Common Questions Asked About Chapter 7 Bankruptcy
What is Chapter 7 and how does it work?
Chapter 7 is that part of the federal bankruptcy laws permitting a person to discharge certain debts by filing a case in the bankruptcy court, turning all of his or her nonexempt property over to a trustee, and obeying the orders and rules of the court. A person who files under Chapter 7 is called a debtor.
What is a Chapter 7 discharge?
It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. Some debts, however, are not released by a Chapter 7 discharge, and some persons are not eligible for a Chapter 7 discharge.
What debts are not released by a Chapter 7 discharge?
All debts of any kind or amount, including debts incurred in other states, are released by a Chapter 7 discharge, except those listed below. The following types of debts cannot be discharged under Chapter 7:
- Debts for certain taxes, including taxes that became due within the last three years;
- If the creditor files a complaint and if the court so rules, debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement (included here are certain debts for luxury goods or services and for certain cash advances made within 60 days before the case is filed);
- Debts not listed on the debtor’s Chapter 7 papers, unless the creditor had notice or actual knowledge of the case in time to file a claim. The Sixth Circuit Court of Appeals has held that debtor’s omission of claim from schedules in a no asset case did not preclude discharge of claim because no deadline was set for filing proofs of claims, therefore, creditor received notice in time to permit timely filing of proof of claim. See In re Madaj, 149 F3d 467 (6th Cir. 1998);
- If the creditor files a complaint and if the court so rules, debts for fraud, embezzlement, or larceny;
- Debts for alimony, maintenance or support, with certain very limited exceptions;
- If the creditor files a complaint and if the court so rules, debts for intentional or malicious injury to the person or property of another;
- Debts for certain fines or penalties;
- Debts for student loans, unless not discharging the debt would impose an undue hardship on the debtor and his or her dependents;
- For death or personal injury caused by the debtor’s operation of a motor vehicle if such operation was unlawful because the debtor was intoxicated;
- Debts that were or could have been listed in a previous bankruptcy case of the debtor in which the debtor did not receive a discharge;
- Debts arising from any act or fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union;
- Debts which arose from the debtor’s malicious or reckless failure to fulfill any commitment to a federal depository institutions regulatory agency regarding the maintenance of capital of an insured depository institution;
- Any payment of an order of restitution issued under Title 18, United States Code (added by the Violent Crime Control and Law Enforcement Act of 1994);
- Loans incurred to pay federal taxes that would be nondischargeable pursuant to ‘523(a)(1);
- If the creditor files a complaint and the court rules, debts, other than those covered in ‘523(a)(5) (subsection 5 above) that are incurred by the debtor in the course of a divorce or separation agreement that satisfy at least one of the following criteria:
(a) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent and if the debtor is engaged in a business, for the payment of expenditures necessary for the operation of such business; or
(b) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor;
- Fee or assessments that become due after the filing of a petition to membership associations with respect to the debtor’s interest in a dwelling unit that has condominium ownership, or in a share in a cooperative housing corporation, but only for the period the debtor either lived in or received rent for the condominium or cooperative unit.
Who is not eligible for a Chapter 7 discharge?
Everyone is eligible for a Chapter 7 discharge except the following persons:
- Those who have been granted a discharge in a Chapter 7 case filed within the last eight years;
- Those who have been granted a discharge in a Chapter 13 case filed within the last six years, unless payments under the plan in such case totaled 100% of the unsecured claims or 70% of such claims and the plan was proposed in good faith and was the debtor’s best effort;
- Those who file a waiver of discharge in their Chapter 7 case that is approved by the court;
- Those who conceal, transfer, or destroy their property with the intent to defraud their creditors or the trustee in the Chapter 7 case;
- Those who conceal, destroy, or falsify records of their financial condition or business transactions;
- Those who make false statements or claims in their Chapter 7 case, or who withhold recorded information from the trustee in the case;
- Those who fail to satisfactorily explain any loss or deficiency of their assets;
- Those who refuse to answer questions or obey orders of the bankruptcy court, either in their case or in the case of a relative, business associate, or corporation, or;
- The debtor is not an individual.
