A Chapter 7 Bankruptcy Overview
How Chapter 7 bankruptcy works.
Chapter 7 bankruptcy is sometimes called “liquidation” bankruptcy — it cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors. (“Chapter 7” refers to the chapter of the federal Bankruptcy Code that contains the bankruptcy law.)
Chapter 7 Bankruptcy Costs in Time and Money
The whole Chapter 7 bankruptcy process takes about four to six months, costs $338 in filing and administrative fees, and commonly requires only one trip to the courthouse.
You must also complete credit counseling with an agency approved by the United States Trustee. (For a list of approved agencies in each state, go to the Trustee’s website, www.usdoj.gov/ust, and click “Credit Counseling and Debtor Education.”)
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Who Can File
You won’t be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. (For more information on these eligibility requirements, see Chapter 7 Bankruptcy — Who Can File?)
Bankruptcy Forms
To file for Chapter 7 bankruptcy, you fill out a petition and a number of other forms and file them with the bankruptcy court in your area. Basically, the forms ask you to describe:
- your property
- your current income and monthly living expenses
- your debts
- property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called “exempt property”) — most states let you keep some equity in your home, clothing, household furnishings, Social
- Security payments you haven’t spent, and other necessities such as a car and the tools of your trade.
- property you owned and money you spent during the previous two years, and
- property you sold or gave away during the previous two years.
Bankruptcy’s Magic Wand — The Automatic Stay
Filing for Chapter 7 bankruptcy puts into effect an “Order for Relief” — known informally as the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab (“garnish”) your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service or welfare benefits. For more information, see How Bankruptcy Stops Your Creditors: The Automatic Stay.
Bankruptcy Court’s Control Over Your Financial Affairs
By filing for Chapter 7 bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can’t sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court’s consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.
The Bankruptcy Trustee for Chapter 7 Bankruptcy
The court exercises its control through a court-appointed person called a “bankruptcy trustee.” The trustee’s primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.
The trustee (or the trustee’s staff) will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.
The Creditors Meeting
A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a “creditors meeting” has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is the debtor’s only visit to the courthouse.
What Happens to Your Property
If, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is nonexempt. To understand exactly how bankruptcy would effect your specific situation, take advantage of a free initial consultation.
Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt (see below).
How Your Secured Debts Are Treated
If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you’re behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before — unless you have enough equity in the property to justify its sale by the trustee.
If a creditor has recorded a lien against your property because of a debt you haven’t paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.
The Chapter 7 Bankruptcy Discharge
At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, except:
- debts that automatically survive bankruptcy, such as child support, most tax debts, and student loans, unless the court rules otherwise, and
- debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).
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Who qualifies for Chapter 7 bankruptcy in Minnesota?
Chapter 7 bankruptcy is generally available to people who meet certain financial eligibility requirements. One important factor is your household income, which is evaluated using a calculation commonly called the bankruptcy means test. Your household size, income, allowable living expenses, and certain other financial circumstances can affect eligibility. Earning more than Minnesota’s median income does not automatically disqualify you. Nicole Anderson can review your financial situation and help determine whether Chapter 7 is an appropriate option.
What is the Chapter 7 bankruptcy means test?
The means test helps determine whether someone with primarily consumer debt qualifies for Chapter 7 bankruptcy. It generally begins by examining average income over the six full calendar months before filing and comparing that amount with applicable income thresholds. If your income is above the median, additional calculations involving allowable expenses and other factors may be necessary. Because these calculations can be complicated, it’s worth speaking with a bankruptcy attorney before assuming you earn too much to qualify.
Can I keep my car if I file Chapter 7 bankruptcy?
Many people are able to keep their vehicles after filing Chapter 7 bankruptcy. Whether you can keep yours depends on factors including its value, how much you owe on it, applicable bankruptcy exemptions, and whether you’re current on your payments. If your car is financed, the lender may retain rights under the loan agreement even after your other debts are discharged. Nicole can evaluate your vehicle’s equity and financing arrangement and explain the options available for keeping it.
Will Chapter 7 bankruptcy take all my property?
No. Chapter 7 bankruptcy does not automatically mean losing everything you own. Bankruptcy exemptions protect certain property and amounts of equity from being sold to repay creditors. Depending on your circumstances and the applicable exemption rules, you may be able to protect household belongings, vehicles, home equity, retirement savings, and other assets. Minnesota residents may have access to state or federal exemption systems, depending on eligibility. An attorney can help determine which exemptions apply and identify any property that might be at risk.
How long does Chapter 7 bankruptcy take in Minnesota?
Many Chapter 7 bankruptcy cases result in a discharge approximately four months after filing, although the timeline can vary. After filing, you will generally attend a meeting of creditors, sometimes called a 341 meeting, where a bankruptcy trustee asks questions about your financial circumstances. You’ll also need to complete required credit counseling and debtor education. Cases involving property sales, disputes, or other complications may take longer. Nicole can explain what to expect at each stage of the process.
Which debts can Chapter 7 bankruptcy eliminate?
Chapter 7 bankruptcy can discharge many common unsecured debts, including credit card balances, medical bills, personal loans, and certain collection judgments. However, some obligations generally survive bankruptcy, including child support, alimony, certain taxes, and most student loans unless additional legal requirements are satisfied. Bankruptcy also does not automatically eliminate valid liens against property. Reviewing your complete debt situation with an attorney can help you understand which obligations may be eliminated and which may remain.
Can I file Chapter 7 bankruptcy if I'm employed?
Yes. Having a job does not prevent you from filing Chapter 7 bankruptcy. Eligibility depends on your overall financial circumstances, including income, household size, allowable expenses, and the types of debt you owe. People with steady employment sometimes qualify because their income falls within applicable limits or because their financial circumstances satisfy the means test. If you’re working but still unable to keep up with your debts, Chapter 7 may be worth exploring.
What happens after I receive my Chapter 7 bankruptcy discharge?
A Chapter 7 discharge generally eliminates your personal legal obligation to repay debts covered by the discharge. Creditors are prohibited from continuing collection efforts on those discharged debts. You can then focus on rebuilding your financial stability, managing ongoing obligations, and working toward improved credit. Secured debts, nondischargeable obligations, and other financial responsibilities may still require attention. Although bankruptcy can affect your credit history for years, it may also provide the relief needed to begin moving forward.