Information On Chapter 7 Bankruptcy
Liquidation Under The Bankruptcy Code
Chapter 7 of the United States Bankruptcy Code is the Bankruptcy Code’s liquidation chapter. It sometimes is referred to as “straight” bankruptcy. It is used primarily by individuals who wish to free themselves of debt simply and inexpensively. In addition, Chapter 7 may also be used by all forms debtors, including individuals, partnerships, limited liability companies, and corporations. However, partnerships, LLCs and corporations should only choose Chapter 7 if they wish to permanently terminate their business operations.
There are several alternatives to chapter 7 relief. Debtors who are engaged in business may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under Chapter 11, or Chapter 13 of the Bankruptcy Code, which allow the debtor to seek an adjustment of debts, either by reducing the debt, extending the time for repayment, or seeking a more comprehensive reorganization. A Chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts can be dismissed by the court, if the court finds that the granting of relief would be a substantial abuse of the provisions of Chapter 7. 11 U.S.C. § 707(b). Additionally, a number of courts have concluded that a Chapter 7 case may be dismissed for substantial abuse when the debtor has the ability to propose and carry out a workable and meaningful Chapter 13 plan. Out-of-court arrangements with creditors or debt counseling services may provide an alternative to filing bankruptcy.
Under Chapter 7 there is no filing of a plan of repayment as in a Chapter 13 bankruptcy. Chapter 7 involves the bankruptcy trustee’s gathering and selling of the debtor’s nonexempt assets, from which creditors will receive distributions in accordance with the provisions of the Bankruptcy Code. In a Chapter 7 bankruptcy the debtor is permitted to retain certain exempt property. The remaining assets are liquidated by a trustee. Potential Chapter 7 debtors should realize that the filing of this type of petition may result in the loss of property.
Chapter 7 relief is available regardless of the amount of the debts or whether or not the debtor is insolvent. An individual cannot file under any chapter 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 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).
Since October of 2005, individuals must identify whether they are “business debtors” or “consumer debtors” which is determined by adding up all consumer debt such as primary home mortgages, medical expenses, student loans and credit cards. Then we add up all business debt, such as rental property mortgages, investment loans, personally guarantied debt, and tax debt. Whichever consists of 51% or more of your total debt will determine whether you are a business debtor or consumer debtor. This determination is essential for some, since median income and the means test do not apply to business debtors.
What is median income/means testing? Again, in October 2005 the Bankruptcy Code was modified to provide that any individual seeking to file for bankruptcy protection must determine their average monthly income based upon the last six months prior to filing bankruptcy. The Census Bureau issues reports for every district in the country. These numbers are posted on the U.S. Trustee’s website and can be found at www.usdoj.gov/ust. If you are median income or higher for our district, then you must complete the means test. This test takes the average of your six month’s income from all sources, and then subtracts all involuntary deductions such as taxes, union dues, health insurance. Then, you can deduct your secured debt for your primary residence, vehicles, and other allowed secured debt. The IRS provides expense allowances for individuals based upon their family statistics that are also deductible. In the end, after deducting all allowed expenses from your net average six month’s income if you have sufficient income to repay your creditors through a Chapter 13 bankruptcy then you do not qualify for a Chapter 7. Filing a Chapter 7 despite this finding would result in the U.S. Trustee’s Office or the Chapter 7 Trustee assigned your case in filing a motion to dismiss for bad faith, arguing you have the ability to repay a portion of your debt back. If you pass the means test, then you are eligible to file Chapter 7.
One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The discharge has the effect of eliminating the debtor’s personal liability on dischargeable debts. Although the filing of an individual Chapter 7 petition usually results in a discharge of debts, an individual’s right to a discharge is not absolute, and some types of debts are not discharged. For example, a bankruptcy discharge does not automatically extinguish a lien on property, avoid certain types of tax liabilities, or terminate child/spousal support and property settlement obligations.
How Chapter 7 Works
A Chapter 7 case begins when the debtor files a petition with the bankruptcy court. The petition should be filed with the bankruptcy court in the area where the individual lives or where the business debtor has its principal place of business or principal assets. 28 U.S.C. § 1408. The debtor is also required to file with the court schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of executory contracts and unexpired leases. Bankruptcy Rule 1007(b). A husband and wife may file a joint petition or separate individual petitions. 11 U.S.C. § 302(a).
In order to file a Chapter 7 bankruptcy, the debtor will need to complete certain tasks and compile the following information:
- the source and frequency of the debtor’s income;
- a list of all the debtor’s property;
- a list of all creditors, including account numbers, addresses, and the amount and nature of their claims;
- a detailed list of the debtor’s monthly living expenses (food, clothing, shelter, transportation, utilities, taxes, medicine…); and
- attendance at a credit counseling course within 180 days of filing for Chapter 7 protection. 11 U.S.C. § 521(b).
