A Chapter 7 filing, otherwise known as “liquidation,” does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's non-exempt assets and uses the proceeds of such assets to pay off creditors. In exchange, the debtor is entitled to a discharge of some debt. While the debtor may keep certain “exempt” property, part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property.
To qualify for relief under chapter 7, the debtor is subject to the “means test.” If your current monthly income is less than the median income for a household of your size in your state, you pass the means test and qualify for chapter 7 bankruptcy. However, for those whose household income exceeds the state median, the means test computation becomes more complex and involves whether the debtor has enough disposable income to pay off at least a portion of the unsecured debts.
One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” In a chapter 7 case, a discharge is only available to individual debtors, not to partnerships or corporations. 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. Moreover, a bankruptcy discharge does not extinguish a lien on property.
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. In addition to providing the assigned case trustee with copies of relevant tax returns or transcripts, the debtor must also file with the court:
• Schedules of assets and liabilities;
• Schedule of current income and expenditures;
• Statement of financial affairs; and,
• Schedule of executory contracts and unexpired leases.
Individual debtors with primarily consumer debts have additional document filing requirements, including the following:
• A certificate of credit counseling;
• A copy of any debt repayment plan developed through credit counseling;
• Evidence of payment from employers; if any, received 60 days before filing;
• A statement of monthly net income;
• Any anticipated increase in income or expenses after filing; and,
• A record of any interest the debtor has in federal or state qualified education or tuition accounts.
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 information:
• A list of all creditors and the amount and nature of their claims;
• The source, amount, and frequency of the debtor's income;
• A list of all of the debtor's property; and,
• A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Filing a petition under chapter 7 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. However, filing the petition does not stay all types of actions, and 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.
Between 20 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. During this meeting, the debtor testifies under oath by answering questions regarding the debtor’s financial affairs and property. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors. Within 10 days of the creditors’ meeting, the trustee will report whether the case is eligible under the means test.
Many debtors who file chapter 7 bankruptcies have no assets. However, for those that do, the trustee organizes the assets for liquidation in a manner that maximizes the return to the debtor's unsecured creditors. The trustee pays out claims based on priority, where certain classes of claims get paid out first. The individual debtor’s primary concern in a chapter 7 case is not how the trustee sells assets but how the debtor can retain exempt property and receive a discharge that covers as much debt as possible. Generally, 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 60 to 90 days after the date first set for the meeting of creditors.
Due to the complexity of federal and state bankruptcy law, it is best that you contact an experienced attorney to guide you through the process. If you feel that your bills have just become too much to bear, contact Louis | White to determine whether bankruptcy is right for you.