|Chapter 7 Bankruptcy - Background
A Chapter 7 Bankruptcy case does not involve the filing of a plan of repayment as in
Chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's
nonexempt assets and uses the proceeds of such assets to pay holders of claims
(creditors) in accordance with the provisions of the Bankruptcy Code. Part of the
debtor's property may be subject to liens and mortgages that pledge the property to
other creditors. In addition, the Bankruptcy Code will allow the debtor to keep
certain "exempt" property; but a trustee will liquidate the debtor's remaining assets.
Chapter 7 Eligibility
To qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may be an
individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101
(41), 109(b). Subject to the means test described above for individual debtors, relief
is available under Chapter 7 irrespective of the amount of the debtor's debts or
whether the debtor is solvent or insolvent. An individual cannot file under chapter 7
or any other chapter, however, if during the preceding 180 days a prior bankruptcy
petition was dismissed due to the debtor's willful failure to appear before the court or
comply with orders of the court, or the debtor voluntarily dismissed the previous case
after creditors sought relief from the bankruptcy court to recover property upon
which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual
may be a debtor under Chapter 7 or any chapter of the Bankruptcy Code unless he
or she has, within 180 days before filing, received credit counseling from an
approved credit counseling agency either in an individual or group briefing. 11 U.S.
C. §§ 109, 111. There are exceptions in emergency situations or where the U.S.
trustee (or bankruptcy administrator) has determined that there are insufficient
approved agencies to provide the required counseling. If a debt management plan is
developed during required credit counseling, it must be filed with the court.
One of the primary purposes of bankruptcy is to discharge certain debts to give an
honest individual debtor a "fresh start." The debtor has no liability for discharged
debts. In a Chapter 7 case, however, a discharge is only available to individual
debtors, not to partnerships or corporations. 11 U.S.C. § 727(a)(1). Although an
individual Chapter 7 case usually results in a discharge of debts, the right to a
discharge is not absolute, and some types of debts are not discharged. Futhermore,
a bankruptcy discharge does not extinguish a lien on property.
How Chapter 7 Works
A Chapter 7 case begins with the debtor filing a petition with the bankruptcy court
serving the area where the individual lives or where the business debtor is organized
or has its principal place of business or principal assets. In addition to the petition,
the debtor must also file with the court:
1) Schedules of assets and liabilities.
2) Schedule of current income and expenditures.
3) Statement of financial affairs.
4) Schedule of executory contracts and unexpired leases.
5) Debtors must also provide the assigned case trustee with a copy of the 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). 11 U.S.C. § 521.
Individual debtors with primarily consumer debts have additional document filing
requirements. They must file:
1) A certificate of credit counseling and a copy of any debt repayment plan
developed through credit counseling
2) Evidence of payment from employers, if any, received 60 days before filing
3) A statement of monthly net income and any anticipated increase in income or
expenses after filing
4) A record of any interest the debtor has in federal or state qualified education or
tuition accounts. A husband and wife may file a joint petition or individual petitions.
11 U.S.C. § 302(a). Even if filing jointly, a husband and wife are subject to all the
document filing requirements of individual debtors.
Chapter 7 Fees
The courts must charge a $245 case filing fee, a $39 miscellaneous administrative
fee, and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the
court upon filing. With the court's permission, however, individual debtors may pay in
installments. (The number of installments is limited to four, and the debtor must
make the final installment no later than 120 days after filing the petition.) If a joint
petition is filed, only one filing fee, one administrative fee, and one trustee surcharge
are charged. Failure to pay these fees may result in dismissal of the case. 11 U.S.C.
If the debtor's income is less than 150% of the poverty level (as defined in the
Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in
installments, the court may waive the requirement that the fees be paid. 28 U.S.C. §
In order to complete the Official Bankruptcy Forms that make up the petition,
statement of financial affairs, and schedules, the debtor must provide the following
1. A list of all creditors and the amount and nature of their claims.
2. The source, amount, and frequency of the debtor's income.
3. A list of all of the debtor's property.
4. A detailed list of the debtor's monthly living expenses (food, clothing, shelter,
utilities, taxes, transportation, medicine, etc.).
Married individuals must gather this information for their spouse regardless of
whether they are filing a joint petition, separate individual petitions, or even if only
one spouse is filing. In a situation where only one spouse files, 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.
Among the schedules that an individual debtor will file is a schedule of "exempt"
property. The Bankruptcy Code allows an individual debtor to protect some property
from the claims of creditors because it is exempt under federal bankruptcy law or
under the laws of the debtor's home state. 11 U.S.C. § 522(b). Many states have
taken advantage of a provision in the Bankruptcy Code 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 an attorney to determine the exemptions available in the
state where the debtor lives.
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 make
telephone calls demanding payments. The bankruptcy clerk gives notice of the
bankruptcy case to all creditors whose names and addresses are provided by the
Between 20 and 40 days after the petition is filed, the case trustee (described below)
will hold a meeting of creditors. If the US Trustee or Bankruptcy Administrator
schedules the meeting at a place that does not have regular US Trustee or
bankruptcy administrator staffing, the meeting may be held no more than 60 days
after the order for relief. During this meeting, the trustee puts the debtor under
oath, and both the trustee and creditors may ask questions. The debtor must attend
the meeting and answer questions regarding the debtor's 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 US
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).
It is important for the debtor to cooperate with the trustee and to provide any
financial records or documents that the trustee requests. The Bankruptcy Code
requires the trustee to ask the debtor questions at the meeting of creditors to ensure
that the debtor is aware of the potential consequences of seeking a discharge in
bankruptcy such as the effect on credit history, the ability to file a petition under a
different 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 debtor is aware of this information. In order to preserve
their independent judgment, bankruptcy judges are prohibited from attending the
meeting of creditors. 11 U.S.C. § 341(c).
