Bankruptcy Information: Chapter 7 for Individuals

Chapter 7 bankruptcy is an option for individuals facing overwhelming bills to wipe out their debt and get a "fresh start." Chapter 7 is also known as the liquidation bankruptcy because the individual debtor relinquishes non-exempt assets to a bankruptcy trustee to sell and distribute the proceeds to the creditors. The Bankruptcy Code allows Chapter 7 filers to retain certain assets apart from the bankruptcy estate; these assets are referred to as exempt assets. The bankruptcy estate is managed by an assigned bankruptcy trustee who oversees the full process including ensuring that all non-exempt assets have been submitted, disseminating relevant information to the court and legitimate creditors and maximizing the liquidation of the non-exempt assets. However, an individual debtor must first qualify for Chapter 7 before any of the process can begin.

Qualification for Chapter 7

To qualify for relief under chapter 7, the debtor may be an individual, a partnership, or a corporation or other business entity. Under the qualifying means test, an individual debtor's current monthly income must not exceed the state median. If the income exceeds the statutory amount, the individual may not qualify for Chapter 7 bankruptcy. One of the primary purposes of a Chapter 7 bankruptcy is to discharge certain debts after which the debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. The right to a discharge is not absolute, however, and some types of debts are not discharged. Undischargeable debts include:

• Debts or creditors not listed on the filed schedules
• Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
• Recent federal, state and local taxes
• Child support and spousal maintenance (alimony)
• Government-imposed restitution, fines and penalties
• Court fees
• Debts resulting from a DUI conviction
• Debts not dischargeable in a previous bankruptcy because of the debtor's fraud

Additionally, a bankruptcy discharge does not extinguish a lien on property.

Filing for Chapter 7

A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives. In addition to the petition, the debtor must also file with the court:

1. schedules of assets and liabilities
2. a schedule of current income and expenditures
3. a statement of financial affairs; and
4. a schedule of executory contracts and unexpired leases.

Debtors must also provide the bankruptcy trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). Consumer debtors with primarily consumer debts must also file:

• a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling;
• evidence of payment from employers, if any, received 60 days before filing;
• a statement of monthly net income and any anticipated increase in income or expenses after filing; and
• a record of any interest the debtor has in federal or state qualified education or tuition accounts.

The typical filing fee is $245. There is also a $39 miscellaneous administrative fee as well as a $15 trustee surcharge. These fees must be paid to the clerk of the court upon filing. If the debtor's income is less than 150% of the poverty level (as defined in the Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in installments, the court may waive the requirement that the fees be paid.

Once the bankruptcy process is completed, the court issues a discharge that releases the individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking further collection actions against the debtor.

Find an Attorney

Because the Chapter 7 bankruptcy can be complicated in some instances, individual debtors should consult legal counsel before filing. Talk with an experienced bankruptcy attorney to get the requisite bankruptcy information to begin the process.