Chapter 7 Bankruptcy Rules and Laws

Bankruptcy allows people that cannot meet their final agreement to be excused from repaying some or all of their debt. It has been in existence since ancient times. In the US, the rules and process to file bankruptcy are under control of federal law. States are prohibited from formulating laws in this section of the law. There are two major types of bankruptcies. In a liquidation bankruptcy, debtors must forgo their property, which is sold and the takings are distributed to creditors. In return, all debts are permanently released. In a reorganization bankruptcy, debtors can keep their property. But they must agree to opt for an instalment plan to repay creditors a portion of the amount they owe. Chapter 7 bankruptcies are by far the most common. In Chapter 7 bankruptcies, the debtors must turn over all of his ‘non-exempt’ property to a supervising officer. This officer is known as the bankruptcy trustee. A property will be considered as exempt if it falls within specific categories of belongings that debtors can keep with them, such as a certain amount of clothing, household items, tools for work and in some cases, vehicles and the family home. The chapter 7 trustee sells the debtor’s non-exempt property. The money will be distributed among all the creditors. The creditors might not receive the full amount of their claims. Remaining loans and obligations of the debtor are forgiven and can never be collected. If any creditors will attempt to collect debts that have been discharged then he will have to face severe penalties under federal law.

Under chapter 7 bankruptcy rules, a debtor is not eligible under certain situations: -

·         A previous debt was discharged within the last eight years under chapter 7 bankruptcy.

·         A previous debt was discharged within the last six years under chapter 13 bankruptcy.

·         If their income, debts and expenses allow them to file for chapter 13 bankruptcy.

·         The debtor attempted to deceive creditors or the bankruptcy court.

·         The debtor failed to attend credit counselling.

A debtor must attend credit counselling prior to filing for chapter 7. Upon completion of credit counselling with an agency approved by the United State trustee, the debtor can file for bankruptcy with a local bankruptcy court. Once a debtor files for bankruptcy, the bankruptcy court will issue a stay order. After this stay order a creditor cannot attempt to collect a debt during the bankruptcy process. It is a protection for the debtor. In effect, all collection activities must cease. It will also protect the debtor from wage garnishment and the takeover of a debtor’s property such as a house, a vehicle or a bank account.