Chapter 7

As noted with our History of Bankruptcy webpage bankruptcy has been an evolving concept since the first established civilized societies.  Results of the evolution of bankruptcy are six main Chapters of Bankruptcy that American people and corporations can file under the United States legal system.  The Chapter we are going to discuss beneath is Chapter 7.

Chapter 7 is the most common and fastest form of bankruptcy that is filed every year.  Professionals also refer to Chapter 7 Bankruptcy as Liquidation Bankruptcy or Straight Bankruptcy.   It is the liquidation of all the debtor’s (borrower) assets in their estate.  A debtor obtains a trustee to oversee the liquidation process of all the assets that are non-exempt.  A major advantage of Chapter 7 Bankruptcy is it allows for a debtor to sign an agreement called a reaffirmation agreement.  A reaffirmation agreement was placed in the rules for Chapter 7 to try and prevent a debtor from losing all their property.  If debtor to keeps paying their monthly car note and mortgage and do not fall delinquent on their payments they have a chance to retain some to all of their property.  Note this rule does not apply to every state. 

When a borrower files for Chapter 7 they have nineteen general classes they file under.  These classes fall under an array of debt from student loans to child support. A debtor has to file in the last district where there primary residence was at least six months.  Due to each state having a different set of laws to follow for bankruptcy a debtor should attain the services of a specialist in bankruptcy (bankruptcy lawyer) proceedings.  The proceedings include entrusting the trustee with the power to perform the tedious tasks such as filing all the required court and bankruptcy paperwork to supervising the liquidation of the debtor’s estate.  The trustee sells off all the assets for cash and then pays the borrower’s debts until all there is no longer any cash available to pay off the borrower’s debt.  If the assets are non-exempt the trustee obtains possession of those assets.  The trustee sells of the assets in which he/she first pays the administration fees for the bankruptcy and then proceeds to pay the creditors in order of priority of the debt.

As an individual there are several requirements you must meet to file for Chapter 7 Bankruptcy.  This is due to an individual being released of liability for all dischargeable debts.  The Congress wanted to make sure individuals did not take advantage of filing for bankruptcy therefore they approved an amendment to the Bankruptcy Code that a borrower must be subjected to and pass a “means test”.  This was filed under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Essentially it subjects a borrower to certain income to expense tests in which if a borrower earns a specific amount of income, however, has been frivolously spending money they may not meet the requirements to file for Chapter 7 Bankruptcy. 

Therefore, when filing for Chapter 7 they first have to file an official petition with the court.  This requires an individual to provide statements which exhibit their current monthly income and expenses, proof of income over the past two years, all property they own (i.e. any assets or possessions), the market value of their assets, all property sold, donated, and/or given away in the past two years, two years of tax filings, and a full list of outstanding debt.  Most states allow specific property to be exempt.  The exempt property claimed on your petition that is exempt usually includes most equity in your home, furniture, clothing, unspent social security, car, and anything that is related to a borrower’s means of making a living.  The debts that have to include non-dischargeable debts and debts the borrower is going to classify under the reaffirmation agreement (see above).  Additionally all creditors and their correct mailing addresses must be listed.    If you are not an individual who keeps great financial records then you may have trouble providing all the required information.  Additionally, for purposes of the trustee any property owned by the debtor prior to and the day of filing may be liquidated to pay the creditors.  We recommend hiring lawyer who has experience in bankruptcy as these requirements are the most integral and time consuming part of filing for Chapter 7 Bankruptcy.  The lawyer will know ways to discover all the required information.  They will know how to find who has liens on your properties and who holds the rights to your debt.  This will speed up the process of bankruptcy and prevent it to be declared without complications.  Once the borrower or their lawyer completes the paperwork, they choose their exemptions, and meet the requirements for Chapter 7 Bankruptcy they have to sign the petition which is under the penalty of perjury. This means you are under oath as if you were actually in the court room in front of the judge (i.e. Do you swear to tell the whole truth and nothing but the truth…).

Another requirement is you must not been approved for Chapter 7 Bankruptcy in the past eight year.  An important point about Chapter 7 cases is almost all assets are exempt and these cases are properly called no-asset cases.  What this means for the borrowers is these assets they own do not have to be liquidated thus the creditors will not receive any payment.  The only way a lender will receive payment to an unsecured claim is if the case is an asset case.  Additionally, the lender must file a proof of claim with the bankruptcy court.  Note if you have a steady income stream you may find Chapter 13 Bankruptcy a more advantageous route.  See our webpage on Chapter 13 Bankruptcy.

