What Happens with Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, which is also known as a liquidation bankruptcy, discharges most unsecured debts, such as medical bills and credit cards. According to the Bankruptcy Code, a discharge “releases the debtor from personal liability for certain specified types of debts.” In plain English, discharge eliminates the legal obligation to pay a debt, but not the debt itself.

Assume the bank sues Frank over unpaid credit card bills. Shortly before he files Chapter 7 bankruptcy, the bank obtains a judgment against Frank. Bankruptcy may discharge the credit card debt, but bankruptcy doesn’t affect the judgment. A bankruptcy judge usually doesn’t have the power to remove judgements or other collateral consequences of unsecured debts.

As outlined below, discharge is a process, not a result. Only a skilled Chicago bankruptcy lawyer guides debtors through the complete process, from initial filing to the discharge hearing (if there is one). Furthermore, every bankruptcy usually hits at least one snag. A Chicago bankruptcy lawyer is there when that happens.

Qualifying for Chapter 7

The means test is the primary Chapter 7 qualification. Usually, a debtor’s income must be below the statewide average for that household size.

We say “usually” because, as one might expect, some loopholes exist. Actual income and expenses are a good example. Living expenses in Chicago are much higher than living expenses downstate. So, if a debtor is above the means test threshold, the debtor can still file Chapter 7 if the debtor has a favorable Schedule I (monthly income) and Schedule J (monthly expenses) imbalance.

In the event a debtor does not qualify for Chapter 7 based on net income or Schedule I/J balance, then quite frankly, that person probably doesn’t need to file Chapter 7. Other alternatives, such as non-bankruptcy debt negotiation, are probably better options.

The Automatic Stay

Qualifying for Chapter 7 and filing the initial paperwork is probably the most labor-intensive part of the process. The remainder, which includes the Automatic Stay, is largely downhill.

When debtors file their voluntary petitions and a creditor receives actual notice of that filing, Section 362 of the Bankruptcy Code stops most adverse actions, such as:

• Foreclosure,
• Wage garnishment,
• Eviction,
• Creditor harassment, and
• Repossession.

Generally, these adverse actions are easy to stop with the filing of a petition. But they’re almost impossible to undo. So, if you are in financial distress, an attorney should at least evaluate your situation.

Chapter 7 Endgame

Debtors meet with trustees (individuals who oversee bankruptcies for judges) about six weeks after they file their voluntary petitions.

Prior to that meeting, debtors must furnish documents for inspection, such as recent tax returns, pay stubs, 1099s, and property ownership records.

At the meeting, the trustee verifies the debtor’s identity and asks a few scripted yes/no questions. If the trustee recommends discharge, the judge usually signs the discharge order without requiring a hearing. If the trustee spots a red flag, such as inconsistencies between the paperwork and the debtor’s answers at the meeting, a hearing may be required.

 Connect With a Dedicated Cook County Lawyer

No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits are available.

Source:

uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/discharge-bankruptcy-bankruptcy-basics