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How does a
Chapter 7 filing begin?
 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 or
principal assets. In addition to the petition, the debtor
must also file with the court: (1) schedules of assets and
liabilities; (2) a schedule of current income and
expenditures; (3) a statement of financial affairs; and (4)
a schedule of executory contracts and unexpired leases.
They must file: a certificate of credit counseling and 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 and any anticipated increase in income or expenses
after filing; and demonstrate qualification to file under
either the median income or the means test described below A
husband and wife may file a joint petition or individual
petitions. Even if filing jointly, a husband and wife
are subject to all the document filing requirements of
individual debtors.
Married individuals must
gather information for their spouse regardless of whether
they are filing a joint petition, separate individual
petitions, or even if only one spouse is filing. In a
situation where only one spouse files, the income and
expenses of the non-filing spouse is required so that the
court, the trustee and creditors can evaluate the
household's financial position.
Among the schedules that
an individual debtor will file is a schedule of "exempt"
property. The Bankruptcy Code allows an individual debtor to
protect most property from the claims of creditors because
it is exempt under New York State law. The debtor
should consult an attorney to determine the exemptions
available in the state where the debtor lives.
What is the
'automatic stay'?
Filing a petition under
chapter 7 "automatically stays" (stops) most collection
efforts against the debtor or the debtor's property, but
filing the petition does not stay all actions and the stay
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.
Approximately 30 days
after the petition is filed, the case trustee (described
below) will hold a meeting of creditors. During this meeting, the
trustee puts the debtor under oath, and both the trustee and
creditors may ask questions. The debtor must attend the
meeting and answer questions regarding the debtor's
financial affairs and property. If a husband and wife have
filed a joint petition, they both must attend the creditors'
meeting and answer questions. Within 10 days of the
creditors' meeting, the U.S. trustee will report to the
court whether the case should be presumed to be an abuse
under the means test described in 11 U.S.C. § 707(b).
It is important for the
debtor to cooperate with the trustee and to provide any
financial records or documents that the trustee requests.
The trustee may ask the debtor
questions at the meeting of creditors to ensure that the
debtor is aware of the potential consequences of seeking a
discharge in bankruptcy such as the effect 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 at or before the meeting to
ensure that the debtor is aware of this information. In
order to preserve their independent judgment, bankruptcy
judges are prohibited from attending the meeting of
creditors.
What is a
Chapter 7 trustee?
When a chapter 7 petition
is filed, the U.S. trustee appoints an impartial
trustee from a panel of attorneys to administer the case and liquidate the debtor's
nonexempt assets. If all the debtor's assets are exempt or
subject to valid liens, the trustee will normally file a "no
asset" report with the court, and there will be no
distribution to unsecured creditors. Most chapter 7 cases
involving individual debtors are no asset cases. But if the
case appears to be an "asset" case at the outset, unsecured
creditors (7) must file their claims
with the court within 90 days after the first date set for
the meeting of creditors. A governmental unit,
however, has 180 days from the date the case is filed to
file a claim. In the typical no asset chapter 7 case,
there is no need for creditors to file proofs of claim
because there will be no distribution. If the trustee later
recovers assets for distribution to unsecured creditors, the
Bankruptcy Court will provide notice to creditors and will
allow additional time to file proofs of claim. Although a
secured creditor does not need to file a proof of claim in a
chapter 7 case to preserve its security interest or lien,
there may be other reasons to file a claim. A creditor in a
chapter 7 case who has a lien on the debtor's property
should consult an attorney for advice.
Commencement of a
bankruptcy case creates a "bankruptcy estate." The estate technically
becomes the temporary legal owner of all the debtor's
non-exempt property. It consists of all legal or equitable interests of
the debtor in property as of the commencement of the case,
including property owned or held by another person if the
debtor has an interest in the property. Generally speaking,
the debtor's creditors are paid from nonexempt property of
the estate.
