Filing Chapter 7 Bankruptcy
A Fresh Start in Life
Chapter 7 bankruptcy is the most popular bankruptcy chapter because it offers the person filing bankruptcy the opportunity to eliminate debts and obtain a fresh start in life. Chapter 7 bankruptcy is commonly called simple bankruptcy, straight bankruptcy or full bankruptcy because it is the bankruptcy chapter most familiar to Americans. When the average person talks about filing bankruptcy they are most likely talking about filing chapter 7 bankruptcy.
Chapter 7 bankruptcy is actually the liquidation chapter of the bankruptcy laws that allows the person filing bankruptcy to eliminate debts in return for the potential liquidation of certain non-exempt assets. Under chapter 7 bankruptcy, a trustee is appointed to determine if there are any assets to collect for the benefit of the estate.
In most chapter 7 bankruptcy cases there are no assets that the trustee collects. In these overwhelming majority of cases, the person filing bankruptcy keeps all of the assets and property but finds themselves in the fantastic position of being debt-free!
The primary purpose of filing chapter 7 bankruptcy is to receive a bankruptcy discharge order that eliminates debts. Chapter 7 bankruptcy is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. People who file chapter 7 bankruptcy whose debts are primarily consumer debts are subject to a means test designed to determine whether the case should be permitted to proceed under chapter 7. If the income of the person filing bankruptcy is greater than the median income for the state of residence and family size, in some cases, creditors have the right to file a motion requesting that the court dismiss the case. It is up to the court to decide whether the case should be dismissed. Under chapter 7, the person filinng bankruptcy may claim certain property as exempt under governing law. A trustee may have the right to take possession of and sell the remaining property that is not exempt adn use the sale proceeds to pay creditors.
Although obtaining the discharge is the purpose of filing chapter 7 bankruptcy, the bankruptcy court may deny the discharge if the purpose filing chapter 7 bankruptcy is found to have committed certain kinds of improper conduct setforth in the bankruptcy laws. The bankruptcy discharge order does not cover all debts owed by all people filing bankruptcy. Even if the person filing bankruptcy receives a general discharge, some particular debts are not discharged under the bankruptcy law because of public policy reasons. The person filing chapter 7 bankruptcy may still be responosible for most taxes and student loans; debts incurred to pay nondischargeable taxes; domestic support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; certain debts which are not properly listed in the bankruptcy papers; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs. Also, if a creditor can provide that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the bankruptcy court may determine that that particular debt is no discharged.
There is no repayment plan as there is in bankruptcy chapters 11, 12 & 13. Receiving the discharge that eliminates debts is a tradeoff that comes to the person filing bankruptcy for the willingness to surrender non-exempt assets. The good news is most people filing bankruptcy have litte to no non-exempt assets that are at risk of loss. So the typical person filing bankruptcy will keep all their assets and will not lose any property. But, to receive this discharge the person filing Chapter 7 bankruptcy must provide comprehensive financial documentation that includes all assets, liabilities, income, expenses, tax returns, pay stubs/pay advices, and more.
In each case, a bankruptcy trustee will be appointed to review the comprehensive financial documentation. The trustee will also personally meet with the person filing Chapter 7 bankruptcy. The trustee then makes a decision whether to liquidate any or all "non-exempt" assets for the benefit of the creditors. If desired, the bankruptcy trustee could gather and sell the "nonexempt" assets of the person to file chapter 7 bankruptcy and use the proceeds of such assets to pay creditors in accordance with the provisions of the bankruptcy laws. The bankruptcy laws will allow the person filing chapter 7 bankruptcy to keep certain exempt property; but a trustee will liquidate the remaining assets. Accordingly, the person filing Chapter 7 bankruptcy should recognize that the filing of a bankrutpcy case may result in the loss of property.
A person who knowingly and fraudulently conceals assets or makes a false oath or statement under penalty of perjury, either orally or in writing, in connection with a bankruptcy case is subject to a fine, imprisonment, or both. All information supplied by a person filing bankruptcy in connection with a bankruptcy case is subject to examination by the Attorney General acting through the Office of the United States Trustee, the Office of the United States Attorney, and other components and employees of the Department of Justice.
