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How Chapter 7 bankruptcy cases work

An individual who may be overwhelmed because of debt might seek a fresh start through bankruptcy. Chapter 7 may be appropriate if there are not secured assets to protect as this form of bankruptcy is a liquidation. Prior to filing under Chapter 7, however, an individual must participate in mandated credit counseling, proof of which will be submitted along with the bankruptcy petition. Additionally, a means test is completed to ensure that this form of bankruptcy is permissible based on an individual's income and obligations.

The petition for Chapter 7 is submitted to the bankruptcy court with jurisdiction over an individual's residential area. A substantial amount of information about personal finances must be submitted, including tax returns, lists of creditors, income, expenditures, and assets. Filing fees are due at the time a petition is submitted to the court, but waivers may be available if a debtor's income is less than 1.5 times the poverty level.

Submission of a petition results in a stay of collection activities, an important factor affecting those whose debts may be in arrears. The court notifies creditors of the pending bankruptcy case, providing them with the time to respond to the petition. Creditors and the debtor appear at a meeting held by a bankruptcy trustee where the debtor may be questioned about property, financial affairs and other relevant details. If a Chapter 7 action is deemed to be an abuse, it may be converted to a different chapter. Upon approval, Chapter 7 allows debts to be discharged, preventing further collection efforts from creditors.

Although Chapter 7 may offer a fresh financial start, there may be reasons to opt for Chapter 13 or to negotiate debt repayment without filing for bankruptcy. Credit counseling may provide some insight as to the options available. Additionally, legal counsel may be helpful in ensuring that appropriate steps are taken in filing bankruptcy.

Source: United States Court, "How Chapter 7 Works", October 13, 2014

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