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Chapter 7
Liquidation Under the Bankruptcy Code
The chapter of the Bankruptcy Code providing for "liquidation," ( i.e., the sale of a
debtor's nonexempt property and the distribution of the proceeds to creditors.)
Alternatives to Chapter 7
Debtors should be aware that there are several alternatives to chapter 7 relief. For
example, debtors who are engaged in business, including corporations, partnerships,
and sole proprietorships, may prefer to remain in business and avoid liquidation. Such
debtors should consider filing a petition under chapter 11 of the Bankruptcy Code.
Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the
debt or by extending the time for repayment, or may seek a more comprehensive
reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of
the Bankruptcy Code.
In addition, individual debtors who have regular income may seek an adjustment of
debts under chapter 13 of the Bankruptcy Code. A particular advantage of chapter 13 is
that it provides individual debtors with an opportunity to save their homes from
foreclosure by allowing them to "catch up" past due payments through a payment plan.
Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts
are primarily consumer rather than business debts if the court finds that the granting of
relief would be an abuse of chapter 7. 11 U.S.C. § 707(b).
If the debtor's "current monthly income"(1) is more than the state median, the
Bankruptcy Code requires application of a "means test" to determine whether the
chapter 7 filing is presumptively abusive. Abuse is presumed if the debtor's aggregate
current monthly income over 5 years, net of certain statutorily allowed expenses, is
more than (i) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as
that amount is at least $6,000. (2) The debtor may rebut a presumption of abuse only by
a showing of special circumstances that justify additional expenses or adjustments of
current monthly income. Unless the debtor overcomes the presumption of abuse, the
case will generally be converted to chapter 13 (with the debtor's consent) or will be
dismissed. 11 U.S.C. § 707(b)(1).
Debtors should also be aware that out-of-court agreements with creditors or debt
counseling services may provide an alternative to a bankruptcy filing.
Background
A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in
chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt
assets and uses the proceeds of such assets to pay holders of claims (creditors) in
accordance with the provisions of the Bankruptcy Code. Part of the debtor's property
may be subject to liens and mortgages that pledge the property to other creditors. In
addition, the Bankruptcy Code will allow the debtor to keep certain "exempt" property; but
a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors
should realize that the filing of a petition under chapter 7 may result in the loss of
property.
Chapter 7 Eligibility
To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an
individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41),
109(b). Subject to the means test described above for individual debtors, relief is
available under chapter 7 irrespective of the amount of the debtor's debts or whether the
debtor is solvent or insolvent. An individual cannot file under chapter 7 or any other
chapter, however, if during the preceding 180 days a prior bankruptcy petition was
dismissed due to the debtor's willful failure to appear before the court or comply with
orders of the court, or the debtor voluntarily dismissed the previous case after creditors
sought relief from the bankruptcy court to recover property upon which they hold liens.
11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under
chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days
before filing, received credit counseling from an approved credit counseling agency
either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in
emergency situations or where the U.S. trustee (or bankruptcy administrator) has
determined that there are insufficient approved agencies to provide the required
counseling. If a debt management plan is developed during required credit counseling,
it must be filed with the court.
One of the primary purposes of bankruptcy is to discharge certain debts to give an
honest individual debtor a "fresh start." The debtor has no liability for discharged debts.
In a chapter 7 case, however, a discharge is only available to individual debtors, not to
partnerships or corporations. 11 U.S.C. § 727(a)(1). Although an individual chapter 7
case usually results in a discharge of debts, the right to a discharge is not absolute,
and some types of debts are not discharged. Moreover, a bankruptcy discharge does
not extinguish a lien on property.
How Chapter 7 Works
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving
the area where the individual lives or where the business debtor is organized or has its
principal place of business or principal assets. (3) In addition to the petition, the debtor
must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of
current income and expenditures; (3) a statement of financial affairs; and (4) a schedule
of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007(b). Debtors must
also provide the assigned case trustee with a copy of the tax return or transcripts for the
most recent tax year as well as tax returns filed during the case (including tax returns for
prior years that had not been filed when the case began). 11 U.S.C. § 521. Individual
debtors with primarily consumer debts have additional document filing requirements.