Who may file under Chapter 7?
Any person who resides in, who does business in, or who has property in the United States may file under Chapter 7, except a person who has been involved in another bankruptcy case that was dismissed within the last 180 days on certain grounds.
It may not be wise, however, for a debtor to file under Chapter 7 if he is not eligible for a Chapter 7 discharge or if some of his debts will not be released by a Chapter 7 discharge.
Also, it may not be wise for a debtor with sufficient current income with which to repay a substantial portion of his debts within a reasonable period to file under Chapter 7, because the court may dismiss the case as constituting an abuse of Chapter 7.
How much does it cost to file under Chapter 7?
The filing fee is currently $299 for either a single or joint case. If a debtor is unable to pay the filing fee when the case is filed, it may be paid in installments, with the final installment due within 120 days.
The period for payment may later be extended to 180 days by the court if a valid reason exists for doing so. The entire amount of the filing fee must ultimately be paid, however, or the case will be dismissed and the debtor’s debts will not be discharged. The fee charged by the debtor’s attorney for handling the Chapter 7 case is in addition to the filing fee.
Where is a Chapter 7 case filed?
In the office of the clerk of the Bankruptcy Court in the district where the debtor lived or maintained his or her principal place of business for the greatest portion of the last 180 days.
Under what conditions should a husband and wife both file under Chapter 7?
Both husband and wife should file if some of the debts to be discharged are owed by both spouses. If both spouses are liable for some of the debts and if only one spouse files under Chapter 7, the creditors often try to collect from the non-filing spouse.
May a husband and wife file jointly under Chapter 7?
Yes. A husband and wife may file a joint petition under Chapter 7, using the same set of forms. Also, only one filing fee is charged for a joint case.
When is the best time to file under Chapter 7?
The answer depends on the status of the debtor’s dischargeable debts and nature of the nonexempt assets. The debtor should follow these rules:
- It is not wise for a debtor to file under Chapter 7 if it is anticipated that substantial additional debts will be incurred in the near future, because it will be another eight years before the debtor is again eligible for a Chapter 7 discharge.
- If a debtor is due to receive an income tax refund or other asset that is not exempt, the debtor should not file under Chapter 7 until after the refund or asset has been received and disposed of. If the debtor files under Chapter 7 before the refund or asset has been received and disposed of, he will lose the nonexempt portion of the refund or asset because it will later have to be turned over to the trustee in the Chapter 7 case.
- All nonexempt property or money acquired by a debtor through inheritance, life insurance, or a divorce within 180 days after the filing of a Chapter 7 case becomes the property of the trustee in the Chapter 7 case. Therefore, if a debtor anticipates acquiring any money or property through any of these means within the next 180 days, he should not file under Chapter 7 at this time.
How does filing under Chapter 7 affect lawsuits and attachments that have already been filed against the debtor?
The filing of a Chapter 7 case automatically stays most lawsuits and attachments that have been filed against the debtor.
A few days after a Chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the debtor. If the debtor cannot wait this long, it is permissible for him or his attorney to notify one or more of the creditors of the filing of the case. Any creditor who intentionally violates this court order may be liable to the debtor in damages. The most common actions not affected by the filing of a Chapter 7 case are criminal proceedings and actions for the collection of debts for alimony, maintenance, or support from exempt property or from property or funds acquired or earned by the debtor after the case was filed.
May employers or government agencies discriminate against persons who file under Chapter 7?
It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under Chapter 7. It is also illegal for local, state, or federal government units to discriminate against a person as to the granting of a license (including a driver’s license), permits, and other similar grants because that person has filed under Chapter 7.
Will a person lose all of his property if he files under Chapter 7?
