Chapter 7 Bankruptcy Rules
A Chapter 7 bankruptcy involves the sale of individual or business assets to pay off debts. A Chapter 7 bankruptcy may be an alternative to other bankruptcies, such as Chapter 11 or Chapter 13, which will prevent liquidation of some assets and pay down debt rather than discharging most of it.
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Eligibility
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Individuals and businesses both are eligible for Chapter 7 bankruptcy. Before bankruptcy proceeds, credit counseling must be sought.
Filing
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A petition must be filed at a local courthouse and all relevant paperwork must be included such as tax receipts, pay stubs, debt records, living expenses, proof of credit counseling and an asset list. A fee for filing will be assessed unless an individual's income is substantially below poverty level.
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Stop Action
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Once a Chapter 7 bankruptcy has been filed, the courts will issue a stop action notification to creditors. This will prevent most creditors from demanding payment or taking legal action against a debtor.
Asset Sale and Discharge
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All non-exempt assets will be sold by a state trustee to pay off outstanding debt. Most debts that cannot be paid off via assets sales are then discharged by the court. Creditors cannot demand payment on debt that has been discharged.
Exclusions
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Some debt does not qualify for discharge under Chapter 7 bankruptcy. These debts may include alimony, child support, government student loans, back taxes or fraudulent charges.
Who Isn't Eligible
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Persons who have received a chapter 7 bankruptcy in the last 7 years are not eligible to file again until after the 7-year mark has passed. Applicants who currently earn over a state median are required to take a means test and may be denied a bankruptcy if they are able to pay debt through other means.
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