Chapter 7 Bankruptcy
Bankruptcy protection in the United States involves several “types” of bankruptcies. Each type of bankruptcy is governed by different Chapters of the Bankruptcy Code. Maybe you’ve heard of Chapter 7, Chapter 11 or Chapter 13 Bankruptcy? Those phrases are used as short form but are also technically correct because each type is governed by the laws in that Chapter of the Bankruptcy Code. For individuals, by far the most common type of bankruptcy is filing for bankruptcy under Chapter 7. As bankruptcy lawyers, we often are asked about the different types of bankruptcy. Here’s a guide to a common type of bankruptcy – bankruptcy under Chapter 7 of the Bankruptcy Code.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcies can most aptly be defined as liquidations. You’ll take whatever property, cash, and assets you have (that aren’t exempt) and all of it will be liquidated. The proceeds will then be used to satisfy as much of your debt as possible. Once the proceeds are gone, the debts are discharged. If everything goes according to the rules, you’ll receive a discharge of any remaining debts at the end of your bankruptcy case.
Chapter 7 bankruptcy involves liquidating your non-exempt assets to satisfy as much of your debt as possible before discharging any unsatisfied debt.
For individuals, this means that a bankruptcy trustee assigned to your case is going to review the disclosures you’ve made regarding your financial circumstances, sell off any assets you have that are not exempt under bankruptcy exemption laws, and use any of the funds raised to satisfy creditors. There’s not going to be a repayment plan such as with a Chapter 13 bankruptcy case. Once your non-exempt property has been sold, your creditors will have their debts satisfied to the extent possible with available funds and when those funds are exhausted, the debts are generally discharged.
Which creditor receives what portions of the funds can depend on a number of factors. Perhaps one creditor has a lien on certain property or other legal obligation that alters the creditor’s priority. There are many unique circumstances that can change which creditor might be paid before another creditor. Ultimately, the creditors will be repaid in order of priority established under the law until the funds or assets in the bankruptcy estate are gone. If everything else falls into line with the overarching bankruptcy laws, any debts not covered by available funds will usually be discharged. Since a Chapter 7 bankruptcy is a liquidation, if you’re considering filing Chapter 7 bankruptcy, you should understand that you could lose property if it is not exempt in an effort to satisfy any and all outstanding debts before receiving a discharge.
From a policy perspective, one of the main aims of bankruptcy is to give honest individual debtors who comply with the bankruptcy law a “fresh start.” If the process is completed and is in compliance with the law, your liabilities ultimately should be extinguished as to discharged debts. In this sense, filing bankruptcy under Chapter 7 is akin to a fresh start.
Am I Eligible to File Bankruptcy Under Chapter 7?
Not everyone is eligible to file for Chapter 7 bankruptcy. While Chapter 7 bankruptcy protection is generally available to individuals, businesses in some cases, self-employed individuals or those operating an unincorporated business, and even married couples (couples may file jointly or separately and information from both will be used for filing), there’s eligibility requirements that must be met. Eligibility is a complex matter so it is best to speak with a bankruptcy attorney to determine if you’re eligible or not. Here’s a few of the eligibility requirements:
1.) During the preceding 180 days, you will not be eligible for Chapter 7 bankruptcy if you filed a bankruptcy petition but it was dismissed due to a willful failure to appear before the court; willful failure to comply with the orders of the court or a voluntary dismissal in response to a creditor or creditors seeking relief from the bankruptcy court to enforce liens they may hold. For more information, see 11 U.S.C. §§ 109(g), 362(d) and (e).
2.) In order to be be eligible for Chapter 7 bankruptcy, within 180 days before filing, you must have attended credit counseling from an approved credit counseling agency (unless there is an emergency situation such as a trustee’s determination that no courses are available). For more information, see 11 U.S.C. §§ 109, 111
3.) You must pass a “means test,” which determines whether you can pay your debts. If you can pay your debts, you may file a Chapter 13, but you would not be eligible to file under Chapter 7. If your “current monthly income”, a specifically defined amount, is more than a state established median, federal bankruptcy law requires application of a “means test” to determine whether you are eligible to file Chapter 7 bankruptcy. The federal means test is complicated but in general, you will not be eligible if your current monthly income over a certain amount. If you don’t pass the means test, there are limited circumstances that justify additional expenses or adjustments of current monthly income. It is very important that you consider means testing because if you’re not eligible due to the means test, your case either must be converted into a Chapter 13 or be dismissed. For more information, see 11 U.S.C. § 707(b)(1).
4.) You will not be eligible if you have filed for bankruptcy protection in the last eight years.
What Information Do I Need to File Bankruptcy Under Chapter 7?
