What debtors should know about liquidation bankruptcy

Chapter 7 bankruptcy, or liquidation bankruptcy, may provide relief for those who are seeking a new financial start.

Millions of people across the country are struggling with debt, and have considered a number of options to free themselves from their financial burdens. While there are several types of bankruptcy available, Chapter 7 bankruptcy is the most common. Otherwise known as liquidation bankruptcy, Chapter 7 allows people to begin again with a clean financial slate. For the 12-month period ending in March 2016, 833,515 people filed for bankruptcy, according to U.S. Courts. Approximately 523,394 of those cases were Chapter 7. Although this popular type of bankruptcy helps to relieve people from the burdens of debt, it is crucial that people understand what Chapter 7 is to ensure that it is the right choice for them.

Qualifying

To qualify for Chapter 7, debtors' must pass the state means test, showing that their income is below the state median. If their income is higher, they must meet certain criteria before filing. Debtors must also take a qualified credit counseling course within 180 days prior to filing their application for bankruptcy.

In addition to the bankruptcy application, debtors must submit required paperwork, such as a statement of monthly net income, a list of all income and expenses, a schedule of assets and liabilities and a comprehensive list of creditors and the amount that is owed to each one.

Automatic stay

Once the application is submitted, the court will issue an automatic stay. This stops creditors from contacting people regarding their debt. Once an automatic stay is in place, creditors are prohibited from pursuing lawsuits, garnishing wages from paychecks, calling debtors or contacting them by email or mail. It is important that debtors list all creditors on their paperwork as these are the creditors that will be given the automatic stay.

Meeting of creditors

The trustee who is appointed to the case will schedule a meeting of creditors between 21 and 40 days after the bankruptcy application is filed. During this meeting, the trustee will ensure the debtors understand the consequences of filing for bankruptcy. The trustee may also decide to repossess certain property and/or assets from the debtor and distribute those funds to the creditors involved in the case. Creditors are also invited to attend the case and ask any questions they may have.

Make sure the process is done correctly

If you are considering filing for bankruptcy, you'll want to ensure that all of your documents are submitted completely and on time. Attorneys who have an extensive knowledge of the bankruptcy process may be extremely helpful, as they may help debtors through the often complicated process.