Chapter 7 - Background

Where a chapter 13 bankruptcy includes the filing of a repayment plan for certain debts, a chapter 7 bankruptcy does not. As an alternative, the Chapter 7 bankruptcy code authorizes the bankruptcy trustee to amass any nonexempt property held by the debtor for liquidation, distributing the proceeds to pay creditors in accordance with the Bankruptcy Code. At the same time the Bankruptcy Code allows for the debtor to retain certain "exempt" assets. Debtors should be aware that when filing a petition under chapter 7 they may have to surrender certain assets if their value cannot be protected using the available exemptions. In general, people facing significant financial distress such that they are considering protection under chapter 7 bankruptcy will primarily hold assets which can be exempted, such as household items, older vehicles and retirement funds.

Chapter 7 - Eligibility

A debtor must either be a partnership, corporation or an individual to qualify for a discharge under chapter 7 of the bankruptcy code. In addition, regardless of whether the debtor is solvent or not the debtor must also meet the income limits outlined in the means test. An individual will not be permitted to file for protection under any chapter of the bankruptcy code if during the last 180 days a bankruptcy case was dismissed due to the debtor's willful failure to comply with or appear before the court, or if the debtor voluntarily dismissed a prior case once creditors pursued relief from the bankruptcy court to recuperate property on which they hold liens. All individuals are required to complete a credit counseling course from an approved agency within 180 days prior to filing regardless of the chapter under which they wish to file.

One of the primary reasons that the Bankruptcy Code was created is to provide an honest individual a “fresh start” by discharging certain types of debt. With the granting of a discharge of debts, the debtor is no longer liable for any debt covered by their bankruptcy. Only an individual debtor’s debts can be discharged in a chapter 7 bankruptcy, those of a partnership or corporation cannot. An individual chapter 7 bankruptcy in general will result in the discharge of debts, though the debtor should be aware that the entitlement to a discharge of all debts is not ensured. Some forms of debt are not dischargeable. One example of this is that a bankruptcy discharge will not automatically eliminate a lien on property.

Chapter 7 - How It Works

A chapter 7 case begins when a debtor files a petition along with all the required certificates, statements and schedules with the regional bankruptcy court for the area in where the business is organized, has it principal place of business or in which they live.

Most collection activities against the debtor or their property will halt with the act of filing of a petition under chapter 7. For as long as the “automatic stay” which is triggered by the filing of the bankruptcy remains in place, creditors are prohibited from initiating or proceeding with such actions as lawsuits, wage garnishments, or even phone calls requesting payment. All creditors listed in the bankruptcy case will be given notice by the clerk of the bankruptcy court once the petition and its associated documents have been filed with the bankruptcy court.

A meeting of creditors will be held by the trustee approximately 20 to 40 days following the filing of the petition. During this meeting, also known as the 341 Hearing, the debtor’s creditors and the trustee are allowed to ask questions of the debtor while they are under oath. The debtor is required to attend this meeting and answer truthfully any questions regarding the debtor's financial affairs and property. It is essential that throughout the process, the debtor cooperate with their chosen representative, as well as the trustee, by providing any documents or records that are requested.

Chapter 7 - The Discharge

The ultimate goal of any bankruptcy case is to achieve the discharge that releases the individual debtor from personal liability for most types of debt. This prevents the creditors who are owed those debts from continuing to pursue any further actions against the debtor in the pursuit of the collection of these debts. Because the discharge of a chapter 7 is bound by a number of exceptions, it is strongly advocated that debtors consult with qualified legal counsel prior to filing to gain a thorough understanding of the scope of the discharge available to you. Unless their case is dismissed or converted, debtors should expect to receive a discharge within 60 to 90 days after the date of their meeting of creditors.

In general, creditors for whom a debt is secured by material goods will retain certain rights to seize the property which secures the underlying debt, even after a discharge is granted. Depending on the debtors financial circumstances, a debtor may ask to retain certain secured possessions (like a vehicle or major appliance). In doing so, the debtor may decide to "reaffirm" this debt by entering into a Reaffirmation agreement. This agreement, entered into by the creditor and the debtor indicates that the debtor means to continue their liability regarding this debt with the goal of paying all or an agreed to portion of the money owed. The debtor may enter into such an agreement, even though the debt could otherwise be discharged as part of their bankruptcy. The creditor, for their end of the bargain, promises not to pursue recovery of the securing property so long as the debtor meets the obligations of the debt.

The types of debt that cannot be discharged through a chapter 7 bankruptcy include; most taxes, court-ordered payments or fees for support of others, punitive fees for willful and malicious injury or death by the debtor and those for specified criminal restitution orders, not to mention student loans.

If it is discovered that the debtor obtained the discharge through fraud it is within the power of the court to revoke a chapter 7 discharge at the request of the trustee, a creditor, or the U.S. trustee.  Some common examples of activity the court would find suspect are, the debtors acquisition of property that is rightfully the property of the estate while knowingly and fraudulently failing to report this acquisition or to surrender it to the trustee or if the debtor, without a satisfactory explanation, makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor's financial affairs.