Liquidation
Under Chapter 7
Frequently Asked Questions Under Chapter 7
1.
What is chapter 7 and how does it work?
Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals
with liquidation. A person who files a chapter 7 is called a debtor.
In a chapter 7 case, the debtor must turn his or her nonexempt property,
if any exists, over to a trustee, who then sells the property for cash
and pays the debtor’s creditors. In return, the debtor receives
a chapter 7 discharge, if he or she pays the filing fee, is eligible
for such a discharge, and obeys the orders and rules of the court.
2.
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 dischargeable
under chapter 7, and some persons are not eligible for a chapter 7 discharge.
3.
What debts are not dischargeable under chapter 7?
All debts of any kind or amount, including out-of-state debts, are dischargeable
under chapter 7 except the debts listed below. The following is a list
of the most common debts that are not dischargeable under chapter 7:
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(1) Most tax debts and debts that were incurred to pay federal tax debts.
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(2) Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor filed a timely complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 60 days before the case is filed).
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(3) Debts not listed on the debtor’s chapter 7 forms, unless the creditor knew of the case in time to file a claim.
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(4) Debts for fraud, embezzlement, or larceny, if the creditor files a timely complaint in the case.
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(5) Debts for alimony, maintenance, or support and, if the creditor files a timely complaint in the case, certain other divorce-related debts including property settlement debts.
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(6) Debts for intentional or malicious injury to the person or property of another, if the creditor files a timely complaint in the case.
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(7) Debts for certain fines or penalties.
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(8) Debts for educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents.
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(9) Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated.
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(10) 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.
4.
What persons are not eligible for a chapter 7 discharge?
The following persons are not eligible for a chapter 7 discharge:
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(1) A person who has been granted a discharge in a chapter 7 case filed within the last six years.
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(2) A person who has been granted a discharge in a chapter 13 case filed within the last six years, unless 70 percent or more of the unsecured claims were paid off in the chapter 13 case.
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(3) A person who files a waiver of discharge that is approved by the court in the chapter 7 case.
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(4) A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the chapter 7 case.
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(5) A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.
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(6) A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee.
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(7) A person who fails to satisfactorily explain any loss or deficiency of his or her assets.
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(8) A person who refuses to answer questions or obey orders of the bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.
5.
What persons are eligible to file under chapter 7?
Any person who resides in, does business in, or 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.
6.
What persons should not file under Chapter 7?
A person who has substantial debts that are not dischargeable under
chapter 7 should not file under chapter 7. In addition, it may not be
wise for a person with current income sufficient to repay a substantial
portion of his or her debts within a reasonable period to file under
chapter 7, because the court may dismiss the case as constituting an
abuse of chapter 7.
7.
May a husband and wife file jointly under chapter 7?
Yes. A husband and wife may file a joint petition under chapter 7. If
a joint petition is filed, only one set of bankruptcy forms is needed
and only one filing fee is charged.
8.
Under what conditions should both spouses file under chapter 7?
Both husband and wife should file if one or more substantial dischargeable
debts are owed by both spouses. If both spouses are liable for a substantial
debt and only one spouse files under chapter 7, the creditor may later
attempt to collect the debt from the nonfiling spouse, even if he or
she has no income or assets.
9.
How does the filing of a chapter 7 case affect collection and other
legal proceedings that have been filed against the debtor in other courts?
The filing of a chapter 7 case automatically stays (or stops) virtually
all collection and other legal proceedings pending against the debtor.
A few days after a chapter 7 case is filed, the court mails a notice
to all creditors ordering them to refrain from any further action against
the debtor. If necessary, this notice may be served earlier by the debtor
or the debtor’s attorney. Any creditor who intentionally violates
the automatic stay may be held in contempt of court and may be liable
to the debtor in damages. Criminal proceedings and actions to collect
alimony, maintenance, or support from exempt property or property acquired
by the debtor after the chapter 7 case was filed are not affected by
the automatic stay. The automatic stay also does not protect cosigners
and guarantors of the debtor, and a creditor may continue to collect
debts of the debtor from those persons after the debtor files a chapter
7 case.
10.
May a person file under chapter 7 if his or her debts are being administered
by a financial counselor?
Yes. A financial counselor has no legal right to prevent anyone from
filing under chapter 7.
11.
How does filing under chapter 7 affect a person’s credit rating?
It will usually worsen it, if that is possible. However, some financial
institutions openly solicit business from persons who have recently
filed under chapter 7, apparently because it will be at least six years
before they can again file under chapter 7. If there are compelling
reasons for filing under chapter 7 that are not within the debtor’s
control (such as an illness or an injury), some credit rating agencies
may take that into account in rating the debtor’s credit after
filing.
12.
Are the names of persons who file under chapter 7 published?