In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor
to convert a Chapter 7 case to case under Chapter 11, 12 or 13, as long as the
debtor is eligible to be a debtor under the new chapter. However, a condition of the
debtor's voluntary conversion is that the case has not previously been converted to
Chapter 7 from another Chapter. 11 U.S.C. § 706(a). Thus, the debtor will not be
permitted to convert the case repeatedly from one chapter to another.
Role of the Case Trustee
When a Chapter 7 petition is filed, the US Trustee (or the bankruptcy court in
Alabama and North Carolina) appoints an impartial case Trustee to administer the
case and liquidate the debtor's nonexempt assets. 11 U.S.C. §§ 701, 704. If all the
debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no
asset" report with the court, and there will be no distribution to unsecured creditors.
Most Chapter 7 cases involving individual debtors are no asset cases. But if the
case appears to be an "asset" case at the outset, 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. 11 U.S.C. § 502(b)(9). In the typical no asset Chapter 7 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 creditor in a Chapter 7 case who has a lien on the debtor's property should
consult an attorney for advice.
Commencement of a bankruptcy case creates an "estate." The estate technically
becomes the temporary legal owner of all the debtor's property. It consists of all legal
or equitable interests of the debtor in property as of the commencement of the case,
including property owned or held by another person if the debtor has an interest in
the property. Generally speaking, the debtor's creditors are paid from nonexempt
property of the estate.
The primary role of a Chapter 7 Trustee in an asset case is to liquidate the debtor's
nonexempt assets in a manner that maximizes the return to the debtor's unsecured
creditors. The trustee accomplishes this by selling the debtor's 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 that the
debtor holds 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 petition; 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. In addition, if the debtor is a business,
the bankruptcy court may authorize the Trustee to operate the business for a limited
period of time, if such operation will benefit creditors and enhance the liquidation of
the estate. 11 U.S.C. § 721.
Section 726 of the Bankruptcy Code governs the distribution of the property of the
estate. Under § 726, there are six classes of claims; and each class must be paid in
full before the next lower class is paid anything. The debtor is only paid if all other
classes of claims have been paid in full. Accordingly, the debtor is not 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. The individual debtor's primary concerns in a chapter 7 case are
to retain exempt property and to receive a discharge that covers as many debts as
Chapter 7 Discharge
A discharge releases individual debtors from personal liability for most debts and
prevents the creditors owed those debts from taking any collection actions against
the debtor. Because a Chapter 7 discharge is subject to many exceptions, though,
debtors should consult competent legal counsel before filing to discuss the scope of
the discharge. Generally, excluding cases that are dismissed or converted, individual
debtors receive a discharge in more than 99 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, 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
meeting of creditors.
The grounds for denying an individual debtor a discharge in a Chapter 7 case are
narrow and are construed against the moving party. Among other reasons, the
court may deny the debtor a discharge if it finds that the debtor:
A) Failed to keep or produce adequate books or financial records.
B) Failed to explain satisfactorily any loss of assets.
C) Committed a bankruptcy crime such as perjury.
D) Failed to obey a lawful order of the bankruptcy court.
E) Fraudulently transferred, concealed, or destroyed property that would have
become property of the estate.
F) Failed to complete an approved instructional course concerning financial
Secured creditors may retain some rights to seize property securing an underlying
debt even after a discharge is granted. Depending on individual circumstances, if a
debtor wishes to keep certain secured property (such as an automobile), he or she
may decide to "reaffirm" the debt. A reaffirmation is an agreement between the
debtor and the creditor that the debtor 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 debtor continues to pay the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is
entered. The debtor must sign a written reaffirmation agreement and file it with the
court. 11 U.S.C. § 524(c). 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 debtor of the amount of the
debt being reaffirmed and how it is calculated and that reaffirmation means that the
debtor's personal liability for that debt will not be discharged in the bankruptcy. The
disclosures also require the debtor to sign and file a statement of his or her current
income and expenses which shows 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. Unless the debtor is represented by an
attorney, the bankruptcy judge must approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation
agreement, the attorney must certify in writing that he or she advised the debtor of
the legal effect and consequences of the agreement, including a default under the
agreement. The attorney must also certify that the debtor was fully informed and
voluntarily made the agreement and that reaffirmation of the debt will not create an
undue hardship for the debtor or the debtor's dependants. 11 U.S.C. § 524(k). The
Bankruptcy Code requires a reaffirmation hearing if the debtor has not been
represented by an attorney during the negotiating of the agreement, or if the court
disapproves the reaffirmation agreement. 11 U.S.C. § 524(d) and (m). The debtor
may repay any debt voluntarily, whether or not a reaffirmation agreement exists. 11
U.S.C. § 524(f).
When an individual receives a discharge for most of his or her debts in a Chapter 7
bankruptcy case, a creditor may no longer initiate or continue any legal or other
action against the debtor to collect a discharged debt. But not all of an individual's
debts are discharged in Chapter 7. Debts not discharged include debts for alimony
and child support, certain taxes, debts for certain educational 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 debtor's operation of a motor vehicle while the debtor
was intoxicated from alcohol or other substances, and debts for certain criminal
restitution orders. 11 U.S.C. § 523(a). The debtor will continue to be liable for these
types of debts to the extent that they are not paid in the Chapter 7 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 by the debtor
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. 11 U.S.C. § 523(c).
The court may revoke a Chapter 7 discharge on the request of the trustee, a
creditor, or the US 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).