Creditors are prohibited by the bankruptcy laws' automatic stay provisions from taking collection actions against the person filing bankruptcy. Prohibited collection actions are listed in Section 362 of the bankruptcy laws. Common examples of prohibited actions include contacting the bankruptcy filer by telephone, mail or otherwise to demand payment; taking actions to collect money or obtain property from the person filing bankruptcy; repossessing the filer's car, truck, or van; starting or continuing a lawsuit or foreclosures; and garnishing wages or deducting from the filer's wages. Under certain circumstances, the stay may be limited to 30 days or not exist at all for filers who have filed bankruptcy more than once in the past 12 months, although the bankruptcy filer can request the court to extend or impose the automatic stay for the remainder of the case.
In general, most all Americans qualify to file chapter 7 bankruptcy. Bankruptcy protection is available under chapter 7 regardless of the amount of debts owed by the person filing chapter 7 bankruptcy or whether that person is solvent or insolvent. However, there are a few eligibility exceptions. For example, a person filing chapter 7 bankruptcy cannot file chapter 7 unless within 180 days before filing, that person has received credit counseling from an approved credit counseling agency either in an individual or group briefing. Another limitation is that the person filing chapter 7 bankruptcy cannot file a chapter 7 case if that person has voluntarily dismissed a previous bankruptcy case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. Next, you cannot file under chapter 7 if during the preceding 180 days a prior bankruptcy case was dismissed due to that person's willful failure to appear before the court or comply with orders of the court. Plus, to file chapter 7 bankruptcy a person must pass the chapter 7 means test ... a complex analysis of income and expenses during the 6 months prior to filing.
There is much work to be done prior to filing a chapter 7 bankruptcy case. A comprehensive strategy should be employed to gather and review necessary financial documentation, digest the bankruptcy laws and procedure, and execute the bankruptcy petition, schedules, and statements. An experienced bankruptcy attorney would be helpful to guide you through this process.
A chapter 7 bankruptcy case begins with the filing of a petition with the bankruptcy court in your district. In addition to filing the bankruptcy case, the person filing chapter 7 bankruptcy must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; (4) a schedule of executory contracts and unexpired leases; (5) a creditors matrix; and (6) a statement of monthly income/ means test . The person filing chapter 7 bankruptcy must file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling. Next, the person filing chapter 7 bankruptcy must also provide the assigned case trustee with copies of pay stubs/pay advices for the 60-day period prior to the date the case was filed. Plus, the person filing chapter 7 bankruptcy must provide the case trustee a copy of tax returns or IRS tax transcripts for the most recent tax year as well as any tax returns filed during the case. A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. Official bankruptcy forms are required and highly structured. These forms can be obtained from your bankruptcy attorney.
To file bankruptcy is not free. The Clerk of the US Bankruptcy Court will charge the person filing chapter 7 bankruptcy $299 to file the bankruptcy case. The person filing chapter 7 bankruptcy must also pay for the pre-filing bankruptcy credit counseling course (approximately $25 to $50) and the bankruptcy filer must pay for the post-filing bankruptcy debtor education course (approximately $17 to $50).
In order to satisfy the bankruptcy documents requirement, the person filing chapter 7 bankruptcy must provide the required information requested in the petition, statement of financial affairs, and schedules. That information includes, in part, the following:
Married couples filing bankruptcy must gather the same information for both spouses regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing a bankruptcy case. In a situation where only one spouse is prepared to file a bankruptcy case, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.
Filing a chapter 7 bankruptcy case automatically stays (stops) most collection actions against the person filing chapter 7 bankruptcy or their property. For example, file a chapter 7 bankruptcy case to stop foreclosure, stop sheriff sale, stop repossession, stop garnishment, and stop lawsuit. But there are exceptions. The filing of the bankruptcy case does not stop certain types of actions listed under 11 U.S.C. § 362(b), like police actions. The automatic stay would not be in effect at all if the person filing chapter 7 bankruptcy had two prior bankruptcy cases pending during the 12 month period prior to filing a new bankruptcy case; however, the bankruptcy court could impose the automatic stay on creditors after a motion and hearing. In other cases, the stay may be effective only for a short time; for example, the automatic stay would be in force for only 30 days (unless extended upon motion and a court hearing) if the person filing chapter 7 bankruptcy had one prior case pending during the 12 month period prior to filing a new bankruptcy case. The automatic stay arises automatically by operation of law and does not require any court hearing or judicial action. As long as the stay is in effect, creditors generally may not initiate and must stop foreclosure, stop sheriff sale, stop lawsuit, stop wage garnishment, demand letter, or even telephone calls demanding payments. The bankruptcy attorney could provide written notice to the creditors if a critical action is pending on the day the bankrutpcy case was file. Either way, the bankruptcy clerk gives notice of the bankruptcy case filing to all creditors whose names and addresses are provided by the person filing bankruptcy.
