How Chapter 7 Bankruptcy Works


By filing Chapter 7 bankruptcy, sometimes known as liquidation bankruptcy, most of your debts are discharged without obligation to make further payments. The cost of filing chapter 7 bankruptcy will vary from state to state, in California a decent law firm can easily run in the range of $1300 to $1700 for the service of helping you file. You will also have to pay the court’s filing fee of $299.

Chapter 7 Petition

Once your chapter 7 petition is filed, something called the Automatic Stay also known as an “Order or Relief” takes effect. This prevents creditors from foreclosing or repossessing the collateral property, it also prevents them from contacting you via any medium to collect payment. If they do harass you while in the process of filing, inform your lawyer, or if filing alone inform the court you’re filing with. Though they usually know better since they could be liable.

Automatic Stay

However this automatic stay is only temporary; after you file your petition, your creditors will be filing a motion to lift the automatic stay, this motion can be granted during the process and before you get discharged, when it does the creditors will be allowed to proceed with foreclosure and/or repossession if your secured debt remains in default.

The court will take control of your chapter 7 case by assigning a bankruptcy trustee, whose primary objective is to liquidate your non-exempt property to pay your debts. You will meet the trustee assigned to your case when you go to your court hearing, which will be scheduled about 30 days after you file.

It is during this meeting that the trustee will examine your paperwork again and ask you questions regarding any major transactions or expenses you had in the last 2 years. The trustee must do all he/she can to find more assets to liquidate during this time, however in chapter 7 bankruptcy, it is very difficult to accomplish this since most people who file under this chapter usually are at the end of their rope.

Once your petition is filed you are no longer obligated to continue making payments, especially if you’re going to surrender your home or your vehicle or whatever collateral got you in this mess. So this is a good time to put money away.

Debt Erasure

Virtually all of your unsecured debts will be erased when your Chapter 7 bankruptcy case is discharged. These debts usually refer to credit card debt, consumer contracts, and any debt for which there is no collateral. Debts that are not discharged under this chapter are those that involve involuntary debts such as being responsible for an accident and causing property damage, lawsuits against you, alimony, child support and student loans.

Also once you have reported your total debts for filing, any debt you accumulate during or after the process will not be dismissed. Remember that you need to follow the court rules precisely in order to have full benefits of the right to discharge your debts, it must be legal and fair. If you fail to disclose necessary information such as other sources of income or if any information is purposely falsified you could find yourself in serious trouble.

Secured debts such as your home, your car or any other collateral property must continue to be paid for even after discharge IF you decide to keep them. Neither chapter 7 or any other chapter will allow you to retain any collateral property or possession which constitutes as part of your total debt without paying for it. There are no freebies with secured debt.

You must either surrender it or keep paying for it. If you do choose to retain your properties, there are certain reaffirmations that must be approved by special rules in court. Please contact a professional for more detail on this point. Also under chapter 7, the terms and interest rates of the secured debt that you keep would remain the same and any overdue payments and interest charges will still be due.

Hire A Bankruptcy Attorney

The whole process of filing for chapter 7 is a lot easier with a qualified bankruptcy attorney like Ryan E. Simpson. You can learn more about him at

Last Words

Other things to keep in mind when filing chapter 7 bankruptcy, is that federal tax debts can be discharged but under limited circumstances, such as if the tax bill is older than 3 years from the time of your petition.

The IRS is going to be on top of this and if they feel your circumstances do not meet the necessary criteria for your tax debt to be dismissed then it won’t be dismissed and they will most certainly notify you, its best to contact the IRS on this point to see if you will qualify. On the other hand, State and local taxes are not dischargeable under chapter 7 or any other circumstances, this may vary from state to state. If you live in California no breaks there.

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