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Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a form of liquidation under the U.S. Bankruptcy Code. Under Chapter 7, the trustee of the bankruptcy court “gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code” (, “Bankruptcy Basics PDF, p. 14), 8/15/2013). Within this context, the debtor’s property can be subject to lien and mortgages, pledging the property to other creditors. The Bankruptcy Code allows the debtor to keep certain property that falls under “exempt.” Other non-exempt remaining assets will be liquidated. In essence, filing under Chapter 7 may result in the loss of property.

Qualifying for relief requires a debtor to fall under one or more categories, which may include individual, partnership, corporation, or other business entity. There are limitations with regard to eligibility. For example, an individual filing a bankruptcy petition cannot file if during the course of the preceding 180 days a prior bankruptcy petition was dismissed “due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens” (“Bankruptcy Basics, p. 15”). An individual may not file a chapter 7 bankruptcy petition without first attending credit counseling[1] through an approved credit counseling agency.

All debtors filing a chapter 7 bankruptcy relief petition must provide the following information: 1) list of all creditors; 2) source, amount, and frequency of debtor’s income; 3) list of all debtor’s property; and 4) a detailed list of the debtor’s monthly living expenses. Debtors will file a schedule detailing exempt property, which is subject to the provisions of state law.

Filing for chapter 7 bankruptcy relief “automatically stays” most collection actions. “The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments” (“Bankruptcy Basics, p. 17”). Once the petition is filed, the case trustee will hold a meeting of creditors to discuss debts. The debtor is afforded complete relief by converting the chapter 7 case to a chapter 11, 12, or 13 case, provided the debtor meets the eligibility requirements under at least one. A bankruptcy discharge does not extinguish a lien on non-exempt property.

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[1] Because of this requirement, individual debtors must also file a certificate of credit counseling and a copy of any debt repayment plan that was developed through credit counseling.

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