They must file: a certificate of credit counseling and a copy of any debt repayment plan
developed through credit counseling; evidence of payment from employers, if any,
received 60 days before filing; a statement of monthly net income and any anticipated
increase in income or expenses after filing; and a record of any interest the debtor has
in federal or state qualified education or tuition accounts. Id. A husband and wife may
file a joint petition or individual petitions. 11 U.S.C. § 302(a). Even if filing jointly, a
husband and wife are subject to all the document filing requirements of individual
debtors. (The Official Forms may be purchased at legal stationery stores or
downloaded from the internet at www.uscourts.gov/bkforms/index.html. They are not
available from the court.)
The courts must charge a $245 case filing fee, a $39 miscellaneous administrative fee,
and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court
upon filing. With the court's permission, however, individual debtors may pay in
installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8. The number of installments is limited to four, and
the debtor must make the final installment no later than 120 days after filing the petition.
Fed. R. Bankr. P. 1006. For cause shown, the court may extend the time of any
installment, provided that the last installment is paid not later than 180 days after filing
the petition. Id. The debtor may also pay the $39 administrative fee and the $15 trustee
surcharge in installments. If a joint petition is filed, only one filing fee, one administrative
fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay
these fees may result in dismissal of the case. 11 U.S.C. § 707(a).
If the debtor's income is less than 150% of the poverty level (as defined in the
Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in
installments, the court may waive the requirement that the fees be paid. 28 U.S.C. §
1930(f).
In order to complete the Official Bankruptcy Forms that make up the petition, statement
of financial affairs, and schedules, the debtor must provide the following information:
Married individuals must gather this information for their spouse regardless of whether
they are filing a joint petition, separate individual petitions, or even if only one spouse is
filing. In a situation where only one spouse files, the income and expenses of the non-
filing spouse is required so that the court, the trustee and creditors can evaluate the
household's financial position.
Among the schedules that an individual debtor will file is a schedule of "exempt"
property. The Bankruptcy Code allows an individual debtor (4) to protect some property
from the claims of creditors because it is exempt under federal bankruptcy law or under
the laws of the debtor's home state. 11 U.S.C. § 522(b). Many states have taken
advantage of a provision in the Bankruptcy Code that permits each state to adopt its
own exemption law in place of the federal exemptions. In other jurisdictions, the
individual debtor has the option of choosing between a federal package of exemptions
or the exemptions available under state law. Thus, whether certain property is exempt
and may be kept by the debtor is often a question of state law. The debtor should
consult an attorney to determine the exemptions available in the state where the debtor
lives.
Filing a petition under chapter 7 "automatically stays" (stops) most collection actions
against the debtor or the debtor's property. 11 U.S.C. § 362. But filing the petition does
not stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be
effective only for a short time in some situations. The stay arises by operation of law and
requires no judicial action. As long as the stay is in effect, creditors generally may not
initiate or continue lawsuits, wage garnishments, or even telephone calls demanding
payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors
whose names and addresses are provided by the debtor.
Between 20 and 40 days after the petition is filed, the case trustee (described below)
will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator (5)
schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy
administrator staffing, the meeting may be held no more than 60 days after the order for
relief. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee puts the debtor under
oath, and both the trustee and creditors may ask questions. The debtor must attend the
meeting and answer questions regarding the debtor's financial affairs and property. 11
U.S.C. § 343. If a husband and wife have filed a joint petition, they both must attend the
creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the
U.S. trustee will report to the court whether the case should be presumed to be an
abuse under the means test described in 11 U.S.C. § 704(b).
It is important for the debtor to cooperate with the trustee and to provide any financial
records or documents that the trustee requests. The Bankruptcy Code requires the
trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor
is aware of the potential consequences of seeking a discharge in bankruptcy such as
the effect on credit history, the ability to file a petition under a different chapter, the effect
of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide
written information on these topics at or before the meeting to ensure that the debtor is
aware of this information. In order to preserve their independent judgment, bankruptcy
judges are prohibited from attending the meeting of creditors. 11 U.S.C. § 341(c).
In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to
convert a chapter 7 case to case under chapter 11, 12 or 13 (6) as long as the debtor is
eligible to be a debtor under the new chapter. However, a condition of the debtor's
voluntary conversion is that the case has not previously been converted to chapter 7
from another chapter. 11 U.S.C. § 706(a). Thus, the debtor will not be permitted to
convert the case repeatedly from one chapter to another.
Role of the Case Trustee
When a chapter 7 petition is filed, the U.S. trustee (or the bankruptcy court in Alabama
and North Carolina) appoints an impartial case trustee to administer the case and
liquidate the debtor's nonexempt assets. 11 U.S.C. §§ 701, 704. If all the debtor's
assets are exempt or subject to valid liens, the trustee will normally file a "no asset"
report with the court, and there will be no distribution to unsecured creditors. Most
chapter 7 cases involving individual debtors are no asset cases. But if the case
appears to be an "asset" case at the outset, unsecured creditors (7) must file their
claims with the court within 90 days after the first date set for the meeting of creditors.
