CHAPTER 7

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BACKGROUND

Chapter 7 bankruptcy cases do not involve filing a repayment plan as in chapter 13. Rather, the trustee collects and sells the unsecured assets of the debtor and uses the proceeds of such assets to pay the owners of the claims (creditors) in fulfillment of the provisions of the Bankruptcy Code. Some of the debtor’s property may be subject to liens and mortgages that gage the property to other creditors. Moreover, the Bankruptcy Code will let the debtor retain certain “exempt” property; but a trustee will decide the outstanding assets of the debtor. Hence, prospect debtors should realize that filing a petition under chapter 7 could result in losing the property.

CHAPTER 7 ELIGIBILITY

To be entitled to benefits under chapter 7 of the Bankruptcy Code, the debtor must be an individual, a partnership, or a corporation, or other business entity. Individual debtors are subject to the “mean test”, relief is available under chapter 7 regardless of the number of the debtor’s debts or whether the debtor is debt-free or foreclosed. An individual may not file under chapter 7 or any other chapter if in the previous 180 days of initial loss petition was dismissed due to the debtor’s deliberately neglected to come in court or follow the court order, or the debtor voluntarily dismissed the previous case after creditors sought comfort from the court to recover the property for which they were responsible. Furthermore, no individual may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he has, within 180 days prior to filing, received credit advice from an authorized credit counseling agency either an individual or group briefing. There are exceptions in emergencies or where the United States trustee (or bankruptcy administrator) found out that there is not enough approved agency to provide the necessary counseling. If a debt management plan is started during the mandatory credit counseling, it is necessary to be filed in court.

One of the main purposes of bankruptcy is to eliminate some debts in order to give an honest individual debtor a “fresh start.” The debtor is not responsible for the debts discharged. But, in the case of chapter 7, a discharge is only obtainable to individual debtors, not to partnerships or corporations. Even though an individual case of chapter 7 usually results in the discharge of debts, the right to a discharge is not complete, and some types of debt are not eliminated. Furthermore, a discharge of bankruptcy does not extinguish a property lien.

HOW CHAPTER 7 WORKS
A chapter 7 case starts with the debtor filing a petition in a bankruptcy court serving in the area where the individual lives or where the business debtor is settled or has a principal place of business or major assets. Along with the petition, the debtor should also file with the court the ff:

  1. schedules of assets and liabilities
  2. schedules of present income and expenditures
  3. affirmation of financial affairs, and
  4. schedule of executory contracts and valid leases.

Debtors should also provide the designated trustee of the case 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 previous years not yet filed when the case began). Individuals who owe a major consumer debt have additional document filing requirements. They should file:

  1. a credit counseling certificate and a copy of any debt repayment plan developed by credit counseling;
  2. evidence of payment from employers, if available, accepted 60 days before filing;
  3. a statement of monthly net income and any expected increase in income or expenses after submission;
  4. and a record of any debtor’s interest in federal or state qualifying education or teaching accounts.

A couple can file joint petitions or individual petitions. Even if filed together, the couple is subject to all document filing requirements of debtor individuals.

 

Courts must charge a $245 filing fee, a $75 different administrative fee, and a $15 trustee fee. Usually, fees must be paid to the court clerk upon filing. With the permission of the court, nonetheless, the debtors can pay in installments. There are four installments, and the debtor must pay the last installment no later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, given that the last installment is paid no later than 180 days after the petition was filed. The debtor can also pay the $75 administrative fee and the $15 trustee fee in installments. If a combined petition is filed, only one filing fee, one administrative fee, and one trustee fee are charged. Debtors must be knowledgeable that failure to pay these fees could end in the dismissal of the case.

 

If the debtor’s earning is less than 150% of the poverty level, and the debtor is inadequate to pay the chapter 7 fees even in installments, the court may waive the obligation to pay the fees.

 

To complete the Official Bankruptcy Forms forming the petition, statement of financial matters, and schedules, the debtor should provide the following information:

  1. List of all creditors and the total and classification of their claims;
  2. Source, amount, and regularity of debtor’s income;
  3. List of all the debtor’s possessions; and
  4. a detailed list of monthly living expenses of the debtor, for example, food, clothing, utilities, accommodation, taxes, transportation, medicine, etc.

 

The couple should meet this information for their spouse in any case of whether they are filing a joint petition, separate individual petitions, or even if only one spouse has filed. In a condition where only one spouse has filed, the income and expenses of the spouse who does not file are necessary so that the court, the trustee, and the creditor can review the financial position of the household.