Currently, the courts are required to charge a filing fee for a Chapter 7 case. The fee should be paid to the clerk of the court upon filing or may, with the court’s permission, be paid by individual debtors in installments. 28 U.S.C. § 1930(a); Bankruptcy Rule 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. Rule 1006(b) limits the number of installments for the filing fee to four (4), and requires that the final installment be payable within 120 days after filing the petition. The court may extend the time of any installment, for cause shown, provided that the last installment is paid not later than 180 days after the filing of the petition. Bankruptcy Rule 1006(b). In the case of a joint petition, there is only one petition fee. Failure to pay this fee may result in dismissal of the case. 11 U.S.C. § 707(a). In some cases, the Court may waive the filing fee if the debtor can show an inability to pay.
The filing of a petition under Chapter 7 “automatically stays” most actions against the debtor and the debtor’s property. 11 U.S.C. § 362. This stay arises by operation of law and requires no judicial action. The stay is an injunction that automatically stops foreclosure, lawsuits, garnishments and most collection activity against the debtor. As long as the stay is in effect, creditors generally cannot even telephone the debtor to demand payment. Creditors will receive notice of the filing of the petition from the Bankruptcy Court noticing center.
One of the schedules filed by an individual debtor is a schedule of “exempt” property. Federal bankruptcy law provides that an individual debtor can protect some property from the claims of creditors, either because it is exempt under federal bankruptcy law or because it is exempt 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 law 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 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 state of Nevada has its own set of exemptions. In order to calculate the value of an exemption, one must take the value of the asset, less any voluntary liens or encumbrances against it, arriving at its stated equity. So long as the amount of equity held in the asset is within the exemption amount, the asset is protected. The following is a list of several of the common exemptions that are available to a debtor in the State of Nevada.
- Household goods and furnishings, and yard equipment not to exceed $12,000.00 in value;
- Homesteads up to $550,000.00 (discuss with your attorney as there are specific rules that must be satisfied to claim this amount);
- One (1) car not to exceed $15,000.00 in value;
- Seventy-Five (75%) percent of disposable earnings, i.e., wages and commissions;
- Tools for the use in a trade not to exceed $10,000 in value;
- Life insurance, Trusts, and Pension plans (subject to certain limitations and qualifications); and
- Qualified retirement plans, IRAs, 401k plans, etc. not to exceed $500,000.00
IT IS IMPORTANT TO NOTE THAT THIS IS BY NO MEANS AN EXHAUSTIVE LIST. FOR A COMPLETE ANALYSIS OF WHAT PROPERTY OF A DEBTOR WOULD QUALIFY AS EXEMPT, PLEASE SEEK THE ADVICE OF ADEQUATE LEGAL COUNSEL.
The next step involves a “meeting of creditors,” which is usually held approximately thirty (30) days after the petition is filed. The debtor must attend this meeting, at which creditors may appear and ask questions regarding the debtor’s financial affairs and property. 11 U.S.C. § 343. If a husband and wife have filed a joint petition, both must attend the creditor’s meeting. The trustee will conduct this meeting. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. Failure to cooperate with the Trustee and provide requested documents will likely result in the dismissal of the bankruptcy and denial of the discharge. The trustee is required to examine the debtor orally at the meeting of creditors to ensure that the debtor is aware of the potential circumstances of seeking a discharge in bankruptcy, including 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.
In order to provide the debtor complete relief, the Bankruptcy Code allows the debtor to convert a Chapter 7 case to either a Chapter 13 or Chapter 11 as long as the debtor meets the eligibility standards under the chapter to which the debtor seeks to convert, and the case has not previously been converted to Chapter 7 from either Chapter 11 or Chapter 13. 11 U.S.C. § 706(a).
Role Of The Trustee
An “estate” is created by the filing of a bankruptcy petition. The estate technically becomes the temporary legal owner of all of the debtor’s property. The estate contains 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. The nonexempt property of the estate, if any, generally pays the creditors.
Upon the filing of the Chapter 7 petition, an impartial trustee is appointed by the United States Trustee to administer the case and liquidate the debtor’s nonexempt assets. 11 U.S.C. §§ 701, 704. If all of the debtor’s assets are exempt or subject to valid liens, there will be no distribution to unsecured creditors. This is called a “no asset” case and typically most Chapter 7 cases involving individual debtors are “no asset” cases. In the typical no asset Chapter 7 case, creditors do not need to file proofs of claim. If the case appears to be an “asset” case at the outset, unsecured creditors who have claims against the debtor must file their claims with the clerk of the court within 90 days after the first date set for the meeting of the creditors. Bankruptcy Rule 3002(c). If the trustee later recovers assets for distribution to unsecured creditors, the creditors will be given notice of that fact and additional time to file proofs of claim. Secured creditors are not required to file proofs of claim in Chapter 7 cases to preserve their security interests or liens, but there may be circumstances when it is desirable to do so. A creditor in a Chapter 7 case who has a lien on the debtor’s property should consult an attorney for advice.
