Chapter 7 provides debtors with a fresh start by wiping out most general unsecured debts, such as credit cards, medical bills, and repossession deficiencies. It is called a “liquidation” bankruptcy because, in exchange for discharging your liabilities, you are subject to surrendering all belongings that are property of the bankruptcy estate and not “exempt”. The term “exempt” means property that you have a right to retain under the law that applies to your bankruptcy case. Exempt property usually includes most necessary items, i.e. your house, vehicles, and household furnishings (up to certain dollar limitations).
If there are any estate assets that are not protected by exemptions, the person appointed to serve as the “trustee” in your case may require you to turn them over. The trustee typically turns non-cash assets into cash by selling them at auction. The proceeds are distributed to your creditors according to the priorities in the Bankruptcy Code, after paying administrative expenses like the trustee’s fees and costs. The trustee decides whether the value of any non-exempt assets justifies liquidating them for the benefit of your creditors. In most cases, there isn’t any non-exempt property of sufficient value for the trustee to liquidate, allowing you to receive a discharge a few months after filing the bankruptcy petition without having to give up any of your assets. These are known as “no-asset” cases.
Whether you qualify to file Chapter 7 depends on your income level. Unless an exclusion applies to your case, you must pass a “means test” that looks back in time at your income over the preceding six months to file Chapter 7. Aside from social security and certain disabled veterans’ benefits, all income you received during the preceding six-month period is included in the means test, even bonuses or overtime that are not continuing. If the total income exceeds the median income level for a household of your size in Arizona (based on current census figures), then you must do a complicated expense calculation known as the “long form means test” to determine your Chapter 7 eligibility.
The duration of a Chapter 7 case is short in comparison with a Chapter 13 proceeding. Approximately 30 days after filing the Chapter 7 petition, schedules, and statements, you are required to appear at a hearing called the “341 Meeting of Creditors”. The bankruptcy trustee assigned to administer your case presides over the 341 Meeting and asks you questions under oath. The trustee’s questions are primarily for the purpose of verifying your identity and confirming that your bankruptcy documents are truthful and accurate. Assuming you have met all requirements, the Bankruptcy Court enters a discharge order as early as 60 days following the 341 Meeting date.
A Chapter 7 discharge means that you are forever released from dischargeable debt, and it is illegal for creditors to attempt to collect on it. However, some types of debts are not dischargeable in Chapter 7; for example, child support and spousal maintenance, most student loans, certain taxes, fines and penalties owed to a governmental unit, and certain obligations that arise out of a divorce. Additionally, it is possible for creditors to object to your discharging a debt based on certain grounds in the Bankruptcy Code, such as fraud or misrepresentation. Although your personal liability on secured debts is discharged (absent a reaffirmation), you must continue paying on the debt to retain the collateral that secures the debt. Specifically, this means that you must maintain mortgage and auto loan payments to keep your house and vehicle.
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Phoenix AZ 85004
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