What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy, also called “Straight Bankruptcy,” allows a debtor to discharge, or wipe-out, unsecured debts. Unsecured means that there are no liens against the property you own, given in exchange for the debt. Examples of unsecured debts are credit cards, medical bills, professional’s fees, or personal loans. However, most student loans and many taxes are not dischargeable.

Who is eligible?

A person is usually eligible to file Chapter 7 if his or her family income over the last six months is Below Median Income for their state. These income limits are given by the U.S. Census Bureau. Due to changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, your best bet is to speak with a local attorney who regularly files bankruptcy cases to determine if you are Chapter 7 eligible.

How does it work?

In a Chapter 7 Bankruptcy filing, a case trustee is assigned to your case to review the petition and later examine you at a meeting called the First Meeting of Creditors. There, it will be the trustee’s job to examine you under oath to see if all of the information in the petition is true and complete and that you have not left anything out, whether on purpose or inadvertently.

The trustee will then review your assets to see if there are any assets he or she can seize and sell. He will be able to seize upon an asset where there is no lien against it, or the lien is less than the value of the asset, provided no exemption exists to protect the asset.

Can I keep any of my assets?

If you are able to take an exemption in an asset, you can protect the asset, even if there is equity and no lien. For example, if you own the home you live in, which has a value of $150,000, and you only owe $110,000 to the mortgage company, you have $40,000 in equity in your home. In New York State, you could be able to protect that equity by using the homestead exemption. As exemptions vary by state, to determine if you will be able to exempt or protect your assets, it is best to review your options with a local, knowledgeable bankruptcy attorney.

What do I need to do in a Chapter 7 Bankruptcy?

As a debtor in Chapter 7, your duties include disclosing information about every asset you own or have an interest in, and every liability you owe. Additionally, you will need to provide your attorney with information regarding your income, through pay stubs, W2s, and tax returns if applicable. It will also be your responsibility to remain current on any mortgage payments, car loan payments, and the like, provided you want to keep those items.

If you are able to successfully file and complete a Chapter 7 Bankruptcy, you will receive a discharge from the Bankruptcy Court, which indicates that those debts which have been discharged can never be collected from you again — a financial “fresh start” courtesy of the Bankruptcy Code.

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