The Chapter 7 Bankruptcy Process

The chapter 7 bankruptcy (liquidation) process is relatively simple and straightforward. Like all court proceedings, it begins with a petition and ends with a final order (the discharge order). The process usually goes as follows for an individual filing chapter 7:

1. The debtor takes a required credit counseling class.
2. The debtor files the petition, along with statements and schedules.
3. The debtor takes a required financial management class.
4. The court sends notice to the creditors of the bankruptcy. This notice sets the time and place of a "meeting of creditors" that the debtor must attend.
5. The debtor is required to attend a "meeting of creditors".
6. The creditors have a certain amount of time to object to discharge.
7. If there are no objections, the court enters the order of discharge.
8. The trustee may make demands to the debtor to turn over property any time before filing the final report.

Statements and Schedules

The statements and schedules that a debtor must file with the petition ask the debtor detailed information about creditors, property, income, expenses, financial history, and other items. The debtor is required to be truthful and complete in disclosing this information and to sign each statement under penalty of perjury. If the debtor is found to have lied these statements, the debtor can be denied discharge or in some cases even punished criminally for failing to do so. Creditors in bankruptcy who believe that the debtor may be engaging in dishonest activity and believe it may be worth the time and money to attack the debtor's right to a discharge may find it in their interest to obtain these statements from the court.

Qualifying for Chapter 7: The Means Test

Ever since bankruptcy laws have been in existence, there has been a principle that a debtor can be denied a discharge if the debtor is "abusing" the bankruptcy process. In 2005, Congress enacted a law requiring all chapter 7 debtors to undergo a "means test" to determine whether it would be an abuse for the debtor to file a chapter 7 bankruptcy (the "means test" actually only creates a presumption of abuse, which may be overcome, one way or the other). Only people with a certain level of income have to pass the means test. See how you will do on the means test.

The basic idea of the means test is to disqualify people from filing a chapter 7 bankruptcy who should be filing a chapter 13 bankruptcy (which is a longer process, and creditors usually get more money out of it). In line with this policy, the means test figures a debtor's disposable income by totaling up income and expenses (some expenses are replaced with IRS-average numbers rather than the debtor's real expenses, to ensure that the debtor's expenses are not too high). If the debtor has a certain minimum amount of disposable income (somewhere between $100 and $200 per month), the debtor will not be allowed to file a chapter 7 bankruptcy, but must file a chapter 13 bankrutpcy if the debtor qualifies.

The Meeting of Creditors

Every chapter 7 bankruptcy case includes a meeting of creditors (sometimes called the "341 Meeting" or "trustee's meeting") that the debtor must attend. The purpose of the meeting of creditors is generally for the trustee and creditors to be able to ask basic questions of the debtors related to the bankruptcy case. The trustee is generally most interested in whether there is property for him or her to sell, and is often the only person present asking questions.

Secured creditors in bankruptcy may wish to attend the meeting of creditors in order to ask questions about the collateral they have a right to. Any creditors in bankruptcy who believe that the debtor may be engaging in dishonest activity and believe it may be worth the time and money to attack the debtor's right to a discharge may wish to attend the meeting of creditors to ask the debtor questions related to their possible objections to the debtor getting a discharge. Such creditors may also wish to make a motion to the court to require the debtor to undergo a more thorough examination (often called a "Rule 2004 examination"), but this is rare.

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