The primary role of a
chapter 7 trustee in an asset case is to liquidate the
debtor's nonexempt assets in a manner that maximizes the
return to the debtor's unsecured creditors. The trustee
accomplishes 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 that the
debtor holds in the property. Often, the trustee will afford
the debtor the opportunity to "buy back" a non-exempt asset
from the bankruptcy estate instead of conducting an auction
or otherwise selling the asset. The trustee may also attempt
to recover money or property under the trustee's "avoiding
powers." The trustee's avoiding powers include the power to:
set aside preferential transfers (made to
made to
insiders (for example: family members or business
associates) within one year from a Chapter 7 filing or to
other creditors within 90
days before the petition; undo security interests and other
prepetition transfers of property that were not properly
perfected under non-bankruptcy law at the time of the
petition; and pursue non-bankruptcy claims such as fraudulent
conveyance and bulk transfer remedies available under state
law. In addition, if the debtor is a business, the
bankruptcy court may authorize the trustee to operate the
business for a limited period of time, if such operation
will benefit creditors and enhance the liquidation of the
estate. 11 U.S.C. § 721.
Section 726 of the
Bankruptcy Code governs the distribution of the property of
the estate. Under § 726, there are six classes of claims;
and each class must be paid in full before the next lower
class is paid anything. A
proactive attorney will seek to have a non-dischargeable
claims (such as past due taxes, or child support arrears) The individual
debtor's primary concerns in a chapter 7 case are to retain
exempt property and to receive a discharge that covers as
many debts as possible.
What does a
discharge in bankruptcy mean?
A discharge releases
individual debtors from personal liability for most debts
and prevents the creditors owed those debts from taking any
furthercollection actions against the debtor. Because a chapter 7
discharge is subject to many exceptions we will discuss with
you, in advance of filing, the scope of the anticipated
discharge. 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 relatively early in the case – generally, 60
to 90 days after the date first set for the meeting of
creditors.
The grounds for denying an
individual debtor a discharge in a chapter 7 case include
situations where the debtor: failed to keep or produce
adequate books or financial records; failed to explain
satisfactorily any loss of assets; committed a bankruptcy
crime such as perjury; failed to obey a lawful order of the
bankruptcy court; fraudulently transferred, concealed, or
destroyed property that would have become property of the
estate; or failed to complete an approved instructional
course concerning financial management.
Secured creditors may
retain some rights to seize property securing an underlying
debt even after a discharge is granted. Depending on
individual circumstances, if a debtor wishes to keep certain
secured property (such as an automobile), he or she may
decide to "reaffirm" the debt. A reaffirmation is an
agreement between the debtor and the creditor that the
debtor will remain liable and will pay all or a portion of
the money owed, even though the debt would otherwise be
discharged in the bankruptcy. In return, the creditor
promises that it will not repossess or take back the
automobile or other property so long as the debtor continues
to pay the debt.
If the debtor was
represented by an attorney in connection with the
reaffirmation agreement, the attorney must certify in
writing that he or she advised the debtor of the legal
effect and consequences of the agreement, including a
default under the agreement. The attorney must also certify
that the debtor was fully informed and voluntarily made the
agreement and that reaffirmation of the debt will not create
an undue hardship for the debtor or the debtor's dependants.
An individual receives a
discharge for most of his or her debts in a chapter 7
bankruptcy case. A creditor may no longer initiate or
continue any legal or other action against the debtor to
collect a discharged debt. But not all of an individual's
debts are discharged in chapter 7. Debts not discharged
include debts for alimony and child support, certain taxes,
debts for certain educational benefit overpayments or loans
made or guaranteed by a governmental unit, debts for willful
and malicious injury 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 of a motor vehicle
while the debtor was intoxicated from alcohol or other
substances, and debts for certain criminal restitution
orders.11 U.S.C. § 523(a). The debtor will continue to be
liable for these types of debts to the extent that they are
not paid in the chapter 7 case. Debts for money or property
obtained by false pretenses, debts for fraud or defalcation
while acting in a fiduciary capacity, and debts for willful
and malicious injury by the debtor to another entity or to
the property of another entity will be discharged unless a
creditor timely files and prevails in an action to have such
debts declared nondischargeable. |
