Chapter 7 - Background

Unlike a chapter 13 bankruptcy, a chapter 7 bankruptcy does not include the filing of a repayment plan for certain debts. Instead, a Chapter 7 authorizes the bankruptcy trustee to gather any nonexempt assets held by the debtor and liquidate them, spending the proceeds to pay creditors in deference to the provisions of the Bankruptcy Code. The Bankruptcy Code permits the debtor to keep certain "exempt" possessions while the trustee is responsible for liquidating the debtor's remaining unprotected assets. Debtors should be aware that in filing a petition under chapter 7 they may lose certain unprotected assets. However, for most people in such financial distress that they are considering chapter 7 bankruptcy the types of property they hold, such as older vehicles, household items and retirement funds can be protected by the available exemptions.

Chapter 7 - Eligibility

Within chapter 7 of the bankruptcy code, in order to qualify for discharge, the debtor first must be either a partnership, corporation or an individual. The debtor must also satisfy the income limits determined in the means test, regardless of whether the debtor is insolvent or not. If during the prior 180 days a bankruptcy case was dismissed because of the debtor's willful failure to comply with or appear before the court, or if the debtor voluntarily dismissed a previous case once creditors pursued relief from the bankruptcy court to recover property for which they hold liens, an individual will not be allowed to file under any chapter of the bankruptcy code. All individuals, regardless of the chapter under which they wish to file, are required to complete a credit counseling course from an approved agency within 180 days prior to filing.

One of the primary purposes for the creation of the Bankruptcy Code is to provide an honest individual a “fresh start” by discharging certain debts. Once a discharge of debts in granted, the debtor no longer has any liability for the debts included in their bankruptcy. A chapter 7 bankruptcy can only discharge the debts of an individual debtor, but not those of partnerships or corporations. An individual chapter 7 bankruptcy will generally result in the discharge of debts, though they should be aware that the right to a discharge of all debts is not guaranteed. There are certain types of debt that are not dischargeable. As an example, a bankruptcy discharge will not automatically remove a lien on property.

Chapter 7 - How It Works

A debtor begins a chapter 7 case by filing a petition and all the required schedules, certificates and statements with the regional bankruptcy court for the area in which they live or where the business is organized or has it principal place of business.

The act of filing of a petition under chapter 7 will halt most collection activities against the debtor or their property. As long as the “automatic stay” that is triggered by the filing of your bankruptcy remains in place, creditors will be prohibited from continuing or initiating such actions as; wage garnishments, lawsuits, or even phone calls requesting payment. Once the petition and the associated documents are filed with the bankruptcy court, the clerk will give notice to all creditors listed in the bankruptcy case.

The trustee will hold a meeting of creditors approximately 20 to 40 days following the filing of the petition. During this meeting the trustee and the debtors’ creditors may ask questions of the debtor while they are under oath. It is required that the debtor attend this meeting and answer truthfully any questions regarding the debtor's property and financial affairs. It is of the utmost importance that the debtor cooperates with their chosen representative, as well as the trustee, throughout this process by providing any documents or records that are requested.

Chapter 7 - The Discharge

The primary goal of a bankruptcy case it to achieve a discharge which releases individual debtors from personal liability for just about all types of debts and thwarts creditors who are owed those debts from pursuing all further actions with regard to the debtor in pursuit of collection of these debts. Since a chapter 7 discharge is bound by a number of exceptions, it is strongly recommended that debtors consult experienced legal counsel prior to filing so as to to gain a complete understanding of the breadth of the discharge available to you. Debtors can expect to receive a discharge 60 to 90 days following the date of the meeting of creditors unless their case is dismissed or converted.

Generally, secured creditors retain certain rights to seize the property which secures an underlying debt. These rights continue even after a discharge is granted. Dependent on the debtors’ circumstances, a debtor may request to retain specific secured property (such as an motor vehicle). In doing so, the debtor may decide to "reaffirm" this debt. A Reaffirmation is an agreement entered into by the creditor and the debtor that indicates that the debtor intends to continue their liability for this debt with the aim of paying all or a portion of the money owed. This is done even though the debt could otherwise be discharged as part of the bankruptcy. For their part, the creditor pledges that it will not pursue repossession of the securing property for as long as the debtor meets the obligations of the debt.

Additional debts that cannot be discharged in a chapter 7 bankruptcy include; certain taxes, court-ordered support, punitive fees for willful and malicious injury or death by the debtor and debts for specified criminal restitution orders as well as student loans.

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 it is within the power of the court to revoke a chapter 7 discharge at the request of the trustee, a creditor, or the U.S. trustee.