When a chapter 7 case is filed, it becomes public record and the name
of the debtor may be published by some credit-reporting agencies. However,
newspapers do not usually report or publish the names of consumers who
file under chapter 7.
13.
Are employers notified of chapter 7 cases?
Employers are not usually notified when a chapter 7 case is filed unless
an employer is a creditor. However, the trustee in a chapter 7 case
may contact an employer seeking information as to the status of the
debtor’s wages or salary at the time the case was filed. If there
are compelling reasons for not informing an employer in a particular
case, the trustee should be so informed and he or she may be willing
to make other arrangements to obtain the necessary information.
14.
Does a person lose any legal or civil rights by filing under chapter
7?
No. Filing under chapter 7 is not a criminal proceeding, and a person
does not lose any civil or constitutional rights by filing.
15.
May employers or governmental agencies discriminate against persons
who file under chapter 7?
No. 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 governmental
units to discriminate against a person as to the granting of licenses
(including a driver’s license), permits, student loans, and similar
grants because that person has filed under chapter 7.
16.
Does a person lose all of his or her property by filing under chapter
7?
Usually not. Certain property is exempt and cannot be taken by creditors,
unless it is encumbered by a valid mortgage or lien. A debtor is usually
allowed to retain his or her unencumbered (or unsecured) exempt property
(see Question 25, below).
17.
When must a debtor appear in court in a chapter 7 case and what happens
there?
The first court appearance is for a hearing called the "meeting
of creditors." This hearing usually takes place about a month after
the case is filed. At this hearing the debtor is put under oath and
questioned about his or her debts and assets by the hearing officer
or trustee. In most chapter 7 consumer cases no creditors appear in
court; but any creditor that does appear is usually allowed to question
the debtor. If the bankruptcy court decides not to grant the debtor
a discharge or if the debtor wishes to reaffirm a debt and is not represented
by an attorney, there will be another hearing about three months later
which the debtor will have to attend.
18.
What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the debtor regarding
the debtor’s property, and the court may issue certain orders to
the debtor. These orders are sent by mail and may require the debtor
to turn certain property over to the trustee, or provide the trustee
with certain information. If the debtor fails to comply with these orders,
the case may be dismissed and the debtor may be denied a discharge.
19.
What is a trustee in a chapter 7 case, and what does he or she do?
The trustee is an officer of the court, appointed to examine the debtor,
collect the debtor’s nonexempt property, and pay the expenses of
the estate and the claims of 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 required duties
in the case. A trustee is appointed in a chapter 7 case, even if the
debtor has no nonexempt property.
20.
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, the chapter 7 case may be dismissed and the debtor may
be denied a discharge.
21.
What happens to the property that the debtor turns over to the trustee?
It is usually converted to cash, which is used to pay the fees and expenses
of the trustee and to pay the claims of unsecured creditors.
22.
What 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
has no nonexempt 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 them to file claims, and that if assets are
later discovered they will then be given an opportunity to file claims.
This type of case is referred to as a no-asset case. Approximately one-half
of all chapter 7 cases that are filed are no-asset cases.
23.
How are secured creditors dealt with in a chapter 7 case?
Secured creditors are creditors with valid mortgages or liens against
property of the debtor. Property of the debtor that is encumbered by
a valid mortgage or liens is called secured property. The claim of a
secured creditor is called a secured claim and secured claims must be
collected from or enforced against secured property. Secured claims
are not paid by the trustee. A secured creditor must prove the validity
of its mortgage or lien and obtain a court order before repossessing
or foreclosing on secured property. The debtor should not turn any property
over to a secured creditor until a court order has been obtained. The
debtor may be permitted to retain or redeem certain types of secured
personal property (see Question 25, below).
24.
How are unsecured creditors dealt with in a chapter 7 case?
An unsecured creditor is a creditor without a valid lien or mortgage
against property of the debtor. If the debtor has nonexempt assets,
unsecured creditors may file claims with the court within 90 days after
the first date set for the meeting of creditors. The trustee will examine
these claims and file objections to those 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 the trustee’s
objections to improper claims, the trustee will distribute the funds
in the form of dividends to the unsecured creditors according to the
priorities set forth in the Bankruptcy Code. Administrative expenses,
claims for wages, salaries, and contributions to employee benefit plans,
claims for the refund of certain deposits, claims for alimony, maintenance
support, and tax claims, are given priority, in that order, in the payment
of dividends 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.
25.
What secured property may a debtor retain or redeem in a chapter 7 case?
A debtor may retain and redeem certain secured personal and household
property, such as household furniture, appliances and goods, wearing
apparel, and tools of trade, without payment to the secured creditor,
if the property is exempt and if the mortgage or lien against the property
was not incurred for the purpose of financing the purchase of the property.
