LIQUIDATION
Chapter 7 bankruptcy is designed for individuals, married couples, and small business owners wishing to make a fresh start, but who are substantially unable to pay debts from current income. This includes such entities such as partnerships, corporations, or limited liability companies.
OVERVIEW
A consumer debtor filing relief from creditors under Chapter 7 is typically permitted to keep most or all of his or her property through exemptions. However, if the property exceeds the limits, any remaining non exempt property is available to be liquidated by the trustee. Net proceeds would then be available for distribution to creditors after deducting commissions and costs.
An individual may not file a Chapter 7 case if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to his or her failure to appear or comply with court orders, or if the debtor requested and obtained a voluntary dismissal of the case following the filing of a request for automatic bankruptcy stay relief by a creditor or party-in-interest.
At the end of the Chapter 7 case, the individual debtor receives a discharge, this cancels the debtor’s legal obligation to pay most consumer debts listed in the bankruptcy petition. There are some special debts which may not be discharged. These are discussed below. A discharge may be denied if the debtor received a discharge in a previous Chapter 7 case. A discharge is available only once every six years. Accordingly, the decision to file a bankruptcy petition under Chapter 7 should be seriously considered.
Chapter 7 bankruptcy is typically best suited for those whose take home pay is swallowed up by basic living expenses. The bankruptcy court has the ability to dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer, rather than business debts, if the Court finds that the debtor filed in bad faith or is substantially abusing the provisions of the Bankruptcy Code by not making his or her best effort to repay at least a portion of the debts through Chapter 13 bankruptcy.
HOW CHAPTER 7 WORKS
A Chapter 7 case begins with the filing, under oath, of a petition, schedules of assets and liabilities, and a statement of financial affairs. A husband and wife who are legally married may together file one joint petition. Although married couples may file together, there may be some strategic advantage to filing individually in certain instances. The filing fee for a Chapter 7 case is $200.00. This is the Court’s fee and not the legal fee. In addition to the court’s fee there is also a legal fee which is dependant upon the amount of work involved in the case.
Upon the filing of the petition, a trustee is appointed by the Office of the United States Trustee to administer and investigate the case, question the debtor under oath, and liquidate any nonexempt assets, if any.
In order to obtain relief pursuant to Chapter 7, a debtor must compile the following information:
- A schedule of all creditors and collection agents (including agencies, attorneys and law firms), containing complete addresses, account numbers, amounts claimed due, and dates each debt was incurred;
- A schedule of the debtor’s real and personal property; and
- The amounts of the debtor’s monthly household income and living expenses, i.e., food, clothing, rent or mortgage payments, utilities, insurance, transportation, medical expenses, child care costs, etc.
The Chapter 7 petition includes a schedule of exempt property. Exempt property is retained by the consumer debtor and is not available to the Chapter 7 trustee or the creditors. Federal bankruptcy law fixes dollar values for exemption of certain types of property. Pennsylvania however, has taken advantage of a provision in the bankruptcy statue which permits a state to adopt its own exemption law in place of federal exemptions. Thus, whether certain debtor’s property-such as a house, care, retirement plan, collections, household goods, jewelry, cash, business equipment, or even a pending lawsuit or claim-is exempt from the reach of the trustee and the creditors, may depend upon whether state or federal exemptions are selected.
Creditors that are listed on the schedules will receive notice of the filing of the petition from the bankruptcy court. Once the petition is filed, most actions by creditors to collect money are subject to an automatic court stay and must stop. Creditors, by law, are not longer permitted to initiate or continue their lawsuits, wage garnishments, attachments or other collection activity-including telephone calls from collection agencies demanding payment. If a creditor needs to be added after the initial filing, there is an additional filing fee, as well as legal fees.
After the petition is filed, a meeting of creditors under section 341 of the Bankruptcy Code is scheduled by the court. The debtor must attend this meeting and must provide proof of his or her social security number, usually through a social security card and valid photo ID. The creditors are entitled to appear and ask questions regarding the debtor’s financial situation and property. If a husband and wife both file together, they both must attend the meeting of creditors. The trustee will preside at this meeting and question the debtor about the matters contained in the petition. It is important for the debtor to cooperate with the trustee. In order to preserve their independent judgment, bankruptcy judges decide questions of law but do not attend the meeting of creditors.
If the debtor has assets over and above what may be claimed as exempt, the trustee has the right to demand turnover of such assets in order to sell them. Depending upon the amount of nonexempt equity in the property, the debtor may sometimes be able to make an offer to purchase the trustee’s interest in jointly held property. The money received at a public or private sale would then be available to pay claims of creditors. If, as is often the case, all of the debtor’s assets are exempt, there would be no distribution to creditors and the debtor will retain all of his or her property. Certain transfers of property made by the debtor within 90 days before filing can be recovered by the trustee for the benefit of all of the creditors.
CHAPTER 7 DISCHARGE
Approximately three months following the meeting of creditor, the individual consumer debtor can typically expect to receive a discharge. The discharge is a court order which cancels the debtor’s legal obligation to repay most of the unsecured debt. Unsecured debts include but are not limited to credit cards, doctor’s bills, past utility bills and personal loans. Secured debts include loans where property has been secured as collateral. These include but are not limited to mortgages and vehicle loans. Certain debts such as sales taxes and other trust fund taxes, i.e. employer withholding tax, debts created by a debtor’s intentional conduct such as assault, defamation, embezzlement or fraud, parking violations, fines, penalties and criminal restitution, alimony and child support obligations, and guaranteed student loans, are not discharged in most cases and are unaffected by a Chapter 7 bankruptcy filing.
Because secured creditors retain significant rights which may permit them to repossess pledged property, even after a discharge is granted, it is sometimes advantageous for the debtor to reaffirm a debt when property, such as a truck or automobile, has been pledged to the creditor as collateral. A reaffirmation is an agreement between the debtor and the creditor that the debtor will pay the money owed, even though the debtor has no obligation to do so upon discharge. In return, the creditor promises that as long as payments are made, the creditor will not seek to repossess, or reclaim, the automobile or truck. The reaffirmation agreement must be filed with the court and approved by the bankruptcy judge before the debtor is discharged from bankruptcy.
If the debtor attempts to hide assets, makes false oaths in connection with a bankruptcy petition, fails to cooperate with a trustee, fails to appear at a meeting of creditors, or fails to obey bankruptcy court orders, a discharge can be denied or revoked. Bankruptcy fraud is a felony under federal criminal law, and carries serious penalties including fines or imprisonment, or both, in addition to the denial of the discharge.