Debtors filing bankruptcy under Chapter 7 must provide quite a bit of information. For a more thorough discussion of the forms need when filing bankruptcy under Chapter 7, click here. In general, the documents request detailed information regarding your assets, liabilities, income, expenditures, and financial affairs. The disclosure requirements are based primarily on Fed. R. Bankr. P. 1007(b).
The assigned case trustee must be provided a copy of your tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began) pursuant to 11 U.S.C. § 521. If you have primarily consumer debts (the funds were used for personal or household uses), there’s going to be additional document filing requirements. You’re going to need to complete credit counseling, provide a certificate of completion and a copy of any debt repayment plan developed through the counseling. You’ll need to provide evidence of payment from employers, if any, received approximately two months before filing; disclose your monthly net income and any increases in income or expenses you anticipate after filing for bankruptcy.
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, you’ll generally need to provide the following information (in addition to other information based on your individual case):
- A list of all your creditors and how much you owe each;
- Information about your income;
- A list of all of your property;
- A list of your monthly living expenses;
- Filing fees and administrative fees;
- Credit counseling from an approved agency within 6 months of filing
How to File Chapter 7 Bankruptcy
A Chapter 7 bankruptcy case begins with the filing of a bankruptcy petition. The bankruptcy petition is filed with the bankruptcy court designated to hear bankruptcy cases for the area where you as an individual lives or where a business involved was formed, has its main place of business or assets. In addition to the petition, you must also file with the court several other documents, forms and schedules.
By completing all of the required forms and commitments, you file bankruptcy by the submission of a full bankruptcy petition to the bankruptcy court.
Whenever someone initiates a case by filing for bankruptcy, an “estate” is created and technically becomes the temporary legal owner of all of your property. This bankruptcy estate consists of all legal or equitable property interests held by the debtor as of the start of the case. Once you file Chapter 7 bankruptcy, your property will be legally placed under the control of the bankruptcy trustee appointed by the bankruptcy court. In certain cases, some of your property may be exempt from creditors. Potential exemptions include homes, furnishings, cars, and pensions. Any property that you have the is not exempt may be liquidated to pay debts. For more about bankruptcy exemptions, speak to a local bankruptcy attorney in your state.
Filing a petition under Chapter 7 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. 11 U.S.C. § 362. But filing the petition does not stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. Once you file bankruptcy, the automatic stay should be imposed by operation of law. This, in almost all cases, will automatically stop most collections against you or your property. Due to significant penalties, creditors should be deterred from suing you, garnishing your wages, or calling you demanding payments.
Within several weeks after the petition is filed, the case trustee will hold a meeting of creditors. Attendance at the meeting of creditors is mandatory. At this Meeting, there won’t be a Judge. Instead, the trustee will ask questions generally about your financial circumstances and more specifically about the information you were required to include in your petition. In certain cases, a representative of creditors such as their lawyer or employee may also be present. This is one of the critical times it pays to have a bankruptcy attorney by your side. For more about the meeting of creditors, click here.
During this meeting, the trustee will place you under oath, and both the trustee and creditors may ask questions. You must attend the meeting and answer questions regarding your financial affairs and property. 11 U.S.C. § 343. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions. Within 10 days of the creditors’ meeting, the U.S. trustee will report to the court whether the case should be presumed to be an abuse under the means test described in 11 U.S.C. § 704(b).
If each requirement has been followed, whatever assets remain in the bankruptcy estate will be distributed to creditors. Federal bankruptcy law, specifically 11 U.S.C. § 726, establishes the order that property will be distributed from a debtor’s bankruptcy estate. There’s a hierarchy that is followed in the order of who is paid first out of six classes of claims. As each class with higher priority is paid in full, the class at the next level is allocated any overage until no assets remain in the bankruptcy estate.
When you file a Chapter 7 bankruptcy, you request the Court for a court ordered “discharge” of any further personal responsibility to pay your creditors.
Will I Lose All My Property if I File Bankruptcy Under Chapter 7?
As an individual debtor, one of the main things you want to accomplish is to retain exempt property. When someone files for bankruptcy, there’s exemptions imposed by law to the property that may be kept outside of the bankruptcy estate. These are called exemptions or property that is exempt from the bankruptcy court. Among the schedules that an individual debtor will file is a schedule of “exempt” property. This form exists because individual debtors can protect some property from creditors in certain cases. This can either be based on Federal bankruptcy exemptions under 11 U.S.C. § 522 or the laws in your home state.
Many states have taken advantage of a provision in the federal bankruptcy laws that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult with a local bankruptcy attorney to determine the exemptions available in the state where you live.