Fed. R. Bankr. P. 3002(c). A governmental unit, however, has 180 days from the date the
case is filed to file a claim. 11 U.S.C. § 502(b)(9). In the typical no asset chapter 7 case,
there is no need for creditors to file proofs of claim because there will be no distribution.
If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy
Court will provide notice to creditors and will allow additional time to file proofs of claim.
Although a secured creditor does not need to file a proof of claim in a chapter 7 case to
preserve its security interest or lien, there may be other reasons to file a claim. A
creditor in a chapter 7 case who has a lien on the debtor's property should consult an
attorney for advice.
Commencement of a bankruptcy case creates an "estate." The estate technically
becomes the temporary legal owner of all the debtor's property. It consists of all legal or
equitable interests of the debtor in property as of the commencement of the case,
including property owned or held by another person if the debtor has an interest in the
property. Generally speaking, the debtor's creditors are paid from nonexempt property of
the estate.
The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor's
nonexempt assets in a manner that maximizes the return to the debtor's unsecured
creditors. The trustee accomplishes this by selling the debtor's property if it is free and
clear of liens (as long as the property is not exempt) or if it is worth more than any
security interest or lien attached to the property and any exemption that the debtor holds
in the property. The trustee may also attempt to recover money or property under the
trustee's "avoiding powers." The trustee's avoiding powers include the power to: set
aside preferential transfers made to creditors within 90 days before the petition; undo
security interests and other prepetition transfers of property that were not properly
perfected under nonbankruptcy law at the time of the petition; and pursue
nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies
available under state law. In addition, if the debtor is a business, the bankruptcy court
may authorize the trustee to operate the business for a limited period of time, if such
operation will benefit creditors and enhance the liquidation of the estate. 11 U.S.C. §
721.
Section 726 of the Bankruptcy Code governs the distribution of the property of the estate.
Under § 726, there are six classes of claims; and each class must be paid in full before
the next lower class is paid anything. The debtor is only paid if all other classes of
claims have been paid in full. Accordingly, the debtor is not particularly interested in the
trustee's disposition of the estate assets, except with respect to the payment of those
debts which for some reason are not dischargeable in the bankruptcy case. The
individual debtor's primary concerns in a chapter 7 case are to retain exempt property
and to receive a discharge that covers as many debts as possible.
The Chapter 7 Discharge
A discharge releases individual debtors from personal liability for most debts and
prevents the creditors owed those debts from taking any collection actions against the
debtor. Because a chapter 7 discharge is subject to many exceptions, though, debtors
should consult competent legal counsel before filing to discuss the scope of the
discharge. Generally, excluding cases that are dismissed or converted, individual
debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases,
unless a party in interest files a complaint objecting to the discharge or a motion to
extend the time to object, the bankruptcy court will issue a discharge order relatively
early in the case – generally, 60 to 90 days after the date first set for the meeting of
creditors. Fed. R. Bankr. P. 4004(c).
The grounds for denying an individual debtor a discharge in a chapter 7 case are
narrow and are construed against the moving party. Among other reasons, the court
may deny the debtor a discharge if it finds that the debtor: failed to keep or produce
adequate books or financial records; failed to explain satisfactorily any loss of assets;
committed a bankruptcy crime such as perjury; failed to obey a lawful order of the
bankruptcy court; fraudulently transferred, concealed, or destroyed property that would
have become property of the estate; or failed to complete an approved instructional
course concerning financial management. 11 U.S.C. § 727; Fed. R. Bankr. P. 4005.
