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About Bankruptcy Protection: Chapter 7

One of the primary purposes of bankruptcy is to discharge certain debts to give you a “fresh start.” A Chapter 7 will typically eliminate credit card debt, medical bills, unsecured lines of credit and vehicle loan deficiencies. In a Chapter 7 case, a discharge is only available to individual debtors, not to partnerships or corporations (see Chapter 11).

 

Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged.

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Dischargeable

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  • Personal Loans

  • Credit Cards

  • Repossession deficiencies

  • Judgments

  • Business Debts

  • Leases

  • Guaranties

  • Tax penalties (over 3 years old)

Non-Dischargeable

  • Recent taxes

  • Trust Fund Taxes

  • Child Support

  • Accident claims involving intoxication

  • Debts not scheduled

  • Student Loans

  • Taxes for years where return was unfiled or filed for less than 2 years

How Chapter 7 Works

A Chapter 7 case begins by filing a petition with the bankruptcy court serving the area where you reside. In addition to the petition, the following must be filed with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases. You must also provide a copy of the tax return or transcripts for the most recent tax year. Our office will prepare all of the necessary documents to ensure a proper filing provided that you qualify and have the court needed documentation required under the Bankruptcy Code. Additionally, you must complete a credit counseling course before filing and complete a debtor education course after filing.

 

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, you must provide the following information and documentation:

  • a list of all creditors and the amount and nature of their claims;

  • the source and amount of your income;

  • a list of all of your property; and

  • a detailed list of your monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Married individuals must gather this information for their spouse regardless of whether they are filing a joint or individual petition. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee and creditors can evaluate the household’s financial position.

 

Filing a petition under Chapter 7 automatically "stays" most collection actions against you or your property. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by you.

Meeting of Creditors

Approximately 30 days after the petition is filed, you will be assigned a case trustee who will hold a meeting of creditors (also referred to as a 341 meeting). During this meeting, both the trustee and creditors may ask questions of the debtor under oath. You must attend the meeting and answer questions regarding your financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions.

 

It is important that you cooperate with the trustee and provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask you questions at the meeting of creditors to ensure that you are aware of the potential consequences of seeking a discharge in bankruptcy, such as the effect on credit history, the ability to file a petition under a different Chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information.

Role of the Case Trustee

When a Chapter 7 petition is filed, the U.S. trustee appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets, if any. If all of the debtor’s assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. Most Chapter 7 cases involving individual debtors are “no asset” cases. In the typical “no asset” Chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim.

 

The primary role of a Chapter 7 trustee in an asset case is to liquidate your nonexempt assets in a manner that maximizes the return to your unsecured creditors. The trustee accomplishes this by liquidating your non-exempt property to the extent that you hold any equity in it.

The Chapter 7 Discharge

A discharge releases you from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against you. Because a Chapter 7 discharge is subject to many exceptions, though, you should consult competent legal counsel before filing to discuss the scope of the discharge.  In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.

 

Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if you wish to keep certain secured property (such as an automobile), you may decide to "reaffirm" the debt. A reaffirmation is an agreement between you and the creditor that you will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as you continue to pay the debt. If you decide to reaffirm a debt, you must do so before the discharge is entered.

Chapter 7

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