The Chapter 7 Discharge
A discharge releases you from the obligation to repay most debts. Furthermore, it will prevent the creditors that are owed from making any collection attempts against you after your case. If you do obtain a discharge, your creditors cannot initiate or continue any legal or other action against you in an attempt to satisfied any of the debts that were discharged. You should know that discharges have many exceptions, so there is simply no alternative to consulting with an experienced bankruptcy lawyer before even filing Chapter 7 bankruptcy to consider the pathway to discharge. In the common case, a discharge is granted. There are circumstances, however, such as a party or the trustee objecting to the discharge, where discharge is not so easily obtained. In addition to objections, some debts are never allowed to be discharged.
It is also possible to be denied a discharge. The grounds for such a denial are narrow and the a Court should construe the circumstances in your favor. Nonetheless, there are several reasons the court may deny your discharge. Some examples include: failing to keep or produce adequate books or financial records; failing to explain satisfactorily any loss of assets; committing a bankruptcy crime such as perjury; failing to obey a lawful order of the bankruptcy court; fraudulently transferring, concealing, or destroying property that could have been used to satisfy creditors; or failing to complete required instructional courses. For more information, see 11 U.S.C. § 727; Fed. R. Bankr. P. 4005.
Just as not all property is subject to bankruptcy liquidation after filing Chapter 7 bankruptcy, not all debts can be discharged. Some examples of debts that may not be discharge include:
- Child support obligations;
- Certain taxes;
- Student loans under some circumstances;
- If it is found that you have Fraudulently incurred debts, as discharge could be jeopardized;
- Debts for willful and malicious injury by you to another entity or to the property of another entity may not be discharged in some cases;
- Debts for death or personal injury caused by your operation of a vehicle while intoxicated from alcohol or other substances
- Debts for certain criminal restitution orders.
With the above types of debt, you may well continue to be obligated to pay the debt even after a discharge. Its possible that your bankruptcy estate has enough to satisfy them but they will not disappear after the case. For more information, see 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).
Aside from whether a debt is discharged or not, the bankruptcy court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee, or if the debtor (without a satisfactory explanation) makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor’s case. 11 U.S.C. § 727(d). There’s a number of requirements you must ultimately meet to obtain a discharge. For example, to be eligible for the final discharge, you must complete a personal financial management course offered by an approved agency within 45 days after the first meeting of creditors. Given discharge is your paramount goal, you should certainly consult with an experienced attorney to maximize your chances of reaching that goal.
Reaffirmations in Chapter 7 Bankruptcy
Many times people wish to make an agreement to keep property that was pledged to a creditor as collateral, such as your home or automobile. This is possible through a reaffirmation agreement, a written contract with the creditor to reaffirm or take the debt back on. These reaffirmation agreements are voluntary on your part and on the creditor’s part. Once you sign a reaffirmation agreement, you have 60 days at a minimum to change your mind and rescind or back-out of a reaffirmation agreement. After that time period, you are legally obligated to pay the reaffirmed debt as if you did not file bankruptcy against that particular creditor.
How Much Does Filing Bankruptcy Under Chapter 7 Cost?
There are various costs involved in filing bankruptcy. For starters, court costs must be applied and paid to the clerk upon filing(courts must charge a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge). It’s important to note that a failure to pay these fees (without a waiver or approval of an installment plan) can result in dismissal of the case. For more information, see 11 U.S.C. § 707(a). In addition to court costs, there’s various other costs involved in filing bankruptcy as well. For more about the fees and costs involved in filing bankruptcy, click here.
Pros and Cons of Filing Chapter 7 Bankruptcy
PROS OF FILING CHAPTER 7 BANKRUPTCY:
- Filing for Chapter 7 Bankruptcy is usually going to automatically stop the incessant and harassing collection attempts
- In some cases, you will not lose everything because some of your property is exempt from liquidation.
- Even though creditors have a lien in most cases on your home and vehicle, you have the option to reaffirm the debts and keep the property.
CONS OF FILING CHAPTER 7 BANKRUPTCY
- Filing Chapter 7 bankruptcy can remain on your credit report for many years and significantly impact your ability to obtain further debt.
- Certain types of debt are not dischargeable or require a showing of extreme hardship which can be costly and difficult to prove.
- Once you’ve received a bankruptcy discharge under Chapter 7, you must wait 8 years to file Chapter 7 bankruptcy again.
- Depending on your individual circumstances , you may lose some of your non-exempt property.
Chris Sawan holds a JD, MBA and is a CPA with a background that yields itself to some of the most complex legal challenges facing businesses, families, and individuals.
Dennis E. Sawan is licensed to practice law in the States of Florida and Ohio. His experience as a transactional attorney makes him a tremendous ally to have for all types of transactions.
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