Secured creditors may retain some rights to seize property securing an underlying debt
even after a discharge is granted. Depending on individual circumstances, if a debtor
wishes to keep certain secured property (such as an automobile), he or she may
decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and
the creditor that the debtor will remain liable and will pay all or a portion of the money
owed, even though the debt would otherwise be discharged in the bankruptcy. In return,
the creditor promises that it will not repossess or take back the automobile or other
property so long as the debtor continues to pay the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is
entered. The debtor must sign a written reaffirmation agreement and file it with the
court. 11 U.S.C. § 524(c). The Bankruptcy Code requires that reaffirmation agreements
contain an extensive set of disclosures described in 11 U.S.C. § 524(k). Among other
things, the disclosures must advise the debtor of the amount of the debt being
reaffirmed and how it is calculated and that reaffirmation means that the debtor's
personal liability for that debt will not be discharged in the bankruptcy. The disclosures
also require the debtor to sign and file a statement of his or her current income and
expenses which shows that the balance of income paying expenses is sufficient to pay
the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is
a presumption of undue hardship, and the court may decide not to approve the
reaffirmation agreement. Unless the debtor is represented by an attorney, the
bankruptcy judge must approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation
agreement, the attorney must certify in writing that he or she advised the debtor of the
legal effect and consequences of the agreement, including a default under the
agreement. The attorney must also certify that the debtor was fully informed and
voluntarily made the agreement and that reaffirmation of the debt will not create an
undue hardship for the debtor or the debtor's dependants. 11 U.S.C. § 524(k). The
Bankruptcy Code requires a reaffirmation hearing if the debtor has not been
represented by an attorney during the negotiating of the agreement, or if the court
disapproves the reaffirmation agreement.11 U.S.C. § 524(d) and (m). The debtor may
repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. 11
U.S.C. § 524(f).
An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy
case. A creditor may no longer initiate or continue any legal or other action against the
debtor to collect a discharged debt. But not all of an individual's debts are discharged in
chapter 7. Debts not discharged include debts for alimony and child support, certain
taxes, debts for certain educational benefit overpayments or loans made or guaranteed
by a governmental unit, debts for willful and malicious injury by the debtor to another
entity or to the property of another entity, debts for death or personal injury caused by the
debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or
other substances, and debts for certain criminal restitution orders.11 U.S.C. § 523(a).
The debtor will continue to be liable for these types of debts to the extent that they are
not paid in the chapter 7 case. Debts for money or property obtained by false pretenses,
debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and
malicious injury by the debtor to another entity or to the property of another entity will be
discharged unless a creditor timely files and prevails in an action to have such debts
declared nondischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).
The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or
the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor
acquired property that is property of the estate and knowingly and fraudulently failed to
report the acquisition of such property or to surrender the property 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 case.
11 U.S.C. § 727(d).
________________________________________
NOTES
1. The "current monthly income" received by the debtor is a defined term in the
Bankruptcy Code and means the average monthly income received over the six
calendar months before commencement of the bankruptcy case, including regular
contributions to household expenses from nondebtors and including income from the
debtor's spouse if the petition is a joint petition, but not including social security income
or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C.
§ 101(10A).
2. To determine whether a presumption of abuse arises, all individual debtors with
primarily consumer debts who file a chapter 7 case must complete Official Bankruptcy
Form B22A, entitled "Statement of Current Monthly Income and Means Test Calculation -
For Use in Chapter 7." (The Official Forms may be purchased at legal stationery stores
or downloaded from the internet at www.uscourts.gov/bkforms/index.html. They are not
available from the court.)
3. An involuntary chapter 7 case may be commenced under certain circumstances by a
petition filed by creditors holding claims against the debtor. 11 U.S.C. § 303.
4. Each debtor in a joint case (both husband and wife) can claim exemptions under the
federal bankruptcy laws. 11 U.S.C. § 522(m).
5. In North Carolina and Alabama, bankruptcy administrators perform similar functions
that U.S. trustees perform in the remaining 48 states. These duties include establishing
a panel of private trustees to serve as trustees in chapter 7 cases and supervising the
administration of cases and trustees in cases under chapters 7, 11, 12, and 13 of the
Bankruptcy Code. The bankruptcy administrator program is administered by the
Administrative Office of the United States Courts, while the U.S. trustee program is
administered by the Department of Justice. For purposes of this publication, references
to U.S. trustees are also applicable to bankruptcy administrators.
6. A fee is charged for converting, on request of the debtor, a case under chapter 7 to a
case under chapter 11. The fee charged is the difference between the filing fee for a
chapter 7 and the filing fee for a chapter 11. 28 U.S.C. § 1930(a). Currently, the
difference is $755. Id. There is no fee for converting from chapter 7 to chapter 13.
7. Unsecured debts generally may be defined as those for which the extension of credit
was based purely upon an evaluation by the creditor of the debtor's ability to pay, as
opposed to secured debts, for which the extension of credit was based upon the
creditor's right to seize collateral on default, in addition to the debtor's ability to pay.
The chapter of the Bankruptcy Code providing for "liquidation," ( i.e., the sale of a
debtor's nonexempt property and the distribution of the proceeds to creditors.)