A debtor may also retain and redeem without payment to the secured creditor
any secured property that is both exempt and subject only to a judgment
lien. Finally, a debtor may redeem certain exempt personal, family,
or household property by paying to the secured creditor an amount equal
to the value of the property, regardless of how much is owed to the
creditor. Deadlines are imposed on the enforcement of these rights by
the debtor during the bankruptcy case.
26.
May a utility company refuse to provide service to a debtor if the company’s
utility bill is discharged under chapter 7?
If, within 20 days after a chapter 7 case is filed, the debtor furnishes
a utility company with a deposit or other security to insure the payment
of further utility services, it is illegal for a utility company to
refuse to provide future utility service to the debtor, or to otherwise
discriminate against the debtor, if its bill for the past utility services
is discharged in the chapter 7 case.
27.
How is a debtor notified when his or her discharge has been granted?
Usually by mail. 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 discharging the debtor from his or her dischargeable debts, and
it serves as notice that the debtor’s discharge has been granted.
It is usually mailed about four months after a chapter 7 case is filed.
28.
What if a debtor wishes to repay a dischargeable debt?
A debtor may repay as many dischargeable debts as desired after filing
under chapter 7. By repaying one creditor, a debtor does not become
legally obligated to repay any other creditor. The only dischargeable
debt that a debtor is legally obligated to repay is one for which the
debtor and the creditor have signed what is called a "reaffirmation
agreement." If the debtor was not represented by an attorney in
negotiating the reaffirmation agreement with the creditor, the reaffirmation
agreement must be approved by the court to be valid. If the debtor was
represented by an attorney in negotiating the reaffirmation agreement,
the attorney must file the agreement and the attorney’s statement
with the court in order for the agreement to be valid. If a dischargeable
debt is not covered by a reaffirmation agreement, a debtor is not legally
obligated to repay the debt, even if the debtor has made a payment on
the debt since filing under chapter 7, has agreed in writing to repay
the debt, or has waived the discharge of the debt.
29.
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 assets
for the trustee to collect, the case will most likely be closed shortly
after the debtor receives his or her discharge, which is usually about
four months after the case is filed. If the debtor has nonexempt assets
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 or her
other duties in the case. Most consumer cases with assets last about
six months, but some last considerably longer.
30.
What should a person do if a creditor later attempts to collect a debt
that was discharged under chapter 7?
When a chapter 7 discharge is granted, the court enters an order prohibiting
the debtor’s creditors from later attempting to collect any discharge
debt from the debtor. Any creditor who violates this court order may
be held in contempt of court and may be liable to the debtor in damages.
If a creditor later attempts to collect a discharged debt from the debtor,
the debtor should give the creditors a copy of the order of discharge
and inform the creditor in writing that the debt has been discharged
under chapter 7. If the creditor persists, the debtor should contact
an attorney. If a creditor files a lawsuit against the debtor on a discharged
debt, it is important not to ignore the matter, because even though
a judgment entered against the debtor on a discharged debt can later
be voided, voiding the judgment may require the services of an attorney,
which could be costly to the debtor.
31.
How does a chapter 7 discharge affect the liability of cosigners and
other parties who may be liable to a creditor on a discharge 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. Therefore,
a person who has cosigned or guaranteed a debt for the debtor is still
liable for the debt regardless of the debtor’s chapter 7 discharge.
The only exception to this rule is in community property states where
the spouse of a debtor is released from certain community debts by the
debtor’s chapter 7 discharge.
32.
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 the chapter
7 case of a typical consumer debtor:
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(1) Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor’s financial problems.
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(2) Advise the debtor of the relief available under both chapter 7 and chapter 13 of the Bankruptcy Code, and of the advisability of proceeding under each chapter.
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(3) Assemble the information and data necessary to prepare the chapter 7 forms for filing .
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(4) Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court.
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(5) Assist the debtor in arranging his or her assets so as to enable the debtor to retain as many of the assets as possible after the chapter 7 case.
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(6) Filing the chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.
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(7) If necessary, assisting the debtor in reaffirming certain debts, redeeming personal property, setting aside mortgages or liens against exempt property, and otherwise carrying out the matters set forth in the debtor’s statement of intention.
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(8) Attending the meeting of creditors with the debtor and appearing with the debtor at any other hearings that may be held in the case.
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(9) If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor.
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(10) If necessary, assisting the debtor in overcoming obstacles that may arise to the granting of a chapter 7 discharge. The fee paid, or agreed to be paid, to an attorney representing a debtor in a chapter 7
case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Most attorneys collect all or most of their fee before the case is filed.
This information is intended to inform, but not to provide legal advice. The reader should seek professional advice with regard to specific applications of the information contained herein.
