Chapter 7 Bankruptcy

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In a Chapter 7 bankruptcy, non-exempt property is liquidated to pay creditors.  That means any property that is not protected by bankruptcy law is sold and the money is divided evenly among your creditors.  Most people who file a Chapter 7 do not lose any property because the exemptions cover all the property they own.

A Chapter 7 starts by the filing of a petition and other documents with the U.S. bankruptcy court.  These documents list your property, your creditors, your income and your budget among other financial information detailing the last two years of your finances. 

You also have to file a means test form, which measures whether you are abusing the bankruptcy system because your income is too high.  If your income is lower than the average income for the state of Washington you have nothing to worry about but if your income is higher, it may be difficult for you to file a Chapter 7.  In that case, you would have to file a Chapter 13.

The exemptions that protect your property in a Chapter 7 are broken down by category.  There is a different category for household goods, jewelry, home equity, cars, personal injury settlements, retirement accounts and more.  There is also a catch all category called the wildcard exemption.  You can choose either federal or state exemptions in Washington.  Most people find that these exemptions cover all of their property in a Chapter 7 and they do not have to give up any of their property.

Chapter 7 bankruptcy stops all collection actions!

All collections stop as soon as the bankruptcy is filed.  A trustee is appointed.  The trustee has the power to sell any non exempt assets for creditors.  A hearing is scheduled one month after the case is filed.  Though the hearing is called a meeting of creditors, creditors rarely appear.  You appear with your attorney and the trustee asks you a series of questions under oath to make sure the documents you filed are accurate and to investigate whether you have any assets. 

In most cases that is the last you see of the trustee but in some cases the trustee has some follow up investigation to do, including taking over property and selling it.  You receive a discharge two months after the meeting of creditors whether the trustee is still investigating or not.  The discharge permanently wipes out debt, though some debt is not included in a discharge such as student loans, some back taxes, fines and domestic support obligations like back child support or spousal maintenance.

If you are making payments on a car of a house, you can usually keep them if you can keep making the payments.  The creditor will ask you to sign a reaffirmation agreement.  Because this reaffirmation agreement excludes the debt from the discharge, you should go over it carefully with your attorney.