The Chapter 7 trustee’s primary role in an “asset” case is to liquidate the debtor’s nonexempt assets in a way that maximizes the return to the debtor’s unsecured creditors. To achieve this, the trustee attempts to liquidate the debtor’s property which has market value above the amount of any security interest or lien and any exemption that the debtor holds in the property. The trustee also pursues causes of action (lawsuits) belonging to the debtor and pursues the trustee’s own causes of action to recover money or property under the trustee’s “avoiding powers.” The avoiding powers include the power to undo security interests and other pre-petition transfers of property that were not properly perfected under non-bankruptcy law at the time of the petition, the power to pursue non-bankruptcy claims such as fraudulent conveyance and bulk transfer remedies under state law, and the power to set aside preferential treatment made to creditors within 90 days before the petition. If the debtor is a business, the bankruptcy court may authorize the trustee to operate the debtor’s business for a limited period of time, if such operation will benefit the creditors of the estate and enhance the liquidation of the estate. 11 U.S.C. §721.
The distribution of the property of the estate is governed by §726 of the Bankruptcy Code, which sets forth the order of payment of all claims. 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 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 major interests of the debtor in a Chapter 7 case are in retaining exempt property and in getting a discharge that covers as many debts as possible.
An order of discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. The bankruptcy law regarding the scope of a Chapter 7 discharge is complex, and debtors should consult competent legal counsel in this regard prior to filing. As a general rule, 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 complaint has been filed objecting to the discharge or the debtor has filed a written waiver, the discharge will be granted to a Chapter 7 debtor relatively early in the case, 60 to 90 days after the date first set for the meeting of creditors. Bankruptcy Rule 4004(c).
The grounds for denying an individual debtor for a discharge in a Chapter 7 case are limited and are construed against a creditor or trustee seeking to deny the debtor a Chapter 7 discharge. Grounds for denying a discharge to a Chapter 7 debtor include: the debtor failed to explain satisfactorily any loss of assets; the debtor failed to keep or produce adequate books or financial records; the debtor committed a bankruptcy crime such as perjury; the debtor failed to obey a lawful order of the bankruptcy court; the debtor fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failure to complete the debt management course. 11 U.S.C. § 727; Bankruptcy Rule 4005. A creditor seeking an order denying discharge must file an adversary complaint within the debtor’s bankruptcy case no later than sixty (60) days following the first scheduled 341 meeting. Bankruptcy Rule 4004 (a).
In certain jurisdictions, even after a discharge is granted secured creditors may retain some rights against the debtor. A debtor wishing to keep possession of property, such as an automobile, must “reaffirm” the debt or “surrender” the property. A reaffirmation is an agreement between the debtor and the creditor that the debtor will pay all or a portion of the money owed, despite the fact that bankruptcy has been filed. The creditor agrees that, as long as payments are made, the creditor will not repossess the property. Legal counsel should be consulted to ensure that the debtor’s rights are protected and that any reaffirmation is in the debtor’s best interests.
Reaffirmation, if chosen, must be accomplished prior to the granting of the discharge. A written agreement to reaffirm a debt must be filed with the court and, if the debtor is not represented by an attorney, it must be approved by a judge. 11 U.S.C. § 524(c). The Bankruptcy Code requires that the reaffirmation agreement contain an explicit statement advising the debtor that the agreement is not required by bankruptcy law. The debtor’s attorney is required to advise the debtor of the legal effect and consequences of such an agreement, including a default under such an agreement. A reaffirmation hearing is required by the Code only if the debtor has not been represented by an attorney during the negotiation of the agreement. 11 U.S.C. § 524(d). Whether or not a reaffirmation agreement exists, the debtor may voluntarily repay any debt. 11 U.S.C. § 524(f).
Currently, most claims against an individual Chapter 7 debtor are discharged. A creditor whose unsecured claim is discharged may no longer initiate or continue any legal or other action against the debtor to collect the obligation. Section 523 of the Bankruptcy Code lists certain types of debts that cannot be discharged. Among the types of debts listed in § 523 are alimony and child support, property settlement agreement, certain taxes, loans against retirement plans, debts for 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 operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for criminal restitution orders under Title 18, United States Code. 11 U.S.C. § 523(a). The debtor will continue to be responsible for these debts to the extent that these types of debts are not fully 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, are discharged unless a creditor timely files and prevails in an action to have such debts declared excepted from the discharge. 11 U.S.C. §523(c); Bankruptcy Rule 4007(c).
The court may revoke a Chapter 7 discharge on the request of the trustee, a creditor, or the United States trustee if the discharge was obtained through fraud by the debtor or 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. 11 U.S.C. § 727(d).
WE WANT TO REITERATE THAT THE ABOVE LETTER IS BY NO MEANS A COMPREHENSIVE ANALYSIS OF THE BANKRUPTCY CODE, NOR IS IT DESIGNED TO REPLACE THE SERVICES OF ADEQUATE LEGAL COUNSEL. THE ABOVE LETTER IS MERELY A ROUGH GUIDELINE AS TO HOW THE BANKRUPTCY PROCESS WORKS. PLEASE CONTACT US WITH ANY QUESTIONS YOU MIGHT HAVE REGARDING FILING A CHAPTER 7 BANKRUPTCY
Here at Goldsmith & Guymon, P.C., you will find our fees competitive and our expertise invaluable in protecting the maximum amount of your property as allowed by law. If you have any questions, please feel free to contact us at 877-262-1466. Thank you.