- a. Alternatives to Chapter 7
b. Background
c. Chapter 7 Eligibility
e. Role of the Case Trustee
f. The Chapter 7 Discharge
Alternatives to Chapter 7
Debtors should be aware that there are several alternatives to chapter 7 relief. For
example, debtors who are engaged in business, including corporations, partnerships,
and sole proprietorships, may prefer to remain in business and avoid liquidation. Such
debtors should consider filing a petition under chapter 11 of the Bankruptcy Code.
Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the
debt or by extending the time for repayment, or may seek a more comprehensive
reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of
the Bankruptcy Code.
In addition, individual debtors who have regular income may seek an adjustment of
debts under chapter 13 of the Bankruptcy Code. A particular advantage of chapter 13 is
that it provides individual debtors with an opportunity to save their homes from
foreclosure by allowing them to "catch up" past due payments through a payment plan.
Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts
are primarily consumer rather than business debts if the court finds that the granting of
relief would be an abuse of chapter 7. 11 U.S.C. § 707(b).
If the debtor's "current monthly income"(1) is more than the state median, the
Bankruptcy Code requires application of a "means test" to determine whether the
chapter 7 filing is presumptively abusive. Abuse is presumed if the debtor's aggregate
current monthly income over 5 years, net of certain statutorily allowed expenses, is
more than (i) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as
that amount is at least $6,000. (2) The debtor may rebut a presumption of abuse only by
a showing of special circumstances that justify additional expenses or adjustments of
current monthly income. Unless the debtor overcomes the presumption of abuse, the
case will generally be converted to chapter 13 (with the debtor's consent) or will be
dismissed. 11 U.S.C. § 707(b)(1).
Debtors should also be aware that out-of-court agreements with creditors or debt
counseling services may provide an alternative to a bankruptcy filing.
Background
A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in
chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt
assets and uses the proceeds of such assets to pay holders of claims (creditors) in
accordance with the provisions of the Bankruptcy Code. Part of the debtor's property
may be subject to liens and mortgages that pledge the property to other creditors. In
addition, the Bankruptcy Code will allow the debtor to keep certain "exempt" property; but
a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors
should realize that the filing of a petition under chapter 7 may result in the loss of
property.
Chapter 7 Eligibility
To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an
individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41),
109(b). Subject to the means test described above for individual debtors, relief is
available under chapter 7 irrespective of the amount of the debtor's debts or whether the
debtor is solvent or insolvent. An individual cannot file under chapter 7 or any other
chapter, however, if during the preceding 180 days a prior bankruptcy petition was
dismissed due to the debtor's willful failure to appear before the court or comply with
orders of the court, or the debtor voluntarily dismissed the previous case after creditors
sought relief from the bankruptcy court to recover property upon which they hold liens.
11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under
chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days
before filing, received credit counseling from an approved credit counseling agency
either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in
emergency situations or where the U.S. trustee (or bankruptcy administrator) has
determined that there are insufficient approved agencies to provide the required
counseling. If a debt management plan is developed during required credit counseling,
it must be filed with the court.
One of the primary purposes of bankruptcy is to discharge certain debts to give an
honest individual debtor a "fresh start." The debtor has no liability for discharged debts.
In a chapter 7 case, however, a discharge is only available to individual debtors, not to
partnerships or corporations. 11 U.S.C. § 727(a)(1). Although an individual chapter 7
case usually results in a discharge of debts, the right to a discharge is not absolute,
and some types of debts are not discharged. Moreover, a bankruptcy discharge does
not extinguish a lien on property.
How Chapter 7 Works
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving
the area where the individual lives or where the business debtor is organized or has its
principal place of business or principal assets. (3) In addition to the petition, the debtor
must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of
current income and expenditures; (3) a statement of financial affairs; and (4) a schedule
of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007(b). Debtors must
also provide the assigned case trustee with a copy of the tax return or transcripts for the
most recent tax year as well as tax returns filed during the case (including tax returns for
prior years that had not been filed when the case began). 11 U.S.C. § 521. Individual
debtors with primarily consumer debts have additional document filing requirements.