The person filing chapter 7 bankruptcy is required to meet with the chapter 7 trustee between 20 and 40 days after the petition is filed. The trustee will conduct a Section 341 meeting of creditors to review the financial documents and court papers filed with the clerk of the court when the bankruptcy case was filed. During this meeting, the bankruptcy trustee places the person filing chapter 7 bankruptcy under oath, and both the trustee and creditors, if present, may ask questions. To file chapter 7 bankruptcy, a person must agree to attend the meeting in person. This is a great time to have a bankruptcy attorney at one's side. The person filing chapter 7 bankruptcy must truthfully answer questions regarding financial affairs and property. If both spouses have filed a joint petition, both must attend the creditors' meeting and answer questions.
Again, the person filing chapter 7 bankruptcy must tell the truth or risk losing the bankruptcy discharge. More importantly, false testimony under oath would be perjury and could result in criminal prosecution. The person filing chapter 7 bankruptcy is also required to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The bankruptcy laws require the trustee to ask questions at the meeting of creditors to ensure that the person filing chapter 7 bankruptcy is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on one's credit history, the ability to file a bankruptcy case under a different bankruptcy chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the person filing chapter 7 bankruptcy is aware of this information. The bankruptcy judge assigned to your case will not attend the meeting.
The person filing chapter 7 bankruptcy could convert the bankruptcy case to chapter 7 bankruptcy if the bankruptcy filer is currently involved in a chapter 13 case. This is most common when the person filing chapter 7 bankruptcy has suffered a substantial reduction in income or an increase in expenses --- or both. In these cases, the person filing chapter 7 bankruptcy may no longer be able to fund a viable chapter 13 plan. Then, the court would allow the chapter 13 bankruptcy filer to convert the chapter 13 bankruptcy case to a case filed under chapter 7 bankruptcy. Once converted, the bankruptcy case would continue as if the case had been filed under chapter 7 bankruptcy originally. The person filing chapter 7 bankruptcy would then be entitled to a chapter 7 discharge as if the case had been filed as a chapter 7 bankruptcy case from the inception.
An impartial case bankruptcy trustee is appointed to every chapter 7 bankruptcy case by the the U.S. Trustee's Office. The appointment is typically assigned randomly via a computer assignment system. You do not have the option of selecting the trustee assigned to your case. The person filing chapter 7 bankruptcy gets the "luck of the draw." The trustee is required to meet with the person filing chapter 7 bankruptcy at the Section 341 meeting of creditors and to determine whether there are any "non-exempt" assets. If non-exempt assets exist, then the trustee could administer the case and liquidate nonexempt assets. However, it is more typical that there are NO assets to administer and all assets are "exempt." If all assets are exempt or subject to valid liens (like mortgages on a home and vehicle liens on cars and trucks), the trustee will normally file a "no asset" report with the court, and there will be no liquidation of assets and no distribution to unsecured creditors. In that case the person filing chapter 7 bankruptcy would not lose any asset or piece of property. Most chapter 7 bankruptcy cases involving individual debtors are "no asset" cases.
But if the case appears to be an "asset" case, then the clerk of the court would mail to the listed creditors a blank proof of claim form. To receive any money from the trustee, a creditor must file a completed and signed proof of claim form with the clerk of the court's office. Unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed to file a claim. In the typical no-asset chapter 7 bankruptcy case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim. Although a secured creditor does not need to file a proof of claim in a chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim.
A bankruptcy estate is created by filing a chapter 7 bankruptcy case. The bankruptcy estate technically becomes the temporary legal owner of all property. It consists of all legal or equitable interests owned by the person filing chapter 7 bankruptcy in property as of the commencement of the case, including property owned or held by another person if one has an interest in the property. Generally speaking, the creditors are paid only from nonexempt property of the estate liquidated and administered by the trustee.
