Chapter 7 - Background

In a Chapter 7 bankruptcy a debtor is required to surrender any assets whose value cannot be protected through the allowed exemptions. The bankruptcy trustee is then charged with the liquidation of such property to repay the debtor’s unsecured creditors. For the majority of individuals who find themselves in financial hardship, the types of assets they possess, such as household goods, retirement funds or older vehicles can be shielded by the allowed exemptions and therefore will not need to be liquidated by the bankruptcy trustee. Unlike a chapter 13 bankruptcy, a chapter 7 bankruptcy case does not involve the filing of a plan of repayment.

Chapter 7 - Eligibility

Under chapter 7 of the Bankruptcy Code, to qualify for relief, the debtor must satisfy the basic income limits established in the means test and be an individual, a partnership, a sole-proprietorship or other business entity, whether the debtor is financially solvent or not. If in the last 180 days you have had a bankruptcy petition dismissed due to a willful failure to fulfill the requirements of the bankruptcy your eligibility may be called into question. All debtors are also required to complete a credit counseling course from an approved agency within 180 days prior to their bankruptcy being filed.

The elimination of certain debts is one of the primary purposes of bankruptcy. Bankruptcy provides an honest debtor a financial "fresh start", where the debtor has no further liability for debts that have been discharged. Within a chapter 7 bankruptcy, the discharge of such debts is not available to partnerships or corporations but only to individual debtors. While the majority of chapter 7 cases will result in a discharge of debts, the right to a discharge is not absolute, and some types of debts cannot be discharged. Furthermore, a bankruptcy discharge will also not eliminate debts secured with collateral, extinguish a lien on property, or discharge most tax debts.

Chapter 7 - How It Works

A chapter 7 case is initiated when the debtor files a petition, accompanied by the required statements, schedules, and certificates, in the regional bankruptcy court for the area in which they live, where their business is organized or it has its principal place of business.

The act of filing a petition under chapter 7 will stop most collection actions against the debtor or their property. So long as the “automatic stay” remains in effect, creditors are prohibited from initiating or continuing litigation for collection, asset garnishments, or even payment demands by phone or mail. Once the petition and its associated schedules have been filed with the bankruptcy court, the clerk of the court serves notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor within the filing.

The bankruptcy trustee will convene a meeting of creditors approximately 20 to 40 days from the date the petition was filed. At this hearing, with the debtor under oath, the trustee and any creditors in attendance may ask questions of the debtor. Attendance at the meeting of creditors is mandatory for every debtor. The debtor must answer truthfully any questions posed regarding the debtor's financial affairs and assets. As you should expect it to be throughout this process, it is essential that the debtor to cooperate with their chosen representative and the bankruptcy trustee, in providing any financial records or documents that are requested.

Chapter 7 - The Discharge

The discharge of debts releases individual debtors from personal liability for most forms of debt and prohibits the creditors owed those debts from executing any further collection actions against the debtor. It is advised that debtors consult competent legal counsel prior to filing to be sure they understand the scope of the discharge available to them, as a chapter 7 discharge is subject to many exceptions. Unless your case is dismissed or converted to another chapter of the bankruptcy code, an individual debtor should expect to receive a discharge 60 to 90 days after the date of their meeting of creditors.

Unlike unsecured creditors, secured creditors may retain certain rights to retake the property securing the debt even after a discharge is granted. Based on your individual circumstances, should a debtor wish to keep certain secured property (such as an automobile), he or she may choose to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor indicating that the debtor will choose to remain liable and intends to pay all or an agreed upon portion of the money owed in exchange for retention of the securing property. The debtor enters into such an agreement with the knowledge that the debt would otherwise be discharged in the bankruptcy. For their part, the creditor promises not to repossess or seize the securing property so long as the debtor continues to meet their obligation for the repayment of the debt.

An individual can expect to receive a discharge of most forms of debt they hold as part of a chapter 7 bankruptcy case. The forms of debt that may not be discharged include debts associated with spousal and child support, certain taxes, debts for education, benefit overpayments or loans made or guaranteed by a government agency, 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, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, and debts for certain criminal restitution orders.

The court may revoke a chapter 7 discharge upon the request of the trustee, a creditor, or the U.S. trustee if it is discovered that 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.