They must file: a certificate of credit counseling and a copy of any debt repayment plan
developed through credit counseling; evidence of payment from employers, if any,
received 60 days before filing; a statement of monthly net income and any anticipated
increase in income or expenses after filing; and a record of any interest the debtor has
in federal or state qualified education or tuition accounts. Id. A husband and wife may
file a joint petition or individual petitions. 11 U.S.C. § 302(a). Even if filing jointly, a
husband and wife are subject to all the document filing requirements of individual
debtors. (The Official Forms may be purchased at legal stationery stores or
downloaded from the internet at www.uscourts.gov/bkforms/index.html. They are not
available from the court.)
The courts must charge a $245 case filing fee, a $39 miscellaneous administrative fee,
and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court
upon filing. With the court's permission, however, individual debtors may pay in
installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8. The number of installments is limited to four, and
the debtor must make the final installment no later than 120 days after filing the petition.
Fed. R. Bankr. P. 1006. For cause shown, the court may extend the time of any
installment, provided that the last installment is paid not later than 180 days after filing
the petition. Id. The debtor may also pay the $39 administrative fee and the $15 trustee
surcharge in installments. If a joint petition is filed, only one filing fee, one administrative
fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay
these fees may result in dismissal of the case. 11 U.S.C. § 707(a).
If the debtor's income is less than 150% of the poverty level (as defined in the
Bankruptcy Code), and the debtor is unable to pay the chapter 7 fees even in
installments, the court may waive the requirement that the fees be paid. 28 U.S.C. §
1930(f).
In order to complete the Official Bankruptcy Forms that make up the petition, statement
of financial affairs, and schedules, the debtor must provide the following information:
- 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.
Married individuals must gather this information for their spouse regardless of whether
they are filing a joint petition, separate individual petitions, or even if only one spouse is
filing. In a situation where only one spouse files, the income and expenses of the non-
filing spouse is required so that the court, the trustee and creditors can evaluate the
household's financial position.
Among the schedules that an individual debtor will file is a schedule of "exempt"
property. The Bankruptcy Code allows an individual debtor (4) to protect some property
from the claims of creditors because it is exempt under federal bankruptcy law or under
the laws of the debtor's home state. 11 U.S.C. § 522(b). Many states have taken
advantage of a provision in the Bankruptcy Code that permits each state to adopt its
own exemption law in place of the federal exemptions. In other jurisdictions, the
individual debtor has the option of choosing between a federal package of exemptions
or the exemptions available under state law. Thus, whether certain property is exempt
and may be kept by the debtor is often a question of state law. The debtor should
consult an attorney to determine the exemptions available in the state where the debtor
lives.
Filing a petition under chapter 7 "automatically stays" (stops) most collection actions
against the debtor or the debtor's property. 11 U.S.C. § 362. But filing the petition does
not stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be
effective only for a short time in some situations. The stay arises by operation of law and
requires no judicial action. As long as the stay is in effect, creditors generally may not
initiate or continue lawsuits, wage garnishments, or even telephone calls demanding
payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors
whose names and addresses are provided by the debtor.
Between 20 and 40 days after the petition is filed, the case trustee (described below)
will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator (5)
schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy
administrator staffing, the meeting may be held no more than 60 days after the order for
relief. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee puts the debtor under
oath, and both the trustee and creditors may ask questions. The debtor must attend the
meeting and answer questions regarding the debtor's financial affairs and property. 11
U.S.C. § 343. If a husband and wife have filed a joint petition, they both must attend the
creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the
U.S. trustee will report to the court whether the case should be presumed to be an
abuse under the means test described in 11 U.S.C. § 704(b).
It is important for the debtor to cooperate with the trustee and to provide any financial
records or documents that the trustee requests. The Bankruptcy Code requires the
trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor
is aware of the potential consequences of seeking a discharge in bankruptcy such as
the effect on credit history, the ability to file a petition under a different chapter, the effect
of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide
written information on these topics at or before the meeting to ensure that the debtor is
aware of this information. In order to preserve their independent judgment, bankruptcy
judges are prohibited from attending the meeting of creditors. 11 U.S.C. § 341(c).
In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to
convert a chapter 7 case to case under chapter 11, 12 or 13 (6) as long as the debtor is
eligible to be a debtor under the new chapter. However, a condition of the debtor's
voluntary conversion is that the case has not previously been converted to chapter 7
from another chapter. 11 U.S.C. § 706(a). Thus, the debtor will not be permitted to
convert the case repeatedly from one chapter to another.
