How Does Chapter 7 Bankruptcy Work?
For people who have never filed for bankruptcy (and for lawyers that don't practice bankruptcy law), the actual mechanics of filing for bankruptcy are unknown. The goal of this post is to answer some common questions about filing from bankruptcy and to give you an idea of what a typical bankruptcy proceeding under Chapter 7 entails. We'll touch on Chapter 13 later.
What is a Chapter 7 bankruptcy?
Bankruptcy under Chapter 7 means you will be liquidating (read: turning over to the trustee) some of your money and possessions in order for the Trustee to pay your creditors. You won't have to give up everything - we'll touch on that later.
What is the "Trustee"?
The bankruptcy trustee is the person who collects all of the property that is part of the bankruptcy, catalogs it, and pays your creditors their share. The trustee is usually a local attorney appointed by the Bankruptcy Court to handle the task. They also conduct the § 341 Meeting of Creditors. If there is something odd, strange, or weird about the filing, the trustee is usually the one who will bring it up if other creditors do not. Other than the § 341 meeting of creditors, it is unlikely that you will have any significant contact with the trustee.
What is the § 341 Meeting of Creditors?
The easiest way to describe the § 341 meeting is to give an overview of how a typical, uneventful Chapter 7 bankruptcy case is handled by the bankruptcy court. So here goes:
First, you meet with a bankruptcy attorney and give them all of the information they need to prepare a petition.
Then, they file the petition with the bankruptcy court. The creditors are notified of the filing and the automatic stay. Not long after, the trustee will schedule something called a § 341 meeting of creditors.
The § 341 meeting of creditors is usually short. You are placed under oath and asked questions about your bankruptcy case. Your lawyer will usually be present with you to clarify if needed. If there are any issues with the petition, the trustee will hone in on those issues and ask questions to sort them out. If there are no issues, the entire meeting often takes less than 10 minutes to complete. As long as you had a good attorney prepare your petition and you are truthful, you will usually be fine.
If there are outstanding issues left after the § 341 meeting, the trustee may leave the meeting open until he receives supplement documentation. Once the meeting is complete, it is marked "closed".
Next, after the trustee closes the §341 meeting, the trustee will determine whether to accept claims from the creditors. You are not typically involved in this process although your attorney is watching the claims closely to make sure they are valid. The trustee will set a deadline for creditor claims or objections. Once that deadline passes, the trustee will no longer accept claims or objections.
Finally, after all that is completed, you should receive your discharge.
Unless there are outstanding issues, like a pending personal injury case, the case will be closed not long after.
What is the automatic stay?
The automatic stay is an immediate court order issued when you file for bankruptcy. It tells all of your creditors that they are not allowed to attempt to collect any more money from you. There are big penalties if a creditor does try to collect after the stay is put in place. A creditor can ask the court to remove the stay, but that is usually only done in technical situations where you aren't actually the one paying (like a personal injury accident where your insurance will foot the bill).
How do I get to keep my stuff?
Each state (plus the federal government) provides a list of exemptions. When you file for bankruptcy, your lawyer will decide whether the state or federal exemptions are better for you. I will go over the different exemption laws in a later post.
This is a very brief overview of the bankruptcy process. The bankruptcy system is much more complicated, but your lawyer handles 99% of the heavy lifting.
I hope this was helpful. If you're considering filing for bankruptcy and live in Illinois (or New York), give me a call and we can talk about your situation.