repay the debt. A debtor may also keep the property through redemption, or paying the creditor the current value of the property.
Step 6: Attend Credit Counseling
A debtor must attend credit counseling with an approved agency at least 180 days before filing for bankruptcy. A counseling agency will help the debtor determine whether Chapter 7 is the best option or whether other alternatives, such as entering into a repayment plan with the creditor, will resolve the debtor's financial problems.
Step 7: Gather Important Documents and File the Paperwork
Filing for Chapter 7 requires the debtor to provide information about income, debts, and property. The debtor will also need to submit a certificate to provide proof of fulfilling the counseling requirement, a list of creditors, their most recent federal tax return, and wage stubs. Once the debtor has completed the appropriate paperwork and filed it with the bankruptcy court, the bankruptcy process begins. In an emergency, such as to stop a home in foreclosure from being sold, a debtor may file for bankruptcy without filing all of the necessary forms. However, the debtor must file the remaining paperwork within 15 days.
Step 8: Attend the Creditors Meeting
After the debtor files for bankruptcy, the bankruptcy trustee will schedule a meeting with creditors. Creditors and the trustee may ask the debtor questions about bankruptcy documents and about other relevant information. In most cases, this is the only time the debtor will appear in bankruptcy court.
Step 9: Attend Personal Financial Management Counseling
Before receiving a bankruptcy discharge, the debtor must attend a course about financial management with an agency approved by the U.S. Trustee's office. The debtor will receive a certificate to file with the bankruptcy court upon completion. This requirement is necessary for the completion of bankruptcy.
Step 10: Receive the Bankruptcy Discharge Notice
Typically, about two months after the meeting with creditors, the debtor will receive a Notice of Discharge from the bankruptcy court. The debtor is no longer responsible for paying the debts discharged in bankruptcy.
Get a Free Initial Case Review
Creditors and other parties involved in a bankruptcy are represented by lawyers and you should be too. Legal counsel can alert you to opportunities to protect your property and can negotiate for the best terms possible. Contact a local attorney for a free initial case review to discuss how they can help get you through the minefield of bankruptcy proceedings.