Role of the Case Trustee
When a chapter 7 petition is filed, the U.S. trustee (or the bankruptcy court in Alabama
and North Carolina) appoints an impartial case trustee to administer the case and
liquidate the debtor's nonexempt assets. 11 U.S.C. §§ 701, 704. If all the debtor's
assets are exempt or subject to valid liens, the trustee will normally file a "no asset"
report with the court, and there will be no distribution to unsecured creditors. Most
chapter 7 cases involving individual debtors are no asset cases. But if the case
appears to be an "asset" case at the outset, unsecured creditors (7) must file their
claims with the court within 90 days after the first date set for the meeting of creditors.
Fed. R. Bankr. P. 3002(c). A governmental unit, however, has 180 days from the date the
case is filed to file a claim. 11 U.S.C. § 502(b)(9). In the typical no asset chapter 7 case,
there is no need for creditors to file proofs of claim because there will be no distribution.
If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy
Court will provide notice to creditors and will allow additional time to file proofs of claim.
Although a secured creditor does not need to file a proof of claim in a chapter 7 case to
preserve its security interest or lien, there may be other reasons to file a claim. A
creditor in a chapter 7 case who has a lien on the debtor's property should consult an
attorney for advice.
Commencement of a bankruptcy case creates an "estate." The estate technically
becomes the temporary legal owner of all the debtor's property. It consists of all legal or
equitable interests of the debtor in property as of the commencement of the case,
including property owned or held by another person if the debtor has an interest in the
property. Generally speaking, the debtor's creditors are paid from nonexempt property of
the estate.
The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor's
nonexempt assets in a manner that maximizes the return to the debtor's unsecured
creditors. The trustee accomplishes this by selling the debtor's property if it is free and
clear of liens (as long as the property is not exempt) or if it is worth more than any
security interest or lien attached to the property and any exemption that the debtor holds
in the property. The trustee may also attempt to recover money or property under the
trustee's "avoiding powers." The trustee's avoiding powers include the power to: set
aside preferential transfers made to creditors within 90 days before the petition; undo
security interests and other prepetition transfers of property that were not properly
perfected under nonbankruptcy law at the time of the petition; and pursue
nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies
available under state law. In addition, if the debtor is a business, the bankruptcy court
may authorize the trustee to operate the business for a limited period of time, if such
operation will benefit creditors and enhance the liquidation of the estate. 11 U.S.C. §
721.
Section 726 of the Bankruptcy Code governs the distribution of the property of the estate.
Under § 726, there are six classes of claims; and each class must be paid in full before
the next lower class is paid anything. The debtor is only paid if all other classes of
claims have been paid in full. Accordingly, the debtor is not particularly interested in the
trustee's disposition of the estate assets, except with respect to the payment of those
debts which for some reason are not dischargeable in the bankruptcy case. The
individual debtor's primary concerns in a chapter 7 case are to retain exempt property
and to receive a discharge that covers as many debts as possible.
The Chapter 7 Discharge
A discharge releases individual debtors from personal liability for most debts and
prevents the creditors owed those debts from taking any collection actions against the
debtor. Because a chapter 7 discharge is subject to many exceptions, though, debtors
should consult competent legal counsel before filing to discuss the scope of the
discharge. Generally, excluding cases that are dismissed or converted, individual
debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases,
unless a party in interest files a complaint objecting to the discharge or a motion to
extend the time to object, the bankruptcy court will issue a discharge order relatively
early in the case – generally, 60 to 90 days after the date first set for the meeting of
creditors. Fed. R. Bankr. P. 4004(c).
The grounds for denying an individual debtor a discharge in a chapter 7 case are
narrow and are construed against the moving party. Among other reasons, the court
may deny the debtor a discharge if it finds that the debtor: failed to keep or produce
adequate books or financial records; failed to explain satisfactorily any loss of assets;
committed a bankruptcy crime such as perjury; failed to obey a lawful order of the
bankruptcy court; fraudulently transferred, concealed, or destroyed property that would
have become property of the estate; or failed to complete an approved instructional
course concerning financial management. 11 U.S.C. § 727; Fed. R. Bankr. P. 4005.
