Wednesday, May 9, 2012

Consumer Bankruptcy: Part 1 - Chapter 7

As a consumber bankruptcy firm, one of the most common questions asked by clients is about the different kinds of bankruptcy (called chapters).  The most common types of cases filed by individual consumer debtors are chapters 7 and 13.  Choosing the right type of case to file is a decision that is based on your financial situation, your goals, the types of debts you owe and your intentions relating to your property.  This decision can be very important and for many people, very difficult.  It is important that you seek professional advice from an experience bankruptcy attorney regarding which may be right for you.  I will provide a general idea of what each chapter involves and who typically qualifies to file.  Remember, this is a general information article.  Each person has a specific set of circumstances that alter the following criteria.  Furthermore, bankruptcy rules (even though through a federal court) are very different from state to state and district to district. Please consult with a local attorney in-person or on the phone in order to properly assess your personal situtation.

Chapter 7

Most people, when thinking of bankruptcy, think of a chapter 7 (also called a liquidation).  During the years of 2008-2012, more than 1 million consumer debtors file for Chapter 7 bankruptcy protection per year. US Courts BK Stats.  Any person residing in or having property in the US (including a business) may file for Ch. 7 bankruptcy protection (11 USC sec. 109).  Before filing, the person muct have received a credit counseling briefing from an approved non-profit agency.  US Trustee Approved Credit Counseling Agencies


There are a number of forms that consumer debtors must fill out in order to complete a chapter 7 filing but in order to start the case, a person only needs to fill out a 3 page petition with an attached proof of credit counseling along with a court assessed filing fee of $306 (current as of May 2012).  The proper place ("venue") to file a petition in bankruptcy is the "domicile, residence, principal place of business or where the principal assets are located" for 180 days prior to petition.  This means that if you have recently moved, the proper place to file and more importantly, the proper rules and exemptions that apply to you might not be where you actually are.  Again, you should consult with a local bankruptcy expert in order to assess your case.


Upon filing the petition, the debtor is automatically granted immediate protection from creditors.  This includes garnishments, levies, seizures and attachments.  Additionally, the assets and property of the debtor are generally frozen (there are always exceptions to any rule).  Within a few weeks of filing, the court will notify all creditors of a meeting to be held with the trustee (an attorney who represents creditors in bankruptcy court).  This meeting is sometimes called the "meeting of creditors" or the "341 meeting"  This notice also sets certain deadlines with the court and the important filing dates with the court.


The 341 meeting is often the only hearing that a consumer debtor has to appear for in a straight chapter 7 case.  At this meeting, debtors and their attorneys meet with the bankruptcy trustee to verify information that was filed with the petition.  The trustee is tasked with administering the bankruptcy estate of debtors and if appropriate, she will distribute assets to creditors that are owed money by the debtor's estate.  Typically, trustees will ask debtors about property they own, law suits that are pending, tax returns for a few years prior to filing, pay stubs (or other proof of income) and questions relating to monthly expenses.  Debtors are required to appear in person with a photo ID and proof of social security number.  Despite being called the "meeting of the creditors", creditors rarely actually appear a the 341 meetings, instead the trustee acts on behalf of the creditors.


What many people don't know is that you can keep much of your personal property even after filing for Ch. 7 protection.  Each state provides that debtors are allowed to protect or "exempt" certain property from creditors.  This means that people who file for bankruptcy can still keep things such as:
  • A primary home up to a certain amount of equity
  • A vehicle up to a certain value
  • Government benefits such as social security or unemployment
  • Retirement funds
  • Clothes
  • Tools used for a trade profession
The bottom line here is that, if you file for Ch. 7, the creditors will not literally take the clothes off of your back.  Bankruptcy protection exists so that people can get a fresh start and unburden themselves from a mountain of debts that seem unsurmountable.

For more information about what you can protect in bankruptcy, you should consult with a local bankruptcy attorney.  For an easy and quick look at Illinois Exemptions follow this Link to Illinois Exemptions.


The final step in the Chapter 7 process is the discharge.  This is the final order from the federal court which grants the debtor relief from any pre-petition debts that were included ("scheduled") in the bankruptcy petition.  Generally, the discharge applies to all debts EXCEPT:

  • Tax Debts and other debts owed to governmental units
  • Debts for domestic support obligations (alimony and child support)
  • Student Loans
  • Debts involving fraud
  • Debts involving personal injury
  • Other debts ruled to be non-dischargeable in a bankruptcy proceeding

Mark A. Laws is a consumer attorney and bankruptcy practitioner in Chicago, Illinois.  For more information visit