Bankruptcy Basics of Chapter 7

  • Chapter 7

Bankruptcy Basics of Chapter 7

Bankruptcy is designed as a means to give a debt-free fresh start to honest individuals who have fallen on bad times. Post-bankruptcy, debtors cannot be held liable for discharged debts. Consumers can file for bankruptcy under chapter 7 where all your non-exempt property is liquidated, and the proceeds are distributed among creditors as per Bankruptcy Code. Part of the property may be subject to mortgages and liens, while any unsecured debts (credit card bills, medical bills, etc.) which remain after the process are discharged.

Though it sounds too good, there are other options available. According to Los Angeles, based bankruptcy firm Recovery Law Group debtors who are in business (corporations, partnerships or sole proprietorships) can definitely avoid liquidation of assets and remain in business. For them, Chapter 11 is a better option where they can adjust their debts by either reducing them, extending repayment time or a better comprehensive reorganization. Sole proprietors can opt for Chapter 13, as can individual debtors who fail to qualify for Chapter 7 and have means to repay loans through a repayment plan. In case you are confused call 888-297-6023 to speak with bankruptcy lawyers about your case.

Eligibility for Chapter 7 Bankruptcy and what can cause your Chapter 7 Bankruptcy case to be dismissed

If you can let go of your non-exempt assets, Chapter 7 is the best bet for you. It takes less time and any unsecured debts which remain are discharged. This chapter can provide relief to individuals, corporations, partnerships and other business entities; however, discharge is available only to individuals and not corporations and partnerships. One of the major hurdles, in this case, is that you need to qualify the “means test” for being eligible for it. The requirements of the mean test include:

  • Debtor’s “current monthly income” should be less than the state median. This is calculated by considering the debtor’s aggregate monthly income over five years. It should not exceed (after statutorily allowed expenses) either $12,850 or 25% of debtor’s nonpriority unsecured debts (up to $7,700).
  • The debtor can justify the additional expenses of the current monthly income due to special circumstances (job loss, health issues resulting in heavy medical bills, etc.)

If the debtor is unable to prove either of the points, it becomes a case of presumptive abuse and the case can either be converted into a Chapter 13 case (with debtor’s consent) or dismissed. An individual cannot file under Chapter 7 if a prior bankruptcy petition was dismissed 180 days prior due to debtor’s failure to either comply with court orders or wilful absence from court or debtor themselves voluntarily dismissed the case after creditors took relief from the bankruptcy court to recover property with liens. It is mandatory for all bankruptcy relief seekers to complete a mandatory credit counseling course (within 180 days prior to bankruptcy filing) from approved credit counseling agencies. In case of emergency situations, relief is available for debtors. Also, if the bankruptcy trustee determines the absence of enough approved agencies for counseling then also the process can be skipped. In case an individual’s debts are largely consumer rather than business, then, the court may dismiss the case if granting of relief is an abuse of Chapter 7.

How does Chapter 7 work?

In this case, a petition is filed in bankruptcy court where the debtor lives or where they have their main business or assets. Along with the petition, the debtor is also required to submit the following documents with the court and bankruptcy trustee:

  1. List of all assets and liabilities;
  2. Current monthly income and expenditure (also include anticipated income or expenditure increase post-filing);
  3. Financial statement;
  4. Schedule of unexpired leases and executory contracts;
  5. Copy of most recent tax returns as well as those filed during the case;
  6. Certificate of credit counseling course;
  7. Copy of debt repayment plan developed through credit counseling;
  8. Pay slips/cheques from employers;
  9. Any federal or state qualified education/tuition accounts.

A couple may file a petition for bankruptcy as individuals or jointly. You are expected to pay the following fees:

  • $245 – case filing fees;
  • $75 – miscellaneous administrative fees;
  • $15 – trustee surcharge

Though usually the fee is paid to the clerk on the filing of the case, individuals can, with court’s approval, pay in four installments; with the last one not later than 120 days of petition filing. This deadline can be extended up to 180 days after filing of the petition on showing genuine cause. The administrative fee and trustee surcharge can also be paid in installments. In case of a joint petition, all charges are to be paid only once. In case the debtor does not pay the fees, the case may be dismissed. In case the debtor’s income is less than 150% of the poverty level and he/she is unable to pay the Chapter 7 fees in installments, the court can waive the requirement.