 

Among the schedules filed by an individual debtor is a schedule of “exempt” property. The Bankruptcy Code allows an individual debtor to protect certain assets from creditor claims because they are excluded under federal bankruptcy law or debtor state law. Many states have taken advantage of a provision in the Bankruptcy Code that allows each state to use its exemption law in exchange for federal exemptions. In other rules, the debtor individual has the option to choose between a federal package of exemptions or the exemptions available under state law. Therefore, whether certain assets are exempt and can be maintained by the debtor is often a question of state law. The debtor must ask an attorney to find out the exceptions available in the state where the debtor lives.

 

Submitting a petition under chapter 7 that “automatically stays” (stops) most of the collection actions versus the debtor or the debtor’s possession. But filing a petition does not stick to certain types of action and the stay can only be effective for a short period in certain situations. Stay arises through the operation of law and does not require judicial action. As long as the stay is valid, creditors generally cannot initiate or proceed with lawsuits, wage garnishments, or even phone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy to creditors whose names and addresses are stated by the debtor.

 

Between 21 and 40 days, after the petition was filed, the case trustee will make a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules a meeting in a place where there is no regular U.S. trustee or bankruptcy administrator staff, the meeting may be held no later than 60 days after the order for relief. During this meeting, the trustee subjected the creditor under oath, and both the trustee and creditors could ask questions. The debtor must attend the meeting and reply to questions about the debtor’s financial and property matters. If the married couple submits a joint petition, they both must go to the creditor’s meeting and answer the questions. Within 10 days from the creditors ’meeting, the U.S. trustee will detail to the court whether the case should speculate to be a mistreat under the means test.

 

The debtor needs to cooperate with the trustee and provide any financial records or documents requested by the trustee. The Bankruptcy Code requires the trustee to ask debtors questions at the creditors ’meeting to ensure that the debtor is aware of the potential consequences of seeking a discharge such as an impact 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 on or before the meeting to make sure the debtor knows this information. To keep their free judgment, bankruptcy judges are disallowed from attending the meeting of creditors. 

 

To provide complete relief to the debtor, the Bankruptcy Code allows the debtor to change a chapter 7 case to a case under chapter 11, 12, or 13 for as much as the debtor is entitled to be a debtor under the new chapter. However, one condition of the debtor’s voluntary conversion is that the case has not previously been changed in chapter 7 from another chapter 11. Thus, the debtor will not be allowed to change the case repeatedly from one chapter to another.

 

ROLE OF THE CASE TRUSTEE

 

When a chapter 7 petition is filed, the United States trustee (or the bankruptcy court in Alabama and North Carolina) assigns an impartial case trustee to handle the case and liquidate the debtor’s non-exempt assets. If all of the debtor’s assets are exempt or subject to valid liens, the trustee will typically file a “no assets” report in court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors do not have property cases. But if the case appears to be an “asset” case initially, unsecured creditors must file their claims in court within 90 days after the first date set for the meeting of the creditors. A government unit, nonetheless, has 180 days from the day the case is filed to file a claim. In the usual no-asset chapter 7 case, there is no need for creditors to present proof of claim because there will be no distribution. If the trustee later obtains assets for distribution to unsecured creditors, the Bankruptcy Court will give notice to the creditors and allow more time to file proofs of claim. Even though a secured creditor does not have to file a proof of claim in a chapter 7 case to maintain its security interest or lien, there may be other grounds to file a claim. A creditor in a chapter 7 case with a lien on the debtor’s property should ask an attorney for advice.

 

Starting a bankruptcy case makes an “estate.” Practically, the estate has become the acting legal owner of all the debtor’s assets. It consists of all the debtor’s legal or equitable interest in the property at the beginning of the case, including property owned or held by another person if the debtor has an interest in the property. Generally, creditors are paid from the unsecured property of the estate.

 

The main role of a chapter 7 trustee in an asset case is to liquidate the debtor’s non-exempt assets in a way that increases the return to unsecured creditors. The trustee fulfills 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 held by the debtor on the property. The trustee may also attempt to save money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to: set aside special transfers made to creditors within 90 days prior to the petition; undo security interests and other prepetition transfers of assets not properly decided under non-bankruptcy law at the time of petition; and pursue non-bankruptcy claims such as fraudulent delivery and multiple transfer remedies available under state law. Plus, if the debtor is a business, the court of bankruptcy may allow the trustee to operate the business for a limited time, if such operation will benefit the creditors and enhance the liquidation of the estate.

