What is Chapter 7?
A Chapter 7 is often referred to as a “Fresh Start” or “Liquidation” bankruptcy. This type of bankruptcy is typically filed by debtors who have low incomes or who have little or no disposable income (most likely because they have very high necessary living expenses). It is used to discharge unsecured debts such as credit cards, personal loans, medical bills, repossessions, money judgments, and even some IRS debts, as well as secured debts on property that is being surrendered.
In return for having the debts discharged, the bankruptcy court limits the amount of property that debtors are entitled to keep. This property is referred to as “exempt property”. The most common types of exempt property under Florida law are as follows:
If the debtors have owned and continuously resided in their Florida home for more than 12 months, but less than 40 months, then up to $170,350.00 worth of equity in the property per person can typically be protected. If the debtors have owned and continuously resided in their Florida home for more than 40 months, then the entire amount of equity in the property can typically be protected.
Each debtor may protect up to $1,000.00 worth of equity in one vehicle.
Each debtor may protect up to $1,000.00 total worth of any personal property, such as household goods, clothing, jewelry, additional vehicle equity and funds held in bank and non-retirement investment accounts.
If the debtors don't have a homestead property, then each debtor may protect up to an additional $4,000.00 total worth of any personal property, such as household goods, clothing, jewelry, additional vehicle equity and funds held in bank and non-retirement investment accounts.
Social security benefits and most retirement plans, such as 401Ks, 403Bs, pensions, and IRAs are protected.
In the majority of filed Chapter 7 cases, most, if not all, of the debtors' property will be protected under the allowed exemptions. However, in those cases where some property is not protected, the debtors typically have the option of either turning over the non‑exempt property to the bankruptcy estate in order to be sold for the benefit of their creditors or keeping the non‑exempt property by paying the value of the property to the bankruptcy estate over a relatively short period of time.
Procedure for a Chapter 7 Bankruptcy:
With very limited exceptions, all debtors must take a credit counseling course before they can file their bankruptcy case. This course, which can be taken on-line, will explain the different alternatives available aside from bankruptcy and will assist the debtors with a budget analysis. The course must be provided by a non‑profit counseling agency that has been approved by the office of the United States Trustee and must be done within the 180 day period immediately before the bankruptcy case is filed.
In order to file a bankruptcy case, debtors must prepare and file a “petition” with the bankruptcy court. The petition is signed by the debtors and is submitted with a number of other documents called “schedules”, which list all of the debtors' assets, debts, income, and expenses, as well as other important financial information. The schedules must be completed truthfully and accurately, as they are meant to give the bankruptcy court a very detailed picture of the debtors' finances at the time that the petition is filed. In addition, the debtors must file a certificate showing completion of the credit counseling requirement and any pay stubs that they received within the 60 day period immediately before the bankruptcy filing.
A very important aspect of bankruptcy is the “automatic stay” which generally goes into effect as soon as the bankruptcy petition is filed. This automatic stay prevents creditors from continuing any type of collection efforts or bothering the debtors in any way about money owed to them unless they get special permission from the Bankruptcy Court. This automatic stay includes, with some limitations, the immediate stopping of such things as lawsuits, foreclosures, repossessions, garnishments, collection letters, and harassing phone calls.
The administration of a bankruptcy case is handled by an individual, called a Trustee, who is specifically assigned by the bankruptcy court for that purpose. The duties of the Trustee include verifying the accuracy of the debtors' bankruptcy petition and schedules, determining the debtors' financial circumstances related to their bankruptcy filing, and making sure that the creditors are being treated properly under the law. In addition, the Chapter 7 Trustee is responsible for liquidating the debtors' non‑exempt property (or for disbursing the money received from the debtors in order to retain such property) for the benefit of the creditors.
The Trustee and the creditors have the opportunity to ask the debtors about their assets, finances and circumstances surrounding their accumulation of debt. This occurs at a brief Meeting of Creditors, which usually takes place about four to six weeks after the petition is filed. There is no judge at the creditor's meeting; instead the Trustee runs the meeting by asking the debtors questions and then allowing creditors who appear to ask a few questions of their own. All debtors are required to be present at this meeting (if a husband and wife have filed jointly, they must both be present), provide proof of their identity (typically a driver's license and social security card), and must cooperate by providing all information, records and/or documents that the Trustee may request.
Within 60 days after the creditors meeting in a Chapter 7 case, all debtors are required to take an educational course intended to help them better manage their future finances so as to avoid the circumstances that led to the bankruptcy filing. It is important to note that, if this requirement is not fulfilled, then a discharge will not be entered in the debtors' case (see Entry of the Discharge, below).
In a Chapter 7 bankruptcy, the debtors will typically receive their discharge just over 60 days after the date of the Meeting of Creditors. Although there are circumstances that could delay or even prevent the debtor from receiving a discharge in a bankruptcy case, these are usually limited to situations where the debtor has proven to be uncooperative with the bankruptcy Trustee or has perpetrated some type of fraud or deception.