Under the state and federal laws, certain properties are declared to be exempt and cannot be taken by a person’s creditors, except those with valid mortgages on the exempt property. A debtor is allowed to keep his unmortgaged exempt property in a Chapter 7 case and must turn only his nonexempt property over to the trustee in the case.
When must a person go to court in a Chapter 7 case and what happens there?
The first court appearance will be about a month after the case is filed for a hearing called the “meeting of creditors.” At this hearing, the debtor will be put under oath and questioned about his money, property and debts by the trustee.
In many Chapter 7 cases, no creditors appear in court; however, if a creditors does make an appearance, he or she will be allowed to question the debtor.
What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the debtor regarding the collection or existence of nonexempt property and the court may issue orders to the debtor. These orders may require the debtor to turn certain property over to the trustee or provide the trustee with certain information.
What is a trustee in a Chapter 7 case, and what does he do?
The trustee is an officer of the court, appointed to gather the debtor’s nonexempt property, turn it into cash and pay the money out to the proper creditors.
In addition, the trustee has certain administrative duties in a Chapter 7 case and is the officer in charge of seeing to it that the debtor performs the duties required of him or her in the case. A trustee is appointed in a Chapter 7 case even if the debtor has no property for the trustee to collect.
What are the debtor’s responsibilities to the trustee?
The law requires the debtor to cooperate with the trustee in the administration of a Chapter 7 case, including the collection by the trustee of the debtor’s nonexempt property. If the debtor does not cooperate with the trustee, then the case may be dismissed and the debts may not be discharged.
What happens to the property that the debtor turns over to the trustee?
It is usually converted into cash, which is later used to pay the administrative expenses of the trustee and to pay the claims of creditors. The trustee is permitted to pay himself a fee, which is based on a percentage of the amount collected from the debtor.
What happens if the debtor has no nonexempt property for the trustee to collect?
If, from the debtor’s Chapter 7 forms, it appears that the debtor will have no nonexempt money or property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay creditors, that it is unnecessary for the creditors to file claims, and that if assets are later discovered the creditor will then be given an opportunity to file claims.
A trustee will be appointed, however, even if the debtor has no nonexempt assets for the trustee to collect, and the debtor must cooperate with the trustee.
What do creditors with mortgages against the debtor’s property do in a Chapter 7 case?
Creditors with valid mortgages against the debtor’s property are usually permitted to repossess or foreclose on the property, if the value of the property does not exceed the amount secured by the property.
A creditor must prove the validity of the mortgage and obtain a court order, however, before repossessing or foreclosing of any property and the debtor should not turn any property over to a creditor until a court order has been obtained.
If the value of the mortgaged property exceeds the amount secured by the mortgage, the creditor might not be allowed to repossess the property. The debtor is permitted to retain certain property even if there is a valid mortgage against it,and the debtor may redeem certain mortgaged property from the creditor by paying less than the amount secured by the mortgage.
What do unsecured creditors do in a Chapter 7 case?
If the debtor has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the date of the meeting of creditors.
The trustee examines these claims and files objections to those that are deemed improper. When the trustee has collected all of the debtor’s nonexempt property and converted it to cash, and when the court has ruled on any objections filed against the claims of creditors, the trustee distributes the funds according to certain priorities.
Administrative expenses, claims for wages, salaries and contributions to employee benefit plans, claims for the refund of certain deposits, and tax claims are given priority, in that order, in the distribution of funds by the trustee.
If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors. If the debtor has no nonexempt assets, the creditors are notified not to file claims.
May the debtor keep any of his mortgage property in a Chapter 7 case without paying off the creditor?
A debtor may retain certain mortgaged personal and household items, such as household furniture, appliances and goods, wearing apparel, and tools of trade, without paying the creditor anything if the items are exempt and if the mortgage against the property is not a purchase-money mortgage.
