Chapter 7, the most common bankruptcy, is a liquidation proceeding. The bankruptcy filer uses state exemptions to protect their assets. The Chapter 7 trustee can take and sell non-exempt assets with value.
If a trustee takes the filer’s non-exempt assets, those assets are distributed to creditors.
The objective is discharge. The Chapter 7 discharge eliminates all personal liability from most debt.
One that files bankruptcy is referred to as a “debtor”, but I also use the word “petitioner”. Married couples can file either individually or jointly. Chapter 7 cases are filed primarily by people with unmanageable debt, with the goal of wiping out that debt. I’ve found that almost all people that file Chapter 7 came by their debt righteously, with the intention of repaying it later. Oftentimes, life doesn’t go as planned, and Chapter 7 bankruptcy protection becomes necessary because of job loss, drop in income, wage garnishment, divorce, illness, loss of a spouse, and global pandemics. Debtors must first pass a “means test” to determine if their income fits into Chapter 7 limitations.
The automatic stay is a powerful tool preventing creditors from any direct contact with the bankruptcy filer. The stay goes into effect “automatically” when the bankruptcy case is filed, and it “stays”, or stops, all collection activity, including wage garnishment, lawsuits, collection letters, nasty phone calls, repossession, and foreclosure. This protection usually lasts through discharge.
Immediately upon the filing of a Chapter 7 bankruptcy, the clerk of the court assigns a case number, a Chapter 7 trustee, and a hearing date. Within a few days after filing, the clerk sends out notice of the case to all the creditors listed on the bankruptcy petition.
The hearing takes place about 5 weeks after filing the case. The hearing is formally called the “meeting of creditors”, although very seldom do any creditors ever show up. It usually takes about 5 minutes, although some hearings are shorter, and many go longer than that. The trustee acts as the hearing officer, and asks several simple questions of the debtors under oath. After the hearing there is a 60-day window in which creditors can file an objection to discharge. After those 60 days, and barring any objection, the clerk issues the discharge. This is not the end of the case, though. The case is not over until the court clerk actually closes the case, which will not happen until the trustee files either a “no-asset” notice or a final report.
Before the case can be closed, the trustee must either (a) file a “no-asset” report, which says that there are no non-exempt assets of value to the estate, or (b) take non-exempt assets and administer them. Here in Maricopa County, Arizona, where I file most of my cases, there are currently about 15 Chapter 7 trustees. They are all private individuals appointed by the Justice Department to represent the pool of creditors on each Chapter 7 case. They earn a percentage of the value of all assets that they administer—this is their motivation to take your stuff.
Arizona exemptions are used here to protect filers’ assets. We can protect $6,000 worth of equity in a vehicle (per spouse), $250,000 equity in your home, your clothes, furniture, retirement accounts, guns, pets, etc. By properly using the exemptions, most Chapter 7 cases can be “no-asset” cases, meaning you have no unprotected assets with any value to the bankruptcy estate, so you keep all your stuff. However, tax refunds are not exempt in Arizona, and the bank account exemption is relatively limited ($300 on the day of filing). Many local trustees make a decent living attaching tax refunds and bank accounts.
The bankruptcy discharge, usually entered about 4 months after the case filing, releases the Chapter 7 filer from liability on most debts. Debts discharged typically include credit card debts, personal loans, medical bills, judgments, repossession deficiencies, and title loans. Some state and federal income taxes are dischargeable. Student loans historically have been difficult to discharge, but the tide is slowly turning, and the law is changing to make discharging student loans more feasible. Child support and alimony are never discharged in a Chapter 7.
A good attorney will not only guide you through the various hazards and pitfalls of bankruptcy, but will also save you money and alleviate stress on your way to a brighter future.