The primary role of a chapter 7 bankruptcy trustee in an asset case is to liquidate nonexempt assets in a manner that maximizes the return to unsecured creditors. The trustee accomplishes this by selling the property if it is free and clear of liens (as long as the property is not exempt) or if it is worth more than any security interest or lien attached to the property and any exemption held in the property. The trustee may also attempt to recover money or property under the trustee's "avoiding powers." The trustee's avoiding powers include the power to: set aside preferential transfers made to creditors within 90 days before the bankruptcy petition was filed; undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law.
Although rarely happening, the person filing chapter 7 bankruptcy could be paid any excess liquidated assets remaining after all creditors who filed a valid and timely proof of claim have been paid in full. Consequently, the person filing chapter 7 bankruptcy would not be particularly interested in the trustee's disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case, like taxes and domestic support obligatons. Thus the primary concern in a chapter 7 bankruptcy case would be to retain exempt property and to receive a discharge that covers as many debts as possible.
The person filing chapter 7 bankruptcy should be granted a discharge at the conclusion of the chapter 7 bankruptcy case. The discharge would release the person filing chapter 7 bankruptcy from personal liability for most debts and would prohibit the creditors owed those debts from taking any collection actions. Because a chapter 7 bankruptcy discharge is subject to many exceptions, the person filing chapter 7 bankruptcy would be smart to consult a skilled bankruptcy attorney before filing a bankruptcy case to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, a person filing chapter 7 bankruptcy receives a discharge in more than 95 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object to the entry of a discharge order, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the Section 341 meeting of creditors.
The grounds for denying a discharge in a chapter 7 bankruptcy case are narrow and are construed against the party trying to deny the discharge. The party seeking to deny a discharge must take court acton and file court papers before the bankruptcy judge assigned to your case to review. The bankruptcy judge makes the final decision on whether the bankruptcy filer would be entitled to a discharge. Among other reasons, the court may deny a discharge if it finds that the person filing chapter 7 bankruptcy: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the bankrutptcy estate; or failed to complete an approved instructional course concerning financial management.
After the person filing chapter 7 bankruptcy receives a discharge, a secured lender would be barred or enjoined from attempts to collect money. However, the secured lender could retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if the person filing chapter 7 bankruptcy wishes to keep certain secured property (such as an automobile), that person should consider "reaffirming" a debt. A reaffirmation agreement is an agreement between the person filing chapter 7 bankruptcy and a particular creditor stating that the filer will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the person filing chapter 7 bankruptcy continues to pay the debt in accordance with the terms of the reaffirmation agreement.
Reaffirming a debt is not mandatory. But if the person filing chapter 7 bankruptcy decides to reaffirm a debt, one must do so before the discharge order is entered. Both the person filing chapter 7 bankruptcy and the creditor must sign the written reaffirmation agreement; the agreement must then be filed with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in 11 U.S.C. § 524(k). Among other things, the disclosures must advise the person filing chapter 7 bankruptcy of the amount of the debt being reaffirmed and how it is calculated. The disclosure must also state that reaffirmation means that the person filing chapter 7 bankruptcy has personal liability for that debt and will not be discharged in the bankruptcy. The disclosures also require the bankruptcy filer to sign and file a statement of your current income and expenses which show that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement.
If the person filing chapter 7 bankruptcy is represented by a bankruptcy attorney in connection with the reaffirmation agreement, the attorney must consider certifying in writing that the attorney has advised the bankruptcy filer of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the bankruptcy filer was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the filer or filer's household. The bankruptcy laws require a reaffirmation hearing if the person filing chapter 7 bankruptcy has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. The person filing chapter 7 bankruptcy may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.
Once the discharge order has been entered, creditors may no longer initiate or continue any legal or other action to collect a discharged debt. But not all debts may be discharged in chapter 7. Debts not discharged include debts for alimony, child support, domestic support obligations, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the operation of a motor vehicle while intoxicated from alcohol or other substances, and debts for certain criminal restitution orders. The person filing chapter 7 bankruptcy will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 bankruptcy case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.
The court may revoke a chapter 7 bankrutpcy discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud committed, if the person filing chapter 7 bankruptcy acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or failed to surrender the property to the trustee, or if you make a material misstatement of fact or failed to provide documents or other information in connection with an audit of your case.
In short, the person filing chapter 7 bankruptcy must be honest, fully disclose one's financial situation, provide the required documentation, and cooperate fully in all aspects of the bankruptcy case. In return, the person filing chapter 7 bankruptcy should be discharged of debts and be debt-free with a fresh start in life.