Although there are different chapters of bankruptcy, Chapter 7 is the most common. It’s sometimes also referred to as a liquidation bankruptcy, which involves the sale of the filer’s non-exempt assets. A trustee handles this and takes any proceeds to pay lenders for any debts that the filer has accrued.
If you’re thinking about filing for Chapter 7 bankruptcy, the following information can help you learn more about the basics:
Qualifying for Chapter 7 bankruptcy
You won’t be eligible to file for Chapter 7 bankruptcy if you might qualify for a repayment plan through a Chapter 13 bankruptcy or if you filed for bankruptcy within the last six to eight years.
Preparing for Chapter 7 bankruptcy
Gather all necessary financial records prior to filing. This includes credit card statements, bank statements, pay stubs, loan documents, and other relevant information. By being prepared prior to filing, you can be more efficient if you need to verify any of your financial information.
When declaring Chapter 7 bankruptcy, you’ll fill out a petition in addition to other forms and file them with a local bankruptcy court. The forms will ask you to describe your current monthly living expenses, any property or assets you own, and your debts.
What happens to your assets
If it’s determined that you have any nonexempt property, you may be ordered to pay its equivalent or otherwise surrender the assets for liquidation. An exception may be for property that doesn’t hold much value. In these situations, the trustee may decide that though it is nonexempt, you are a still allowed to keep it.
Nonexempt property vs. exempt property
Bear in mind that what is classified as nonexempt and exempt property will vary by state. Examples of items that you may be eligible to keep, also known as exempt property, include jewelry up to a specified value, pensions, some unpaid earned income, some vehicles up to a certain value, and instruments or tools of the individual’s trade, also up to a specific amount. Benefits are also usually classified as exempt property as well, and include welfare benefits, unemployment compensation, and Social Security benefits. On the other hand, nonexempt property, which can be claimed by lenders, may include bank account funds, cash, securities (such as bonds or stocks), second vehicles, second properties or vacation homes, and valuable items, such as antiques, stamp collections, coin collections, or musical instruments (unless the individual filing for Chapter 7 bankruptcy needs the instrument for his or her profession).