Secured creditors may retain some rights to seize property securing an underlying debt
even after a discharge is granted. Depending on individual circumstances, if a debtor
wishes to keep certain secured property (such as an automobile), he or she may
decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and
the creditor that the debtor will remain liable and will pay all or a portion of the money
owed, even though the debt would otherwise be discharged in the bankruptcy. In return,
the creditor promises that it will not repossess or take back the automobile or other
property so long as the debtor continues to pay the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is
entered. The debtor must sign a written reaffirmation agreement and file it with the
court. 11 U.S.C. § 524(c). The Bankruptcy Code requires that reaffirmation agreements
contain an extensive set of disclosures described in 11 U.S.C. § 524(k). Among other
things, the disclosures must advise the debtor of the amount of the debt being
reaffirmed and how it is calculated and that reaffirmation means that the debtor's
personal liability for that debt will not be discharged in the bankruptcy. The disclosures
also require the debtor to sign and file a statement of his or her current income and
expenses which shows that the balance of income paying expenses is sufficient to pay
the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is
a presumption of undue hardship, and the court may decide not to approve the
reaffirmation agreement. Unless the debtor is represented by an attorney, the
bankruptcy judge must approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation
agreement, the attorney must certify in writing that he or she advised the debtor of the
legal effect and consequences of the agreement, including a default under the
agreement. The attorney must also certify that the debtor was fully informed and
voluntarily made the agreement and that reaffirmation of the debt will not create an
undue hardship for the debtor or the debtor's dependants. 11 U.S.C. § 524(k). The
Bankruptcy Code requires a reaffirmation hearing if the debtor has not been
represented by an attorney during the negotiating of the agreement, or if the court
disapproves the reaffirmation agreement.11 U.S.C. § 524(d) and (m). The debtor may
repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. 11
U.S.C. § 524(f).
An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy
case. A creditor may no longer initiate or continue any legal or other action against the
debtor to collect a discharged debt. But not all of an individual's debts are discharged in
chapter 7. Debts not discharged include debts for alimony and child support, certain
taxes, debts for certain educational benefit overpayments or loans made or guaranteed
by a governmental unit, debts for willful and malicious injury by the debtor to another
entity or to the property of another entity, debts for death or personal injury caused by the
debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or
other substances, and debts for certain criminal restitution orders.11 U.S.C. § 523(a).
The debtor will continue to be liable for these types of debts to the extent that they are
not paid in the chapter 7 case. Debts for money or property obtained by false pretenses,
debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and
malicious injury by the debtor to another entity or to the property of another entity will be
discharged unless a creditor timely files and prevails in an action to have such debts
declared nondischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).
The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or
the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor
acquired property that is property of the estate and knowingly and fraudulently failed to
report the acquisition of such property or to surrender the property 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 case.
11 U.S.C. § 727(d).
________________________________________
NOTES
1. The "current monthly income" received by the debtor is a defined term in the
Bankruptcy Code and means the average monthly income received over the six
calendar months before commencement of the bankruptcy case, including regular
contributions to household expenses from nondebtors and including income from the
debtor's spouse if the petition is a joint petition, but not including social security income
or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C.
§ 101(10A).
2. To determine whether a presumption of abuse arises, all individual debtors with
primarily consumer debts who file a chapter 7 case must complete Official Bankruptcy
Form B22A, entitled "Statement of Current Monthly Income and Means Test Calculation -
For Use in Chapter 7." (The Official Forms may be purchased at legal stationery stores
or downloaded from the internet at www.uscourts.gov/bkforms/index.html. They are not
available from the court.)
3. An involuntary chapter 7 case may be commenced under certain circumstances by a
petition filed by creditors holding claims against the debtor. 11 U.S.C. § 303.
4. Each debtor in a joint case (both husband and wife) can claim exemptions under the
federal bankruptcy laws. 11 U.S.C. § 522(m).
5. In North Carolina and Alabama, bankruptcy administrators perform similar functions
that U.S. trustees perform in the remaining 48 states. These duties include establishing
a panel of private trustees to serve as trustees in chapter 7 cases and supervising the
administration of cases and trustees in cases under chapters 7, 11, 12, and 13 of the
Bankruptcy Code. The bankruptcy administrator program is administered by the
Administrative Office of the United States Courts, while the U.S. trustee program is
administered by the Department of Justice. For purposes of this publication, references
to U.S. trustees are also applicable to bankruptcy administrators.
6. A fee is charged for converting, on request of the debtor, a case under chapter 7 to a
case under chapter 11. The fee charged is the difference between the filing fee for a
chapter 7 and the filing fee for a chapter 11. 28 U.S.C. § 1930(a). Currently, the
difference is $755. Id. There is no fee for converting from chapter 7 to chapter 13.
7. Unsecured debts generally may be defined as those for which the extension of credit
was based purely upon an evaluation by the creditor of the debtor's ability to pay, as
opposed to secured debts, for which the extension of credit was based upon the
creditor's right to seize collateral on default, in addition to the debtor's ability to pay.
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