Once the petition is filed with the correct officials the Order for Relief (a.k.a. automatic stay, herein) is enacted.  An automatic stay is a legal action which helps protect debtors.  It immediately halts creditors from trying to collect the money you owe them.  Additionally, the creditors and collection agencies are not legally allowed to contact you, remove money from your wages, not allowed to cut-off services to utilities, unable to stop welfare benefits, remove money from your bank account, and are unable to place liens on your car, home, or any other property.  Creditors which were listed in your petition are notified by a trustee who has been appointed by the courts.  This bankruptcy trustee has been appointed by the courts as an independent party whose purpose is to ensure the borrower’s creditors receive as much money as you can possibly pay them which is justified by the courts.  The way the courts ensure independence is by basically paying the trustee through commissions.  The more money recovered for creditors from the debtor’s non-exempt assets the more money the trustee earns.  The bankruptcy trustee invades every aspect of your financial life.  For example they will review your financial transactions from the past couple of years to see if there is anything that can be undone to reclaim more money to pay to your debtors.  However, in the majority of Chapter 7 Bankruptcy cases the trustee is usually unable to find anything of significant value to sell. 

Once you file for bankruptcy you are not allowed to sell, donate, or give any of your assets away without the consent of the court.  Normally after a debtor files Chapter the money and property they earn and purchase after they are allowed to keep. 

One to two weeks following a petition of bankruptcy all the creditors listed in your petition will be notified by mail for the time and place of the creditors meetings.  Most of the proceedings after a debtor has filed for bankruptcy do not involve them exception of the first meeting.  For people who want to refer to the Code look up SS 341.  The idea of this meeting is for the creditors, debtor, and trustee all to be in one place at one time and ask questions of the debtor about their assets, liabilities, reasons for claiming bankruptcy, and anything that is on the official papers.  The meeting is performed under oath of the court.

Dependent upon if the trustee can legally prove the debtor has possession of nonexempt assets the trustee has the ability to claim possession of the property or the debtor will have to pay the trustee the cash equivalent of the property.  If the property is determined to hold no significant value then the trustee may abandon the property which allows the debtor to maintain possession of it.

Once the 341 meeting is adjourned creditors have a 60 days from that point to contest the debtor’s rights to discharge a debt.  They can challenge the discharge by filing for an adversary proceeding.  Refer to Bankruptcy Code SS 523 (a) (2), (4), (6), (15), and SS727.

If none of the creditors file for an adversary preceding the court will discharge the debt soon after the 60 days.  If a creditor does file for to have an adversary preceding it does not hinder the entry of a discharge of the debtor’s claim.

The courts will not officially discharge a debtor’s debt until they have completed an educational course of finance from a recognized licensed institution which has to be court approved.  If the borrower does not complete the case within the instructed timeframe the case may result in being closed without the borrower being discharged.  However, do not be alarmed the debtor may apply to have the case reopened submit the certificate and receive a discharge from their outstanding debt.  The reason the courts require the borrower to attend a class is because the borrower financially mismanaged their funds and did not live within their means causing them to file bankruptcy.  The courts want to do to their best to ensure the debtor will not find themselves in the same situation several years later.  Note this applies to persons filing for bankruptcy after October 15, 2005. 

The reader should note that there are debts that automatically survive bankruptcy.  These include but are not limited to child support, certain liens, reaffirmed debts, student loans, and outstanding taxes to government.  The only way these are discharged is if the court rules that you are relieved of your obligation to pay the debt.  Other debts which remain after filing bankruptcy are debts you incurred by committing a tort which is a wrongful act.  An example would be if you borrowed money fraudulently or received a loan through acting maliciously.

As we noted above most property under a debtor filing Chapter 7 is exempt or has minimal market value.  Therefore, creditors usually do not receive any money by the time the Chapter 7 Bankruptcy case is closed.  However, there are exceptions to creditors who receive property.  The most common exception is when a debtor pledges their property to a creditor until they loan is repaid.  This is more commonly known as collateral.  Which means the debtor promises to give the creditor a piece of property that has the same value of the outstanding loan if the debtor is unable to pay the balance of the loan.  When a debtor makes this promise they are securing debt hence the debt commonly referred to as a secured debt (i.e. house, boat, and car).  If you have filed for bankruptcy and the courts have enacted the automatic stay the creditor may request to have the automatic stay lifted in order to claim the debtor’s property which was contractually owed to them.  However, the catch is the debtor has to have defaulted on their loan to that creditor.  If the debtor is not in default then the creditor will be denied approval to lift the automatic stay on your property.  This is because a court wants to prevent a creditor from reclaiming property due to the debtor’s endangerment of not paying them in the future.  The creditor has to wait until the debtor actually has defaulted.  There is one other exception to this rule.  If the debtor can prove they have enough equity in the property to justify the sale of the property to pay off more of the debt they owe; the creditor will be denied the ability to lift the automatic stay.

Once the proceedings has taken place, the bankruptcy trustee has done everything possible to reclaim money on behalf of the creditors, and the debtor has met his court appointed obligations, the local district court will declare the debtor bankrupt and discharge him/her of all their debts.  The Chapter 7 Bankruptcy process from start to finish may take as short as month to as long as six months.  The costs involve can be as minimal as $300 to thousands of dollars.  It is a case by case basis and what type of help you have to obtain.

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