A debtor may also retain exempt property that is subject only to a judgment lien without paying the creditor anything. A debtor may retain certain exempt personal, family, or household items by paying to the creditor only an amount equal to the value of the items, regardless of how much is owed to the creditor.
How is a debtor notified that his discharge has been granted?
Most courts send a form called Discharge of Debtor to the debtor and to all creditors.
This form is a copy of the court order releasing the debtor from his dischargeable debts and it usually serves as notice that the debtor’s discharge has been granted. It is usually mailed about four months after the case is filed, unless the trustee or a creditor has filed an objection to the discharge of the debtor, in which case a hearing must be held so that the court can rule on the objection.
If the debtor’s discharge is not granted, the court must inform the debtor of the reasons for not granting it.
What if a debtor wishes to repay one or more of his discharged debts after filing under Chapter 7?
A debtor may repay as many of his discharged debts as he wishes after filing under Chapter 7.By repaying one creditor, a debtor does not become legally obligated to repay any other creditor. The only discharged debts that a debtor is legally obligated to repay after filing under Chapter 7 are those for which the debtor and the creditor have entered into a reaffirmation agreement that meets with certain requirements of the bankruptcy laws.
Unless a debt is covered by a valid reaffirmation agreement, a debtor is not legally obligated to repay (or continue repaying) any discharged debt, even if the debtor has made one or more payments on the debt since filing under Chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt.
How long does a Chapter 7 case last?
A chapter 7 case begins with the filing of the case and ends with the closing of the case by the court.
If the debtor has no nonexempt money or property for the trustee to collect, the case will most likely be closed shortly after the debtor receives his discharge, which is usually about four months after the case is filed. If the debtor has nonexempt money or property for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his other duties in the case.
What should a person do if a creditor later attempts to collect a debt that was discharged in his Chapter 7 case?
When a discharge is granted, the court enters an order prohibiting the creditors from later attempting to collect from the debtor any debt that was discharged in the Chapter 7 case.
If a creditor violates this court order, they may be held in contempt of court and fined; and it may be liable for damages to the debtor. If a creditor later attempts to collect a discharged debt, the debtor should give the creditor a copy of the order of discharge and inform it that the debt has been discharged under Chapter 7.
Does a Chapter 7 discharge affect the liability of other parties (e.g. co-signers) who may be liable to a creditor on a discharged debt?
A Chapter 7 discharge releases only the debtor. The liability of any other party on a debt is not affected by a Chapter 7 discharge. The only exception to this rule is in community property states where the spouse of a debtor may also be released from certain community debts.
What is the role of the attorney for a consumer debtor in a Chapter 7 case?
The debtor’s attorney performs the following functions in a Chapter 7 case of a typical consumer:
- Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor’s financial problems.
- Advise the debtor of the relief available under both Chapter 7 and Chapter 13 of the bankruptcy laws, and the advisability of proceeding under each chapter.
- Assemble the information and data necessary to prepare the Chapter 7 forms for filing.
- Prepare the petitions, schedules, statements and other Chapter 7 forms for filing with the bankruptcy court.
- Assist the debtor in arranging assets so that he or she can retain as much of them as possible after the Chapter 7 case.
- Filing the Chapter 7 petition, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.
- If necessary, assisting the debtor in redeeming certain personal property and in setting aside certain mortgages or liens against exempt property.
- Attending the meeting of creditors with the debtor.
- If necessary, preparing and filing amended schedules and certain statements and other documents with the bankruptcy court in order to protect the rights of the debtor.
- If necessary, attending the discharge and reaffirmation hearing with the debtor and assisting the debtor in reaffirming certain debts and in overcoming obstacles to the granting of the Chapter 7 discharge.
The fee paid, or agreed to be paid, to an attorney representing the debtor in a Chapter 7 case must be disclosed to the bankruptcy court. The court will allow the attorney to charge only a reasonable fee for representing the debtor. It is customary for the debtor’s attorney to collect all or most of his fee before the case is filed.