How Does Chapter 7 Bankruptcy Work?

A Chapter 7 bankruptcy petition is what many people file when they find themselves in financial trouble. It involves a complete liquidation of a debtor's property to pay creditors and to wipe out any remaining debts. This is often referred to as giving the debtor a fresh start, which is what is needed in most cases.

How a Chapter 7 Bankruptcy Works

1. The debtor files a Chapter 7 bankruptcy petition to be filed with the court.


2. The petition must contain schedules of all assets and liabilities, a schedule of current income and expenditures, statements of financial affairs and a schedule of executor contracts and unexpired leases. It must also include a copy of your past and present income tax returns.


3. The debtor must complete a certified-credit counseling course and submit a copy of certification along with any debt repayment plan developed during the course.


4. The debtor must pay a case filing fee, a miscellaneous administration fee and a trustee surcharge before filing a petition for bankruptcy. The fees may be waived if the debtor's income is less than 150% of the poverty level.


5. The Bankruptcy Code provides protection of some of the debtor's property from the claims of creditors, which is referred to as "exempt property." Each state adopts its own exemption law.


6. Filing a Chapter 7 bankruptcy automatically stops most collection actions against the debtor and the debtor's property. Creditors may not initiate or continue lawsuits, garnish the debtor's wages or place calls demanding payment.


7. A meeting of the creditors is held approximately 20 to 40 days after the petition is filed. It involves the debtor being placed under oath and the trustee or a creditor may ask them questions.


8. A Chapter 7 bankruptcy remains on a debtor's credit report for a period of 10 years.