Both individuals and business entities may file a Chapter 7 bankruptcy. The person or entity which files bankrputcy is known as the debtor, and the debtor must pay a $175 filing fee and file a number of forms which include a complete schedule of the debtor's assets and liabilities, personal background information, a schedule of monthly income and personal expenses, and a mailing list including the names and addresses of all creditors (persons or companies to whom money is owed).
When a debtor files bankruptcy, he or she is seeking to wipe out all of his or her debts. This is known as a "discharge" of obligations. In order to obtain this discharge, the Chapter 7 Debtor must fulfill certain duties, including filing the forms previously described, cooperating with the Chapter 7 Trustee, and attending a general meeting of creditors. Failure to perform these duties can result in a denial of the discharge and the case can be dismissed.
The Chapter 7 Debtor's Rights
Automatic Stay: The "stay" is tantamount to a court order placing a hold on all collection actions. It goes into effect immediately upon the filing of the Chapter 7 bankruptcy. The automatic stay stops all entities and individuals from taking any action against the debtor or the debtor's property, including collecting debts, starting or continuing lawsuits or foreclosing on homes (or evictions from homes based upon unlawful detainer), cars or other property. The stay also stops the filing of liens.
Exemption of Assets: A Chapter 7 Debtor may prevent certain assets from being sold by the Chapter 7 Trustee and may shield these assets from creditors. These assets are known as "exemptions". In California, a Chapter 7 Debtor may choose to claim one of two sets of authorized exemptions.
Under the most commonly used set of exemptions, a debtor may exempt $50,000 (if single), $75,000 (if married) or $100,000 (if over 65, or disabled, or indigent) of equity in his or her house. A Debtor can also exempt a reasonable amount of household goods such as clothing, furniture, appliances, and personal effects, including wedding rings, as well as $1,900 of equity in one motor vehicle.
Under the other set of exemptions, a debtor may claim up to $15,800.00 in any property as exempt. This set of exemptions is usually used when the debtor is a renter, or if he/she has little or no equity in his/her home.
Right to a Discharge: A third and perhaps the most important right is the right of the individual to receive a discharge of pre-bankruptcy debts, including but not limited to credit cards, judgments from lawsuits and medical bills.
Other debts, however, generally cannot be discharged in a Chapter 7 bankruptcy. These include, certain taxes (such as income taxes that came due within the last three years before the bankruptcy was filed); debts incurred by fraud (if the creditor files a complaint in the bankruptcy court); debts not listed by the Chapter 7 Debtor in his or her schedules; debts arising from willful or malicious injury caused by the Chapter 7 Debtor; most educational loans; certain drunk/intoxicated driving damages caused by the Debtor (except property damage); charges made upon credit cards shortly before the bankruptcy; cash advances against credit cards taken out shortly before the bankruptcy; and, child/spousal maintenance, support, and alimony obligations.
If a debtor owns consumer goods such as a car, boat, computer, television, washer and dryer, which were purchased on credit and subject to a lien in favor of a creditor (i.e., Sears, Circuit City, Montgomery Wards, etc.), and the debtor would like to keep the item, the debtor must either "reaffirm" the obligation (contract with the creditor that the debtor will continue to make payments), "redeem" the item (purchase the item outright from the creditor based on its fair market value), or return the item to the creditor with the balance due being discharged in the bankruptcy case.
Effect on Credit: A Chapter 7 bankruptcy will appear on all credit reports for up to ten (10) years. Some people are able to re-establish credit after they file bankruptcy through car and home loans, as well as secured credit cards.
Lastly, an individual can only receive a Chapter 7 bankruptcy discharge once every six (6) years counted from the date the bankruptcy was filed.