What is Chapter 7 Bankruptcy?
Liquidation of Debtor’s Property Pays Creditors
Chapter 7 Bankruptcy is the chapter of the United States Bankruptcy Code that allows for liquidation of a debtor’s property and the distribution of the proceeds to the debtor’s creditors. According to the U.S. Courts, Chapter 7 is the most common form of bankruptcy in the United States.
In order to qualify for Chapter 7 bankruptcy, the debtor may be an individual, a partnership, or a corporation, and have received credit counseling from an approved credit counseling agency within the 180 days before filing. The primary purpose of bankruptcy is to discharge debts in order to allow honest individuals to have a fresh start in their finances. In a chapter 7 case; however, the discharge is only available to individual debtors, not to partnerships or corporations. In the case of a corporation or partnership bankruptcy, the corporate entity is completely dissolved.
Un-exempt Property is Returned to Lienholders or Sold
As in the case of a cars or homes that may be returned to the bank, a debtor’s property may be subject to liens and mortgages that commit the property to the original creditors. Additionally, many types of debt are not discharged at all in a Chapter 7 bankruptcy. These include child support, income taxes less than 3 years old, property taxes, student loans, fines and restitution imposed by a court for any crimes, and spousal support.
Unlike Chapter 13 bankruptcy, a Chapter 7 bankruptcy case does not require that a repayment plan is filed in court. Instead, the bankruptcy trustee sells the debtor’s nonexempt assets and pays creditors in accordance with the bankruptcy code. Property that will be sold in the bankruptcy are expensive musical instruments; stamps, coins, and other collectibles; family heirlooms; cash, bank accounts, and other investments; and a second car/truck or home.
Exempt Property Allows Debtors to Get Back on Their Feet
U.S. law allows debtors to keep a certain amount of “exempt” property after going through bankruptcy. These “necessities of modern life” are considered to be required for living and working and include motor vehicles, up to a certain value; clothing, household goods and furnishings; Jewelry, up to a certain value; pensions; some equity in the debtor’s home; tools of the debtor’s trade or profession, up to a certain value; and damages awarded for personal injury.
Filing a petition under chapter 7 ends (also known as “stays”) most collection attempts by creditors who are put on notice by the bankruptcy clerk. After receiving notice, creditors may not initiate or continue lawsuits, wage garnishments, or demanding phone calls.
Three Basic Steps of Chapter 7 Bankruptcy
Step 1 – Filing a Petition A chapter 7 case begins with the debtor filing a petition with the bankruptcy court where they live or where their principal place of business or principal assets are located. In addition to the petition, the debtor must also file a list of assets and liabilities; current income and expenditures; a statement of financial affairs; and a schedule of contracts and unexpired leases. Debtors must also provide the assigned case trustee with a copy of tax returns for the most recent tax year and for the years related to the case.
Individual debtors that have primarily consumer debt must file additional documents including a certificate of credit counseling, a copy of any debt repayment plan developed through credit counseling, evidence of payment from employers received 60 days before filing, a statement of monthly net income and any anticipated increase in income or expenses, and a record of any interest the debtor has in federal or state qualified education or tuition accounts.
Step 2 – Fee Payment The courts charge a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge which is paid to the clerk of the court. If the debtor’s income is less than 150% of the poverty level, the court may waive the requirement that the fees be paid.
The debtor must also provide a list of all creditors and the amount and nature of their claims; the source, amount, and frequency of the debtor’s income; a list of all of the debtor’s property; and a detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Step 3 – Meeting with Trustee and Creditors Between 21 and 40 days after the petition is filed, the case trustee holds a meeting of creditors where the debtor is placed under oath, and both the trustee and creditors may ask questions regarding the debtor’s financial affairs and property. Within 10 days of the creditors’ meeting, the U.S. trustee will report to the court.
The trustee ensures that the debtor is aware of the potential consequences of bankruptcy including its effect on credit history, the inability to file a petition under a different chapter, and the effect of receiving a discharge. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors. In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to a case under chapter 11, 12, or 13 if eligible.