The debtor also needs to provide a list of all creditors, the amount and nature of their claims; the debtor’s source, amount and frequency of income; list of any property owned and a detailed account of their expenses (food, shelter, clothing, transportation, taxes, etc.). This information is to be gathered by married individuals for their spouses, in case of joint or separate individual petitions and even if only one of them is filing.

A bankruptcy estate is formed on commencement of bankruptcy case which consists of all property owned by the debtor. According to the Bankruptcy Code, individual debtors can keep some of their property. This is known as exempt property. The government offers a choice to bankruptcy filers to choose from federal exemptions or state exemptions; however, in some states like California, you can choose only state exemptions (there are 2 sets of exemptions in California). A bankruptcy attorney in California can best guide you which set of exemption will allow you to keep most of your property from being liquidated.

One of the benefits of filing for bankruptcy is automatic stay which prevents all collection actions by creditors like repossession, wage garnishment, foreclosure, and threatening calls. The stay remains effective for as long as the bankruptcy is in place. All creditors are informed of your bankruptcy petition due to the notice sent to them by bankruptcy clerk. It is therefore essential not to miss any creditor from the list, else they will not be informed of the automatic stay and you might be in trouble.

A meeting of creditors is scheduled between 21 and 40 days of the filing of the petition. This meeting is attended by the bankruptcy trustee, the debtor and his/her attorney along with creditors. It is mandatory for the debtor to attend the meeting; however, creditors may skip it if they do not have any objection to the filing. In the case of a joint petition, both husband and wife need to attend the meeting. Within 10 days of the meeting, the U.S. court, on trustee’s advice decide whether the case should go ahead or dismiss due to abuse of means test.

What is the role of a bankruptcy trustee?

The courts appoint a bankruptcy attorney who is responsible for several jobs, major of which include:

  • Making the debtor aware of the consequences of seeking and receiving bankruptcy discharge (low credit rating, difficulty in getting loans, jobs, etc.);
  • Suggesting filing for bankruptcy in a different chapter (covert bankruptcy to chapter 11, 12 or 13) if they are eligible under the new chapter;
  • Effects of reaffirming any debt;
  • Filing of the report with the court. If all assets are exempt or subject to valid liens, the bankruptcy is a “no asset” one where unsecured creditor does not get any dues. However, if it is an asset’s case, unsecured creditors need to file their claim within 90 days of creditors meeting, while governmental units have 180 days for filing the claim. If an asset is later discovered for distribution, Bankruptcy court notifies creditors and allows additional time to file proof of claim.
  • Administer the case and liquidate non-exempt assets of the debtor to maximize return to unsecured creditors;
  • The trustee also has “avoiding powers” through which any preferential transfers to creditors within 90 days of petition filing can be undone, pursue any fraudulent and/or bulk transfer.

Chapter 7 discharge

There are several reasons why a debtor might not get discharged by the court –

  1. If the debtor fails to produce their financial records;
  2. Fails to reasonably explain the loss of any asset;
  3. Committed perjury;
  4. Fraudulently concealed, transferred or destroyed property which was a part of the bankruptcy estate;
  5. Failed to obey bankruptcy court order;
  6. Failed to complete mandatory financial management course.

Generally, 99% of Chapter 7 cases result in a discharge, within 60-90 days of creditors’ meeting. Getting a discharge relieves the debtor of any personal liability for the discharged debts and cannot be pursued by creditors for them. Secured creditors, however, have right over some property even after discharge is granted.

In case a debtor reaffirms any debt, they remain liable for the debt (entire or part of it) even after discharge. With reaffirmation agreement, debtor confirms their intention to pay debts which otherwise would have been discharged, while creditor assures that property will not be repossessed if the debtor continues making a payment regarding the debt. However, the reaffirmation of debt needs to be done before discharge is entered. The personal liability of the debtor is not discharged after reaffirmation of the debt. It is therefore important for debtor’s attorney to make the client aware of the consequences of reaffirming their debt.

However, all debts are not discharged during chapter 7 bankruptcy. Those debts which remain include child and spousal support, education loans, some taxes, and loans made by or to government units, debts for malicious injuries by the debtor to property or another individual, etc.