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Chapter 7 FAQ : Background and filing information

1. What is a chapter 7 bankruptcy case and how does it work?

2. What is a chapter 7 discharge?

3. How does a person obtain a chapter 7 discharge?

4. Who is eligible to file and maintain a chapter 7 case?

5. Who is eligible for a chapter 7 discharge?

6. What types of debts are not dischargeable in a chapter 7 case?

7. Who should not file a chapter 7 case?

8. How much is the filing fee in a chapter 7 case and when must it be paid?

9. Where should a chapter 7 case be filed?

10. May a husband and wife file jointly under a chapter 7?

11. Under what circumstances should a joint chapter 7 case be filed?

12. When is the best time to file a chapter 7 case?

13. 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?

14. May a person file a chapter 7 case if his or her debts are being administered by a financial counselor?

15. How does filing a chapter 7 case affect a person’s credit rating?

16. Are employers notified of chapter 7 cases?

17. Does a person lose any legal or civil rights by filing a chapter 7 case?

18. May employers or governmental agencies discriminate against persons who file chapter 7 cases?

19. Will a person lose all of his or her property if he or she files a chapter 7 case?

20. What is exempt property?

21. When must a debtor appear in court in a chapter 7 case and what happens ?

22. What happens after the meeting of creditors?

23. What is a trustee in a chapter 7 case, and what does he or she do?

24. What are the debtor’s responsibilities to the trustee?

25. What happens to the property that the debtor turns over to the trustee?

26. What if the debtor has no non-exempt property for the trustee to collect?

27. How are secured creditors dealt with in a chapter 7 case?

28. How are unsecured creditors dealt with in a chapter 7 case?

29. What secured property may a debtor retain or redeem in a chapter 7 case?

30. May a utility company refuse to provide service to a debtor if the company’s utility bill is discharged under chapter 7?

31. What should the debtor do if he or she moves before the chapter 7 case is closed?

32. How is a debtor notified when his or her discharge has been granted?

33. What if a debtor wishes to repay a dischargeable debt?

34. How long does a chapter 7 case last?

35. What should a person do if a creditor later attempts to collect a debt that was discharged in his or her chapter 7 case?

36. 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?

37. What is the role of the attorney for a consumer debtor in a chapter 7 case?

 


1. What is a chapter 7 bankruptcy case and how does it work? Back to top

A chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 7 of the Bankruptcy Code. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is the set of federal laws that deal with bankruptcy. A person who files a chapter 7 case is called a debtor. In a chapter 7 case, the debtor must his or her non-exempt 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 the discharge, and obeys the orders and rules of the bankruptcy court.

2. What is a chapter 7 discharge? Back to top

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 a debt that the debtor is released from and does not have to pay.

3. How does a person obtain a chapter 7 discharge? Back to top

By filing and maintaining a chapter 7 bankruptcy case, and being eligible for a chapter 7 discharge. However, not all debts are discharged by a chapter 7 discharge. Certain types of debts are by law not dischargeable under chapter 7 and all debts of this type will not be discharged even if the debtor receives a chapter 7 discharge.

4. Who is eligible to file and maintain a chapter 7 case? Back to top

Any person who resides in, does business in, or has property in the United States may file a chapter 7 bankruptcy case except a person who has intentionally dismissed a prior bankruptcy case within the last 180 days. Any person who is eligible to file a chapter 7 bankruptcy case may maintain the case except a person who is shown to have disposable income that is sufficient in the amount to pay off a substantial portion of his or her debts within a reasonable period. Disposable income is net income after the payment of the necessary living expenses of the debtor and his or her dependents.

5. Who is eligible for a chapter 7 discharge? Back to top

Any person who is qualified to file and maintain a chapter 7 case is eligible for a chapter 7 discharge except the following :

(1) A person who has been granted a discharge in a chapter 7 case that was filed within the last eight years.
(2) A person who has been granted a discharge in a chapter 13 case that was filed within the last eight years, unless 70 percent or more of the debtor’s unsecured claims were paid off in the chapter 13 case.
(3) A person who files and obtains court approval of a written waiver of discharge in the chapter 7 case.
(4) 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.
(5) A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.
(6) A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee.
(7) A person who fails to satisfactorily explain any loss or deficiency of his or her assests.
(8) A person who refuses to answer questions or obey the 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.
(9) A corporation, company or other debtor who is not an individual. (Only natural persons are eligible for a chapter 7 discharge.)

