| People file Chapter 7 to eliminate debts they can no longer pay. The process involves mostly paperwork, and there is normally no courtroom or judge. Here's how it works:
We start by conversing on the telephone about your problem. 30 minutes to an hour is about average to go over things, but we can talk as long (and as often) as you wish. Once you have decided that Chapter 7 is necessary, if you have not already, you will need to take a credit counseling course. (This is discussed below in "Needed to Start".) We would then set up an appointment where you bring me your latest billing statements and credit reports, paycheck stubs, bank statements, etc.
Among other things, we will review your income and expenses carefully, and we will put together a list of all creditors (including their addresses) so the court can notify them. We go over all the information together at my office, and you do not fill out any forms in advance. We will do all this together, usually taking about 2-3 hours.
Once we have sorted out the details, I type the papers up and have you return to review and sign them several days later. At that point, the case is ready to file, and I usually file the papers the same day you sign them. Once filed, creditors are forbidden to contact you, and must talk to me instead (although there's not a lot left to say).
From there, we have a couple of chores left. The court will assign a bankruptcy trustee to be in charge of your case, and we will meet with that person for a few minutes about one month after filing. The trustee is not unpleasant to deal with, and there is rarely any reason for the trustee to keep your file open after this meeting.
The trustee has two main concerns: do you qualify for Chapter 7, and can any of your property be taken and sold to pay debt?
Qualifying for Chapter 7 used to be simple: all of your income must be needed to pay necessary expenses. That is, there was no real surplus in your cash flow, even without paying the debts to be cancelled in Chapter 7. Under the new law, if your gross income is much above the state median, Chapter 7 will likely be challenged by a trustee seeking to force you into Chapter 13 bankruptcy instead. In Chapter 13, you enter a payment plan that can last for 3-5 years. On the other hand, if your gross income is below the median, you will likely not face any challenge at all.
Congress has decided to use this method to determine eligibility, and I will be guided by their questionable logic. At this time, I will only be filing cases for clients with gross income below the median, or possibly within 10-20% above it. The median annual income amounts for Texas after 11/1/09 are: $38,940 (one person); $55,859 (two); $59,222 (three); $66,381 (four); plus $6,900 each beyond that. But note: your annual income is computed by averaging the past 6 calendar months' gross income and then multiplying the result by 12. Thus, your annual income (for Chapter 7) is effectively twice what you received in the 6 complete calendar months before you file. (That is, the six months ends the last day of the month before filing.) Be aware also that the definition of income is sweeping, and includes almost anything received, including rent from a roommate and withdrawals from retirement funds. (Loans, Social Security benefits, and tax refunds do not count.) If you are self-employed, you deduct your expenses first before calculating income, so your profit is what counts.
Your property is rarely sold by the trustee, although it helps a great deal if you have lived in Texas for the past two years. Far more likely, the exemption laws involved will allow you to keep everything you own, although some payments (house and car, mostly) must continue or else that creditor could still take back their collateral. But the trustee typically takes nothing. Thus, the trustee's involvement is usually brief. Someone has to look us over to make sure we are following the rules, but that's what I'm here for. I know the trustees and they know me. We all get along pretty well.
The case is not quite over after our meeting with the trustee. 60 days more must pass before the court can make the case final. There are three reasons for this.
First, if you want to "reaffirm" a debt, papers that do that must be filed during the 60 days. The only time reaffirming comes up is when you will be continuing to pay on a debt after bankruptcy, typically a house or car loan. The creditor involved not only wants you to make payments, but also to sign an agreement saying you will. The result is that you will still owe the debt just as before bankruptcy, and it will be the exact same deal in most all cases. However, if you later let the property go back to the lender, you will owe any amount the sale of the property does not pay (which is the whole point of wanting you to reaffirm the debt). I generally discourage reaffirming debt, preferring to have my clients simply continue their payments. However, some creditors may insist on the reaffirmation, or will not report future payments to the credit bureaus unless you reaffirm.
Second, if a creditor sees a lot of debt (I mean $1,000 plus) added to their account within two or three months before filing bankruptcy, they could file a complaint during the 60 days asking the court to not cancel that part of their debt. This happens rarely, because I would not file a case where I expected that kind of challenge. We would wait and file later, most likely, but be aware that continued heavy use of credit may mean it's not safe to file yet. Even a balance transfer can be a problem, although no money was paid directly to you. Small charges (gas, groceries) do not worry me.
Third, you must complete a financial management course within 45 days after the meeting with the trustee. This concept is new, and seems to correspond to the credit counseling now required before filing bankruptcy. This course is offered over the telephone or internet, like credit counseling, and providers are found at the same websites mentioned below in "Needed to Start". The intent is to provide you with information that may prove useful after bankruptcy. People have done this on their own before, but now you must do so to be discharged by the court. I know of one website that only charges about $15 (each) for this (WWW.NATIONALPERSONALFINANCE.COM).
So, the 60 days runs out, and the court grants you a discharge, or cancellation, of your debt. There is no second hearing to attend; the discharge order is mailed to us soon after, and the case is closed. Your credit report will show the Chapter 7 for 10 years, but the negative effect on your credit will likely end within about one year (cars, credit cards) to two years (mortgage, refinancing).
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