The Chapter 7 bankruptcy rules are not as difficult to understand as you might believe, but there’s quite a few of them. Keep reading to get a basic understanding of the Chapter 7 bankruptcy rules and ensure a successful Chapter 7 bankruptcy filing.
Written by Attorney Andrea Wimmer.
Updated September 23, 2020
The Chapter 7 bankruptcy rules are a combination of the United States bankruptcy laws and the local court rules. The United States bankruptcy laws can be separated into the Bankruptcy Code and the Bankruptcy Rules. Since these bankruptcy laws cover every bankruptcy case, there’s quite a few of them. No worries, you don’t have to learn them all. But, if you’re going to file Chapter 7 bankruptcy, it’s a good idea to have a basic understanding of the Chapter 7 bankruptcy rules so you don’t jeopardize your fresh start due to a simple oversight.
There’s no rule that says you have to have a lawyer to file Chapter 7.
While we’re going to be looking at what the rules are, let’s start with some bankruptcy basics: There’s nothing in the United States bankruptcy laws that requires you to hire a lawyer to file bankruptcy. Only businesses have to hire a bankruptcy lawyer because they can’t represent themselves. People can, and many do so quite successfully.
There is a rule that says you have to use the official bankruptcy forms.
The United States bankruptcy courts required that everyone filing bankruptcy anywhere in the country use the same bankruptcy forms. The forms are available for free on the U.S Courts website. If you download any bankruptcy forms, make sure you’re getting them from a .gov site as that’s the only way to make sure they’re the official version.
In addition, the bankruptcy court in your state may have special local forms. These local bankruptcy forms need to be filed (if required) on top of the federal ones; they’re not a replacement.
Rules For Chapter 7 Eligibility
There are a couple of rules that determine whether someone is allowed to file Chapter 7 bankruptcy in the first place.
You have to take credit counseling.
At some point in the 6 months (180 days, to be exact) before filing bankruptcy, everyone has to take a credit counseling course from an approved credit counseling agency. Without it, you’re not eligible to file any type of bankruptcy. Plus, the credit counseling agency you choose for this 1-hour course has to be approved by the United States Trustee.
You have to pass the Chapter 7 bankruptcy means test.
The means test is an eligibility analysis for Chapter 7 bankruptcy. Failing the means test is a bit of a bad news/good news situation. On the one hand, you’re not eligible to file a Chapter 7 bankruptcy case because you make too much money. On the other hand, while it may not be enough to keep up with all the monthly payments creditors want you to make, your monthly income is pretty solid.
How does the means test work?
Basically, it sets the income limits for Chapter 7 bankruptcy. If your current monthly income is less than the median income in your state, you pass the means test. If you’re earning more than the median income, you may still pass the means test. You have to show that your disposable income (after deducting your income tax withholdings and considering your living expenses) is not enough to pay your unsecured creditors at least 25% in a Chapter 13 bankruptcy.
Chapter 7 Bankruptcy Rules For After The Case Is Filed
Once your Chapter 7 bankruptcy case is filed, the bankruptcy laws immediately provide you with protection from your creditors in the form of the automatic stay. The Bankruptcy Code bans any collection activity against the debtor and the debtor’s property as soon as a bankruptcy petition is filed. That’s why a wage garnishment has to stop right away after a bankruptcy case is filed. But, that’s not the only thing that happens. There are additional rules for the person filing Chapter 7 bankruptcy, their creditors, and the bankruptcy trustee handling the case.
Chapter 7 Rules For the Person Filing Bankruptcy
Every person filing bankruptcy has to meet the requirements of the Bankruptcy Code. Once their Chapter 7 bankruptcy case has been filed, this means that, at minimum, they have to:
Pay the court filing fee (if it isn’t waived or paid at the time of filing)
Submit their last federal income tax return to their bankruptcy trustee
Attend their meeting of creditors, and
Complete the second bankruptcy course, called debtor education or financial management.
Of course, that’s the bare minimum. You have to cooperate with your bankruptcy trustee. Oftentimes that means sending them certain other documents (like bank statements, for example) in preparation for the creditors’ meeting. Sometimes that means letting the trustee know if you become eligible to receive an inheritance within 6 months from your filing date. It just depends on what’s going on in your case. You also have to make sure that you update both the bankruptcy court and the trustee if your contact information changes.
What is the trustee’s role in all of this?
The trustee’s job is to determine if there are any non-exempt assets that can be sold for the benefit of unsecured creditors. That means reviewing the bankruptcy forms, tax returns, and other documents, like bank account statements. Asset cases stay open for however long the trustee takes to handle things and the filer has to continue to cooperate with them even after the bankruptcy discharge is granted. Most people filing Chapter 7 bankruptcy don’t own any nonexempt property, so the trustee’s role is limited and their job is often done before a discharge of debts is granted.
Rules For Dealing With Secured Debts
Secured debts are connected to a specific piece of property. Car loans are a common secured debt in Chapter 7 proceedings. If you have this type of debt, you have to let the secured creditor know what you want to do with it by filing a Statement of Intentions. But, that’s not all.
If you’re giving the car back, there’s not much else to do. But, if you’re planning on redeeming the car or reaffirming the loan, the Chapter 7 bankruptcy rules require that you actually follow through with it. Usually that means either filing a motion to redeem or signing a reaffirmation agreement. If you don’t do so within 45 days from the date of your creditors’ meeting, the automatic stay expires and the bank can come pick up the car whenever.
Chapter 7 Bankruptcy Rules For Creditors
The big one here is the automatic stay outlined in the Bankruptcy Code, mentioned earlier. Aside from that, creditors have to meet certain deadlines if they want to object to something in your case. In no-asset cases, unsecured creditors often don’t take any action at all. Unsecured debt includes credit card debt, personal loans, most tax debts, and student loans.
Are the rules the same if I file Chapter 13 bankruptcy?
The Bankruptcy Rules are the same but a different chapter of the Bankruptcy Code applies. That’s actually why the different types of bankruptcy are called “chapters.” In a Chapter 13 proceeding, the filer proposes a repayment plan that pays back certain types of debt in full and others in part before the bankruptcy discharge is granted by the court. Since Chapter 13 cases go on for 3 - 5 years from the filing date, you have a few additional responsibilities, including:
Keeping the Chapter 13 bankruptcy trustee updated if your income changes and - if requested - providing them with your tax returns for each year that your case is pending
Filing any amendments necessary to update your income, expenses, or add additional assets you may receive during the bankruptcy process
Staying current with any domestic support obligations like child support or alimony
The most important rule of bankruptcy is to be truthful. The bankruptcy laws provide a fresh start to the “honest but unfortunate debtor.” Anyone trying to hide anything can get in trouble, even if they follow all the other rules perfectly. That’s why it’s so important to file an amendment if you realize you forgot to include something in your forms.
If you’re eligible to file Chapter 7 and there’s nothing particularly unusual about your financial situation, the bankruptcy process is pretty straightforward and you don’t necessarily need to hire a bankruptcy attorney to help you with your case. Working with a bankruptcy lawyer you trust can be a great investment, if you can afford to make it. But, as mentioned above, there’s no rule that says you have to hire a bankruptcy attorney.
If you can’t afford an attorney, see if you’re eligible to use Upsolve’s free online tool to prepare your bankruptcy forms. For more information, check out our guide on how to file bankruptcy and feel free to browse Upsolve’s Learning Center.