 

Section 726 of the Bankruptcy Code controls the distribution of the property of the estate. There are six classes of claims, and each class must be paid in full before the next lower class can be paid for anything. The debtor will only be paid if all other types of claims have been paid in full. Accordingly, the debtor is not particularly interested in the trustee’s disposal of the estate assets, except about the payment of those debts which for some reason cannot be dischargeable in a bankruptcy case. The individual debtor’s primary concern in a chapter 7 case is to preserve the exempt assets and receive a discharge covering as many debts as possible.

 

THE CHAPTER 7 DISCHARGE

A discharge sets free individual debtors from personal liability for most debts and prevents creditors from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult excellent legal advice before submitting to discuss the scope of the discharge. In general, excluding cases eliminated or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless an interested party 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 on the case – in general, 60 to 90 days after the first date set for the meeting of creditors.

 

The grounds for rejecting an individual debtor a discharge in a chapter 7 case are narrow and are said to be against the moving party. Among other factors, the court may deny the debtor a discharge if it is found that the debtor: has failed to maintain or produce adequate financial books or records; fails to satisfactorily explain any loss of assets; committed a crime at bankruptcy such as perjury; fails to follow a legal bankruptcy court order; fraudulent transfer, concealment, or destruction of property that may belong to the estate; or fails to complete an approved course of instruction in financial management.

 

Secured creditors may retain certain rights to seize ownership of the property of an underlying debt even after a discharge has been awarded. Depending on individual circumstances, if a debtor wants to keep certain secured assets (such as a vehicle), he may decide to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and pay all or part of the money owed, even if the debt is otherwise discharged at losses. In return, the creditor assures that it will not remove or return the vehicle or other property as long as the debtor continues to pay the debt.

 

If the debtor decides to reaffirm a loan, he must do so before the discharge enters on. The debtor must sign a written reaffirmation agreement and file it in court. The Bankruptcy Code requires that reaffirmation agreements contain a wide range of disclosures. Among other things, disclosures must advise the debtor of the amount of the debt reaffirmed and how it is calculated and the reaffirmation means that the debtor’s liability for that debt will not be included in the discharge of the bankruptcy. The disclosures also require the debtor to sign and file a statement of his current income and expenses showing that the balance of income repayment costs is sufficient to repay the reconfirmed debt. If the balance is not sufficient to repay the loan to be reaffirmed, there is an assumption of hardship, and the court may decide not to approve the reaffirmation agreement. Except if the debtor is represented by an attorney, the bankruptcy judge must accept the reaffirmation agreement.

 

If the debtor was represented by an attorney related to the reaffirmation agreement, the attorney must prove in writing that he advised the debtor on the legal effect and consequences of the agreement, including a default under of agreement. The lawyer must also prove that the debtor was fully knowledgeable and voluntarily entered into the agreement and the reaffirmation of the debt will not create too much hardship for the debtor or those dependents of the debtor. The Bankruptcy Code requires a reaffirmation hearing if the debtor was not represented by an attorney during the settlement negotiation, or if the court did not approve the reaffirmation agreement. The debtor may voluntarily repay any debt, however, whether or not a reaffirmation agreement exists.

 

An individual receives a discharge for most of his debts in a chapter 7 bankruptcy case. A creditor may stop initiating or continuing any legal or other action against the debtor to collect the discharged debt. Yet not all of an individual’s debts are discharged in chapter 7. Debts that are not discharged include debts for alimony and child support, certain taxes, debts for certain additional education overpayments or loans made or guaranteed by a government unit, debts for intentional and malicious damage 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 in a motor vehicle while the debtor is intoxicated from alcohol or other substances, and debts for certain criminal recovery orders. The debtor keeps being liable for these types of debts supposing that they are not paid in the case of chapter 7. Debts for money or property obtained by pretenses, debts for fraud or peculation while acting in a fiduciary capacity, and debts for willful and destructive damages of the debtor to another entity or property of another entity will be discharged unless a creditor has timely files and prevails in an action to declare such nondischargeable debts.

 

The court may withdraw a chapter 7 discharge at the request of a trustee, a creditor, or a United States trustee if the discharge was gained through fraud by the debtor, if the debtor obtained property owned by the estate and he knows and fraudulently failed to report the possession of such property or to give the property to the trustee, or if the debtor (without a satisfactory statement) has made a materially false statement or failed to provide documents or other information related to an audit of the debtor’s case.

In this time of distress in your financial problem, you need someone who can help you. Here in Shaff Bankruptcy Lawyer, we will provide the necessary information that you need to know about bankruptcy. We will assist you throughout the process. We will help you to find which chapter is the best for your financial situation. We have a guiding hand that you perfectly needed! Why not book a FREE consultation with us so we can start settling your financial problem? Cheers to your future “fresh start”!

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