Known as liquidation, Chapter 7 bankruptcy gives an honest citizen the chance to start all over and basically eliminates most debts, with the exception of some, including school loans, alimony and tax debts.

Eligibility

Only a person, corporation, partnership or other business entity can file for Chapter 7 bankruptcy. However, no one can file for chapter 7 relief if they have previously filed for bankruptcy within the past 6 months and had the request dismissed due to failure to follow the orders of the court, or if the debtor dismissed his or her own case after creditors tried to recover property.

Also, a debtor must receive credit counseling from an agency approved by the government within 6 months of filing for Chapter 7 bankruptcy, unless that requirement has been waived.

Income Requirements

Chapter 7 also is only available to debtors whose income is below the median for their state, or if they can pass a “means test” - a complicated mathematical formula that adds up income and expenses to determine what is left over. If it’s too much, the debtor either is out of luck, or can apply for a Chapter 13 bankruptcy plan.

Bankruptcy Districts

There are 90 bankruptcy districts in the country and a debtor begins his or her Chapter 7 case by filing in their local district. Along with the petition, the debtor has plenty of facts and figures to provide the local trustee or administrator. That information includes all assets and liabilities, along with a current listing of income and expenses. A statement of financial affairs also is required, along with the most recent year’s tax return.

Cost

The cost to file Chapter 7 is $299, which includes $15 for the local trustee or administrator, along with an administrative fee and the case filing fee.

Exemptions

As part of the paperwork blitz, debtors also must file a schedule of property they believe is exempt, and thus cannot be claimed by the trustee or administrator in the case. One of the main jobs of a trustee in Chapter 7 cases is to manage the estate and sell any non-exempt property and split the proceeds evenly among all creditors. Many cases, however, involve no assets.

Some exemptions are included in the federal Bankruptcy Code, while each state has its own list of exemptions, usually including a portion of the value of the main house and vehicle.

The debtor uses all the income and expense information to determine total gross income. That figure is compared to median figures compiled by the government for all states. If a debtor is below the median amount, the Chapter 7 petition can continue. If not, the debtor goes into another mode of complicated calculations called the “means test.”

Using the debtor’s income figures and a combination of real expenses and expenses determined by federal guideline (the Internal Revenue Service), the debtor comes up with a figure left over after expenses are subtracted from all the income. The figure either allows the case to proceed, or requires the debtor to present special circumstances to receive approval from the trustee or abandon the case.

341 Meeting

The first official interaction with the bankruptcy court and trustee is the so called “341″ meeting of creditors. The meeting must be held no more than 2 months filing. The trustee and any creditors who show up - often there are none - can ask the debtors questions under oath.

Though there are still a few hurdles to overcome, debtors receive discharges in 99 percent of Chapter 7 cases, usually within a couple of months of the 341 meeting.