Chapter 7 is a liquidation of non-exempt assets of the bankruptcy estate. In a Chapter 7 Bankruptcy the trustee will take over the non-exempt assets of the debtor’s estate, sell them for cash, and distribute the monies to the creditors. Usually the bankruptcy estate has no assets to liquidate and distribute to creditors. The unsecured creditors will receive a distribution from the bankruptcy estate only if there are assets and the creditor files a proof of claim with the Bankruptcy Court.
Under a Chapter 7, the debtor must qualify for relief. To qualify the debtor must pass the “means test”. The “means test” is a measure of gross median income for the debtor’s family. Median income is dependent on the number of household members.
When the debtor files his/her petition with the Court, the debtor files a schedule of exempt property. This allows the debtor to protect certain pieces of property from the claims of his/her creditors. In Missouri, the debtor uses state law to exempt property. The property that is not covered by an exemption will be used to pay creditors.
When the debtor appears at the 341 meeting, it is important for the debtor to cooperate with the trustee. The trustee will ask the debtor questions under oath. Some typical questions are: “have you ever filed bankruptcy?”, “did you list all of your property?”, “did you list all of your debts?.” Before the meeting the trustee will review the debtor’s case, and if the trustee has questions about certain pieces of property, the trustee will ask for information regarding the property. For example, a trustee may want more information about the debtor’s car to determine the fair market value of the car. If the trustee determines that a piece of property should be liquidated, the trustee will arrange with the debtor the surrender of the property to the trustee. If the trustee determines that no property is available for liquidation, he/she will file a report with the Bankruptcy Court that says the trustee is abandoning all interests in the debtor’s property.
Secured creditors may retain some rights to seize property that is securing a debt. An example of a secured creditor is the mortgage company that has a deed of trust for the debtor’s home. A debtor may want to keep certain secured pieces of property and may decide to reaffirm the debt. A reaffirmation agreement is an agreement between the debtor and the secured creditor that states the debtor will remain liable for the debt and will pay the debt, even though the debt would otherwise be discharged in the bankruptcy. The creditor agrees to not repossess/foreclose the property as long as the debtor continues to the pay the debt. The Bankruptcy Court must approve the reaffirmation agreement, unless the debtor is represented by an attorney during the negotiations of the agreement.
A debtor receives a discharge for most of his/her debts in a Chapter 7 bankruptcy. Once a discharge is granted, a creditor can no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. The debtor receives a fresh start and can begin to build a better financial future for the debtor and the debtor’s family.