Bankruptcy
Chapter 7

Chapter 7 bankruptcy is preferable for people who do not want to be "locked down" to a stringent budget for up to five years, or who don't have a consistent income stream that is sufficent to pay all monthly bills as they come due.  Chapter 7 is a "liquidation" procedure, which actually works best for most people.  The typical timeline for Chapter 7 is only 90 days start to finish and it works like this:

You (and your attorney) prepare the "bankruptcy petition package" and file it with the Bankruptcy Court.  The "bankruptcy petition package" is a bunch of forms and information needed by the court.  The purpose of the "bankruptcy petition package" is, in essence, to create three categories of information.

1. You list all of your "assets." Assets are the things that you own: cars, house, clothing, household furnishings, money in the bank, etc.
2. You list all of your debts:  credit cards, loans, medical bills, car payments, mortgage, judgments, liens, unpaid taxes, etc.
3. You list your monthly income and your monthly expense budget:  Monthly income for bankruptcy purposes is wages from your job and any other money that you regularly receive, e.g. unemployment, disability, social security, alimony, etc.  Monthly expenses are all of your normal monthly bills that you have to pay to support you and your dependents like rent, house payments, utilities, car payments, insurance, food for you and your family, taxes, basic necessities, medical and dental expenses, support for children and elders that you care for, and all the other bills that you have to pay in order to live.

Once your bankruptcy petition package is filed with the Bankruptcy Court, a government appointed person called the "Chapter 7 Trustee," and a Judge are assigned to your case.  In the vast majority of Chapter 7 cases, you will never need to have any interaction with the Judge, and your interaction with the Chapter 7 Trustee will be minimal. 

The Chapter 7 Trustee's role is to evaluate your bankruptcy petition package; the list of debts, the list of assets, and the monthly income and expense budget.  What the Trustee is required to do is to determine whether he or she can generate any money to pay any of the "debts" (from your Debt schedule) in the bankruptcy petition package. The Chapter 7 Trustee looks at your Assets and your monthly income and expense budget to determine if (1) any assets can be sold off to generate money to pay your debts, or (2) if you have extra income after paying expenses each month to pay towards your debts.

The monthly income and expense budget inquiry is straightforward; the Chapter 7 Trustee looks at the income/expense budget to determine if there is excess "disposable" income available on a monthly basis to allow you to make a payment to your creditors.  (If there is extra “disposable” income left over after paying your monthly expenses then you will have to do a Chapter 13 repayment plan for three to five years).  This is a fair requirement of the law - if you have extra income left over after paying all of your bills each month and you can afford to make payments to your creditors, you should be required to pay what you can ... in reality however, this is not an issue in the typical chapter 7 case because if there is more than enough money coming in every month to pay all of your bills, you don’t need bankruptcy.  This is a legal requirement that is basically designed to keep people who can legitimately afford to pay their bills from avoiding their debts through bankruptcy. 

The other inquiry of the Chapter 7 Trustee is a determination whether you have any "non-exempt" assets that the Trustee can sell to generate money to pay your debts.  This is the "liquidation" concept mentioned earlier.  Not every asset you have is subject to sale by the Chapter 7 Trustee!!!  You are allowed to keep sufficient assets to allow you to have a "fresh start" financially.   

The amount of assets that you are allowed to keep is determined by the law of your state.  The key here is that the value of your assets is determined from the point of view of a Chapter 7 Trustee who is considering selling them off.  Your assets are, by and large, used stuff; so the value of your used stuff is the value that a Chapter 7 Trustee could sell your "used" stuff for. What is in your favor is that there is no ready market for most "used stuff."  The value of used assets is what they could be sold for now, typically in a "garage sale" format.  In other words, the value of your assets is not what you paid for them, but instead, what they are worth now...used.  Remember, the value is not determined by what you paid for it. The value is what it could be sold for at a garage sale. It is sometimes hard for people to accept that the custom furniture, home theater, brand new cars, or expensive clothes that they paid big money for... are not really worth very much now...but if there is any consolation, the low values help you in bankruptcy.

In 99% of the chapter 7 cases filed, there are not enough "non-exempt" assets for the Chapter 7 Trustee to be able to sell anything.  These are called "no-asset" cases.  You want to be a "no-asset" case.  It means that you will keep everything that you have now.

Ninety days after your Chapter 7 bankruptcy petition package is filed, you will be entitled to a "discharge" of your debts.  "Discharge" means that your debts are legally eliminated, and your creditors cannot ever come after you again to try to collect those debts.

Please note that there are a specific few types of debt that do not go away in bankruptcy (cannot be discharged), such as child support, taxes, student loans, criminal restitution payments, debts resulting from fraud, etc. 

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