Chapter 7 Bankruptcy
Chapter 7, also known as liquidation bankruptcy, in most cases, allows you to eliminate unsecured debts such as credit card debt, medical bills, payday loan and money judgments. Chapter 7 can also discharge your personal liability on secured debt.
Chapter 7 is generally filed when you don’t have any property that covered by an exemption and you are current on the secured loans secured by property you wish to keep.
Chapter 7 Frequently Asked Questions
- What is chapter 7 and how does it work?
Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is that part of the federal laws that deal with bankruptcy. A person who files under 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 converts the property to 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.
- 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.
- 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:
- Most tax debts due for the three years prior to filing Bankruptcy and debts that were incurred to pay federal tax debts.
- Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement if the creditor files a complaint in the case (included here are debts for luxury goods or services and debts for cash advances for an amount exceeding $1,000 (this figure may vary) made within 60 days before the case is filed).
- Debts for fraud, embezzlement, or larceny.
- Debts for alimony, maintenance, or support and certain other divorce-related debts including property settlement debts.
- Debts for intentional or malicious injury to the person or property of another.
- Debts for certain fines or penalties.
- Debts for educational benefits and student loans are not dischargable unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents.
- Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated.
- 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.
- What persons are not eligible for a chapter 7 discharge?
The following persons are not eligible for a chapter 7 discharge:
- A person who has been granted a discharge in a chapter 7 case filed within the last eight years.
- 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.
- A person who files a waiver of discharge that is approved by the court in the chapter 7 case.
- 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.
- A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.
- A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee.
- A person who fails to satisfactorily explain any loss or deficiency of his or her assets.
- 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.
- 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.
- 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.
- 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 non-filing spouse, even if he or she has no income or assets.
- 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.
- 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.
- 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 eight 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.
- Are the names of persons who file under chapter 7 published?
When a chapter 7 case is filed, it becomes a public record and the name of the debtor may be published by some newspapers and credit-reporting agencies and can be found on the internet.
- Are employers notified of chapter 7 cases?
Employers are not usually notified when a chapter 7 case is filed unless of course if the employer is a creditor who is listed in the schedules of debts or if the employer must be notified to stop a wage garnishment by one of the debtor’s creditors.
- 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.
- 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 in a chapter 7 case. A debtor may also be allowed to retain certain encumbered (or secured) exempt property (see Question 28, below). Depending on the law of the local state, property that is exempt in a chapter 7 case may be either property that is exempt under state law or property that is exempt under the Bankruptcy Code.
- 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 creditor.” 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.
- 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.
- 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 lien is called secured property. If the property that is encumbered by a secured creditor is being surrendered by the debtor, the secured creditor is usually permitted to repossess or foreclose its secured property, unless the value of the secured property greatly exceeds the amount owed to the creditor. 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 28, below).
- 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.
- 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 future 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 past utility services is discharged in the chapter 7 case.
- 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. 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 a few weeks to a month after the Chapter 7 discharge date is set by the Court.
- 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.
- 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.
- 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 discharged 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 creditor 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.
- How does a chapter 7 discharge affect the liability of cosigners and other parties who may be liable to a creditor on a discharged 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.
- 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.
- Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor’s financial problems.
- 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.
- Assemble the information and data necessary to prepare the chapter 7 forms for filing.
- Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court.
- 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.
- Filing the chapter 7 petition, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.
- 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.
- Attending the meeting of creditors with the debtor and appearing with the debtor at any other hearings that may be held in the case.
- If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor.
- If necessary, assisting the debtor in overcoming obstacles that may arise to the granting of a chapter 7 discharge.