Most residents of Rockland County who have never filed a bankruptcy petition view the process as a long, dark journey during which they will be forced to sell most of their assets in exchange for having many of their debts declared uncollectible by the bankruptcy court. Individuals who are contemplating bankruptcy usually file a petition under either Chapter 7 or Chapter 13. A Chapter 7 petition is a request for the bankruptcy court to discharge and declare uncollectible most of their debts. A Chapter 13 petition asks the court for more limited relief by presenting a plan for reorganization of the debtor’s finances that proposes paying those debts over five years. The two proceedings have many differences, and this post will explore Chapter 7.
The filing of the petition invokes a court order called the “automatic stay.” The automatic stay freezes all collection actions that have been brought or that could have been brought. Not all debtors are eligible to seek relief under Chapter 7. If a person’s net income is greater than the median income for New York residents, the person will not be allowed to file a Chapter 7 petition.
The debtor must provide the bankruptcy court with a list of income, expenses, assets and, of course, debts. The bankruptcy judge will appoint a trustee to review the case, collect the debtor’s assets and sell the assets according to procedures specified in the Bankruptcy Act. The proceeds of these sales will be used to pay the petitioner’s creditors until the funds are exhausted. In a typical Chapter 7 proceeding, unsecured creditors receive very little on their claims, usually only a few cents on the dollar. The debtor will be entitled to declare certain assets “exempt” from creditor’s claims, and those assets will not be sold by the trustee.
When all assets have been collected and sold and creditors’ claims paid in full or in part, the bankruptcy court will issue an order of discharge. This order discharges the debtor’s legal obligation to repay debts that are named in the order and prevents creditors from taking any action to collect those debts.