The main purpose of a Chapter 7 bankruptcy is to allow an individual debtor a “fresh start.” This means that most debts will be discharged upon completion of the bankruptcy, with no remaining liability to the debtor. However, there are exceptions to this rule. Most taxes and student loan debts are non-dischargeable in any bankruptcy. There are a few instances in which these could be discharged, but it does not happen often, and requires special consideration before a bankruptcy judge. In addition, criminal fines and child support are also both non-dischargeable debts, without exception.
Unlike a Chapter 13 bankruptcy in which a debtor follows a plan and makes payments on his or her debts, a Chapter 7 does not require any payments other than on those debts for assets which the debtor intends to keep. This is called “reaffirming” a debt, and may only be considered if a debtor is current on payments for such account.
Further, a bankruptcy judge must find that the asset is a necessity, not a luxury. As a general rule of thumb, one vehicle is allowed for each driver in the household. Any vehicles over and above those may be ordered by the judge to be sold by the Trustee, and funds disbursed to the debtor’s creditors. Similarly, a debtor may be allowed to keep a house in which he or she resides, but ordered to sell a vacation home, as it would be considered a luxury asset.
Chapter 7 bankruptcy will wipe out all unsecured debt. Some examples of these could be credit cards, payday loans, and medical bills. Once the debtor receives a discharge order from the court, he or she is no longer liable for these debts and no further collection activity may be pursued by the creditor.
The process for Chapter 7 is similar to Chapter 13 in that a debtor must collect all account information, tax returns, and proof of income to file, as well as complete required bankruptcy counseling. A bankruptcy petition will be completed and filed with the court. A meeting of creditors, also known as a 341 meeting, will take place within 30 days of filing.
Afterwards, a debtor’s creditors will have approximately 60 days to dispute a debtor’s intent or provide agreements to be executed. At the end of that 60-day period, if no objections have been filed, a debtor will receive a discharge order from the court. It is at that time that credit rebuilding can begin.
Any bankruptcy filing, regardless of chapter, can be expected to remain on a debtor’s credit file for up to 10 years.