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“Chapter 7” bankruptcy is the most common type of bankruptcy and is available to individuals, married couples, corporations and partnerships. “Chapter 7” refers to Chapter 7 of the United States Bankruptcy Code.

Chapter 7 bankruptcy is a legal proceeding in which the debtor’s non-exempt assets, if any, are sold by a court-appointed “trustee” and the proceeds distributed to creditors according to priorities established in the U.S. Bankruptcy Code. In most consumer (non-business) cases, however, all or virtually all assets are “exempt” (off-limits to creditors). Therefore, there are no assets to liquidate and there is no payment to creditors. All or most debts are completely forgiven or “discharged” and the debtor retains all of his or her assets.

If the debtor owes money on a home, motor vehicle or other property that is collateral for a mortgage, car loan, or other type of lien or security agreement, he or she has the following options under Chapter 7:

1) retain the property, “reaffirm” the debt and keep making regular payments to the creditor;

2) “redeem” the property by making a lump sum payment to the creditor for its fair market value (see “Redeeming Your Automobile and Other Property In Chapter 7 Bankruptcy“); or

3) surrender the property to the creditor and discharge all further liability for the debt.

A Chapter 7 bankruptcy will not eliminate student loans except in undue hardship cases, certain types of taxes, alimony or child support obligations (also known as “domestic support obligations”), criminal fines and restitution, debts incurred through fraudulent conduct, debts incurred through intentional injury to person or property, or debts for personal injuries caused while intoxicated.

A Chapter 7 bankruptcy proceeding is commenced by completing and filing Official Bankruptcy Forms in the United States Bankruptcy Court. These forms require a debtor to list all of his or her assets and liabilities (debts), income and expenses, along with certain other financial information. Properly completing the forms is the most time-consuming part of a Chapter 7 bankruptcy filing.

It is important that every creditor is listed on the bankruptcy forms with an accurate mailing address. All debts must be listed, even if a particular debt is non-dischargeable or the debtor intends to “reaffirm” and continue paying the debt.

The bankruptcy forms (collectively referred to as “Bankruptcy Petition”) are signed by the debtor(s) under penalty of perjury then filed with the United States Bankruptcy Court in the district and state where the debtor(s) has resided for the greater part of the last 180 days (6 months).

To file an individual or joint Chapter 7 bankruptcy petition, a court filing fee in the amount of $338 must be paid to the United State Bankruptcy Court at the time of filing, or the debtor(s) may apply to pay the filing fee in up to four (4) monthly installments. If the debtor’s annual gross household income is not more than 150% of the federal poverty guideline for his or her family size, the Chapter 7 filing fee can be waived by the bankruptcy court altogether.

A Chapter 7 bankruptcy is effective immediately upon filing and an “automatic stay” immediately stops all collection activity, including foreclosure, repossession, garnishment, lawsuits, creditor contact, etc.

The bankruptcy court will mail notice of the bankruptcy filing and automatic stay to each of the creditors listed on the debtor’s bankruptcy forms. Any creditor that violates the automatic stay by attempting to collect a debt from the debtor may be held in contempt of court and punished by fine or imprisonment.

About 4 weeks after the bankruptcy filing date, the debtor(s) must attend a “341a meeting” (also known as a “meeting of creditors”). Since April, 2020, the meetings are conducted by phone or online meeting—not in person. At the 341a meeting, the trustee will ask the debtor(s) a few questions regarding his or her financial situation. The meeting in a typical consumer case lasts about 3-5 minutes and creditors rarely attend.

The debtor(s) should receive a final discharge order in the mail within 60-70 days after the 341a meeting. The final discharge order will provide that the debtor’s debts (except any debts that have been voluntarily reaffirmed or are non-dischargeable by law) are formally discharged (forgiven) and that any court judgments for money entered against the debtor(s) at any time prior to filing the bankruptcy petition are null and void.

A Chapter 7 bankruptcy proceeding can be filed once every eight (8) years from the previous bankruptcy filing date, unless it was dismissed without a discharge being entered.