Filing for Chapter 7 Bankruptcy - The Steps Involved

What is chapter 7 bankruptcy anyway? What kind of protection does it give you against creditors? How does one file for chapter 7 in the United States? Unfortunately, these are common questions right now. We are having hard financial times right now, and whenever that happens the number of bankruptcy filings will increase dramatically.

In this article, I'll talk about some of the steps involved when filing for chapter 7 bankruptcy, and other important facts you should know about it.

A Basic Definition to Start With

Let's start with a quick definition, just so we're all on the same page. Chapter 7 is a type of bankruptcy in which your debts are essentially wiped away, in exchange for your surrendering of certain nonexempt property. This is different from a chapter 13 bankruptcy filing, in which the debtor follows a court-approved repayment plan to repay the debts he or she owes.

In a chapter 7 bankruptcy filing, the court-approved trustee will basically gather all of the nonexempt property owned by the debtor and sell it off to pay any claims against the debtor. In other words, the person's assets will be used to cover his or her debts -- or most of them, at least. This is the core principle that makes a chapter 7 filing different from other types of personal bankruptcy, such as chapter 13.

The debtor will be allowed to keep certain exempt property, and in this context "exempt" refers to items that are not allowed to be seized as part of the bankruptcy filing and judgment. In other words, and exempt item is something the debtor gets to keep.

The Process of Filing Chapter 7

As I stated in the beginning of this article, this is a general overview of chapter 7 bankruptcy. So I'm not going to get into the complete steps on filing for such a bankruptcy, because it gets fairly complex from a legal standpoint. With that being said, these are the basic steps involved when a person files for chapter 7 protection from creditors:

1. The first step is for the debtor to file a petition with the bankruptcy court. This is typically done within the county where the person lives, or where the business is located in the case of a business bankruptcy filing.
2. The debtor must also file a variety of financial documents, in addition to the actual petition. This will include income-related documents, expense reports, a general statement describing the person's financial condition, a list of assets and liabilities, and a few other items.
   
3. You can expect to pay a filing fee when you initially file for Chapter 7 bankruptcy, and this fee usually averages between $200 and $300. There may be some other miscellaneous fees involved as well, but they generally don't amount to very much.
4. If the debtor is married, things can be a little more complicated. This is because the courts will require financial documents for both the person filing for bankruptcy and his or her spouse. This is true even if only one spouse is filing for Chapter 7.
5. When you initiate your bankruptcy filing, you will be able to protect certain pieces of property. In legal terms, these assets are referred to as "exempt" property. The types of property that are considered exempt will vary from one state to another.
   
6. Debtors may have the option of choosing between the state's definition of exempt property or a federal package that outlines such exemptions. This is one of the areas where things can get confusing, so it's probably best to consult a bankruptcy attorney if you have questions about these exemptions.
7. After these preliminary steps, the debtor will work closely with the court-appointed trustee to provide additional paperwork, to surrender nonexempt property, and to otherwise discharge the chapter 7 proceedings.
8. Once the bankruptcy has been fully discharged (a legal term for "completed"), the debtor is released from some of the debts he or she has accumulated. In addition, creditors are prevented from carrying out any kind of debt collection against the debtor.
   
9. When you hear somebody talk about "protection from creditors," this is generally what they are referring to. It is the element of a chapter 7 filing that protects the debtor against creditor claims.

Again, I'd like to stress that these steps may vary from one state to another, and from one debtor to another. But regardless of these differences, most people will go through the steps I've outlined above when filing.

Continuing Your Bankruptcy Research

While this article offers a brief introduction into the world of bankruptcy law -- and chapter 7 filing in particular -- it is by no means an all-inclusive lesson. My goal with this lesson is simply to explain the basic steps involved with chapter 7 and how they affect the person who files for such protection.

If you think you may be forced to file for personal bankruptcy in the near future, my advice is to research far and wide to get a better understanding of the subject. It's probably a good idea to hire a bankruptcy lawyer as well, especially when it comes to property protection. Here's a good place to continue your research (the official website of the U.S. court system).

Related Q&A Sessions:

• How can I improve my credit after bankruptcy?
• Improving your FICO score after Chapter 7
• Buying a home after a bankruptcy filing

I hope you have found this article helpful. Good luck!