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What happens in an individual Chapter 7 bankruptcy?

Most people in and around Rockland County who are contemplating bankruptcy know that the federal Bankruptcy Code provides two types of bankruptcy proceedings for individuals which are commonly used: Chapter 13 and Chapter 7. Few people, however, know what happens during a Chapter 7 proceeding.

A person who files a Chapter 7 petition generally wants to eliminate as much of his or her debt burden as possible. The consequences of doing so may be painful, such as losing a house, but the forgiveness of the debts can make these sacrifices worthwhile. A Chapter 7 debtor must provide a complete list of all debts, all assets, current income and expenses, tax returns and a certificate of credit counseling. Once the financial information is gathered, the court will determine whether the debtor's income is low enough to qualify for Chapter 7 relief. If the debtor passes this "means test," the case will continue as a Chapter 7 bankruptcy.

The court will appoint a trustee to gather all of the debtor's assets that are not exempt from attachment under New York or federal law, as the case may be. The trustee is empowered to sell these assets and to pay creditors with the proceeds. In most Chapter 7 cases, the proceeds from the sale of assets will not provide enough cash to satisfy the claims of all creditors. The trustee will prepare a list of the amounts to be paid to each creditor. The trustee will then convene a meeting of all creditors and the debtor. Creditors are given the opportunity to examine the debtor regarding the debtor's financial affairs.

Once the trustee has certified to the court that all available assets have been sold and payments made to creditors, the court will enter an order discharging the unpaid portions of all debts. The debtor will be allowed to keep all exempt assets, but these assets, such as an automobile, may still be subject to a lien or other security interest.

Source: New York City Legal Referral Service, "Chapter 7 Bankruptcy Process," accessed on Oct. 1, 2017

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