The Chapter 7 bankruptcy process starts when a debtor files a petition and schedules in the bankruptcy court. The debtor must include information about property, debt, and income. The debtor must also file a means test. The bankruptcy means test is a relatively new requirement that Congress designed to weed out abuse of the bankruptcy system. It adds up income and expenses, many of which are set by IRS standards, and determines if income exceeds expenses by more than a few dollars. Unfortunately, the means test is poorly drafted and illogical, and does not do much to stop abuse.
After the debtor files the petition and schedules, the bankruptcy court assigns the case to a bankruptcy trustee. The trustee will hold a meeting of creditors about one month after the debtor files. The meeting of creditors is the creditors’ chance to ask questions about the debtor’s finances and bankruptcy. Creditors rarely show up and the trustees generally complete six meetings every half hour. However, the trustee also asks several questions during the meeting and asks all of the questions necessary to establish jurisdiction and the prima facie case for a Chapter 7 bankruptcy. Therefore, most people never have to go back to court for their bankruptcy.
Meanwhile, it is the trustee’s job to gather up the debtor’s nonexempt assets, sell them, and distribute the money to the creditors. Most Chapter 7 cases have no nonexempt assets. Sometimes this requires some planning prior to filing for bankruptcy. For example, if the debtor has nonexempt cash, he can spend it on something exempt prior to filing. Also, trustees will often not pursue nonexempt property because it is not profitable to seize the nonexempt property. For example, a person in bankruptcy may have a nonexempt vehicle that does not run and might sell for just a couple hundred dollars. If the trustee wants it, the trustee will have to pay to have it towed, pay to store it, and pay an auctioneer to sell it. In the end, it is just not worth it.
After the meeting of creditors, interested parties such as creditors have 60 days to file objections to the bankruptcy. They may file objections to the discharge of specific debts, and/or an objection to the entire bankruptcy. In most bankruptcies, no one files an objection. If no one files an objection, the court enters the bankruptcy discharge after the 60 days pass, usually within a couple weeks after the 60th day. If someone files an objection to discharge of a specific debt, the court will still issue the discharge, but the debtor will have to litigate the specific debt before a bankruptcy judge.
After the court enters the bankruptcy discharge, the case stays open for a few months and the debtor still has to update the court with a new address if the debtor moves. This is the end of most bankruptcy proceedings. If you need bankruptcy advice, please contact me.