Because of the recent changes in the law many Americans mistakenly believe that they are no longer eligible to file for bankruptcy. Although this may be the case for some people, in reality the rationale behind the 2005 legislation was to try to prevent abuse of the system by introducing a threshold for debtors. If your income goes over this threshold you will not be entitled to file under Chapter 7. Liquidation is the process by which an entity's assets are sold (liquidated), and the proceeds are given to creditors.
Broadly speaking, although chapter 7 allows a debtor to make a ‘fresh start', they will also be likely to lose their non-exempt property. The majority of chapter 7 cases are ‘no asset' cases involving individuals although the debtor can be an individual, a corporation, a partnership or another type of business. If a debtor wishes to file under chapter 7, they file a number of documents in their local bankruptcy court, which may be near their home address, their place of business or where their main assets are. As well as filing the petition at the court, a number of other documents related to their financial situation are required (e.g. statement of assets & liabilities, tax returns, income & expenditure etc.) If the debtor is an individual who has a lot of consumer debt, further documentation is required.
There are fees involved in petitioning a bankruptcy: $245 for filing the case, an administrative fee of $39 and a trustee surcharge of $15. The court can allow these fess to be paid in installments or in some circumstances may waive them entirely, although only if the debtor's income is calculated at being below 150% of the poverty level.
If an individual is married, the information they provide must pertain to their spouse as well. This is the case regardless of whether or not the spouse is also filing jointly, separately or not at all. In the latter case, the spouse's situation will be considered in conjunction with the rest of the household. Individuals are entitled to claim exemption for some types of property. Whether or not a certain type of property is exempt is determined by the individual's state or by federal bankruptcy law.
The effect of filing a petition under chapter 7 is that creditors cease trying to enforce collection, whether against the debtor or debtor's family. The bankruptcy clerk uses the information provided by the debtor to inform all creditors about the petition. This has the effect of stopping lawsuits, phone calls etc, for the duration of the ‘stay.' However, this does not apply to certain types of collection actions, and some ‘stays' may only be very temporary.
The effect of the bankruptcy case is that an ‘estate' is created that temporarily owns all the debtor's assets. The non-exempt assets are liquidated and creditors are paid from these proceeds. Some debts take preference over others and in total there are six classes of creditor claims.
The meeting of creditors is arranged by the case trustee and held at least 20 days after the petition is filed (and in some circumstances up to 60 days later). The case trustee is appointed by the U.S. trustee to handle the case and liquidate any assets that are not exempt. This meeting provides a chance for the creditors to ask the debtor questions, so it is very important that the debtor prepares for this meeting and provides documents as requested by the case trustee.
Before the discharge is entered, a debtor may ‘reaffirm' a debt. This means that the debtor keeps the property in question but agrees to pay all or part of the outstanding debt in relation to it, in return for the creditor promising not to seek to repossess the property. This debt must not cause ‘undue hardship' and of course, the debtor must keep up the repayments.
In the majority of cases an individual will be discharged between two and three months after the first date of the creditor's meeting. A discharge under chapter 7 avails the individual of their personal debts, preventing creditors from taking any further action in relation to them. Of those cases that are eligible (i.e. not converted to another chapter or dismissed) more than 99 per cent of individuals are discharged.
Bankruptcy laws in the US are complex, and have become more difficult since the new bankruptcy laws of 2005. If you are experiencing financial difficulties and would like to discuss your options contact a bankruptcy lawyer today.