You must complete a credit counseling class approved by the bankruptcy court within six months before filing for Chapter 7. Since Chapter 7 bankruptcy is governed by Chapter 7 of the federal bankruptcy code, you must file your petition with a federal bankruptcy court. Your petition must be filed in the appropriate judicial district -- normally the district where you live or where most of your assets are located.
Once you file for bankruptcy, the court will issue an automatic stay -- a court order that prevents your creditors from suing you, seizing your property or independently contacting you during bankruptcy proceedings. The U.S. trustee or the bankruptcy court will appoint a bankruptcy trustee to examine your finances, administer your case, sell your nonexempt assets and pay your creditors. If the trustee finds that your finances are sufficient to pay your creditors in full, the court will either reject your petition or convert it into a petition for another type of bankruptcy, such as Chapter 13, which requires you to pay your debts in installments.
Some of your assets cannot be seized by your unsecured creditors, either during or after bankruptcy proceedings. While the exact assets vary from court to court, they typically include your personal residence, your car, your work tools and your household furnishings. All of these items are exempt only up to a certain value, although these values vary from state to state. A secured creditor can foreclose or repossess property used as collateral for a debt, even if the property would otherwise be exempt under bankruptcy rules. If the collateral is worth less than the debt, however, the creditor may not demand that the debtor pay the deficiency.
Secured Vs. Unsecured Creditors
A debt is "secured" when your creditor can seize a particular asset if you don't pay the debt. If you don't pay your car payments, for example, your creditor can repossess your car. An unsecured debt is not secured by any particular asset. Your secured creditors must obtain permission from the bankruptcy court before repossessing your property. If you wish to keep a particular asset despite your bankruptcy, you can ask your creditor to allow you to reaffirm your debt. This will allow you to keep the property as long as you keep up with the payments. After your secured creditors have been satisfied, your unsecured creditors are entitled to share your remaining nonexempt assets.
Once the court discharges your debts, you will no longer be legally obligated to pay them, even if your creditors have not been paid in full. Limitations apply to your debt discharge, however. For example, you must list all of your creditors of your bankruptcy filing so that the court can notify them of the proceedings. If you don't, your debt discharge will not apply to any creditor you did not list. Some assets can never be discharged in bankruptcy for public policy reasons -- federally guaranteed student loans, certain tax debts, child support and spousal support, for example.