6. What types of debts are not dischargeable in a chapter 7 case? Back to top

All debts of ant type or amount, including out-of-state debts are dischargeable in a chapter 7 case except for the 19 types of debts that are by law declared not to be dischargeable in a chapter 7 case. The following is a list of the most common types of debts that are not dischargeable in a chapter 7 case:

(1) Most tax debts and debts that were incurred to pay non-dischargeable federal tax debts.
(2) Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or false financial statement, if the creditor files a complaint in the bankruptcy case (included here are debts for so called luxury goods or services and debts for cash advances made within 60 days before the case is filed).
(3) Debts not listed on the debtor’s chapter 7 forms, unless the creditor knew of the bankruptcy case in time to file a claim.
(4) Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the bankruptcy case.
(5) Debts for alimony, maintenance, or support and, if the creditor files a complaint in the bankruptcy case, certain other divorce-related debts including property settlement debts.
(6) Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the bankruptcy case.
(7) Debts for certain fines or penalties.
(8) Debts for educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents
(9) Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated.
(10) 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.

7. Who should not file a chapter 7 case? Back to top

A person who is not eligible for a chapter 7 discharge should not file a chapter 7 case. Also, in most instances a person who has substantial debts that are not dischargeable under chapter 7 should not file a chapter 7 case. In addition, it may not be advisable for a person with disposable income sufficient to repay a substantial portion of his or her debts within a reasonable period to file a chapter 7 case, because the case may be dismissed as an abuse of chapter 7.

8. How much is the filing fee in a chapter 7 case and when must it be paid? Back to top

The filing fee is $209 for either a single or a joint case. The filing fee is payable when the case is filed, it may be paid in up to four installments, with the final installment due within 120 days. The period for payment may be later extended to 180 days by the court, if there is a valid reason for doing so. The entire filing fee must ultimately be paid, however, or the case will be dismissed and the debtor will not receive a discharge.


9. Where should a chapter 7 case be filed? Back to top

In the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the grater portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court.

 

10. May a husband and wife file jointly under a chapter 7? Back to top

Yes. A husband and wife may file a joint case under chapter 7. If a joint chapter 7 case is filed, only one set of bankruptcy forms is needed and only one filing fee is charged.

11. Under what circumstances should a joint chapter 7 case be filed? Back to top

A husband and wife should file a joint chapter 7 case if both of them are liable for one or more substantial dischargeable debts. 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 assists.

12. When is the best time to file a chapter 7 case? Back to top

The answer depends on the status of the person’s dischargeable debts, the nature and status of the person’s non-exempt assets, and the actions taken or threatened to be taken by creditors. The following rules should be followed:

(1) Don’t file the case until all anticipated debts have been incurred, because only debts that have been incurred when the case is filed are dischargeable and will another six years before the person is again eligible for a chapter 7 discharge. For example, a person who has incurred substantial medical expenses should not file a chapter 7 case until the illness or the injury has either been cured or covered by insurance, as it will do little good to discharge, say, $100,000 of medical debts now and then incur another $100,000 in medical debts after the case has been filed.
(2) Don’t file the case until the person filing has received all non-exempt assets to which he or she may be entitled. If the person is entitled to receive an income tax refund or a similar non-exempt asset in the near future, the case should not be filed until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will have to be turned over to the trustee.
(3) Don’t file the case if the debtor expects to acquire non-exempt property through inheritance, life insurance or divorce in the next 180 days, because the property will have to be turned over to the trustee.
(4) If hostile creditor action threatens a debtor’s exempt assets or future income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a chapter 7 case (see question 13 below). If a creditor has threatened to attach or garnishee the debtor’s wages or if a foreclosure action has been instituted against the debtor’s residence, it may be necessary to file the case immediately in order to protect the debtor’s interest in the property.

13. 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?
Back to top

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 will mail 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 and 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 case has been filed.

14. May a person file a chapter 7 case if his or her debts are being administered by a financial counselor? Back to top

Yes. A financial counselor has no legal rights to prevent anyone from filing a chapter 7 case.

15. How does filing a chapter 7 case affect a person’s credit rating? Back to top

Some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least six years before they can file another chapter 7 case. If there are compelling reasons for filing a chapter 7 case that are not within the debtor’s control (such as illness or an injury), some credit rating agencies will take that into account in rating the debtor’s credit after filing.

16. Are employers notified of chapter 7 cases? Back to top

Employers are not usually notified when a chapter 7 case is filed. However, the trustee in a chapter 7 case often contacts an employer seeking information as to the status of the debtor’s wages or salary at the time the case was filed. If there are compelling reasons for not informing an employer in a particular case, the trustee should be informed and he or she may be willing to make other arrangements to obtain the necessary information.

17. Does a person lose any legal or civil rights by filing a chapter 7 case? Back to top

No. Filing a chapter 7 case is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.

18. May employers or governmental agencies discriminate against persons who file chapter 7 cases? Back to top

No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person had filed a chapter 7 case. It is also illegal for local, state, or federal government units to discriminate against a person as to the granting of licenses (including a drivers license), permits, student loans, and similar grants because that person has filed a chapter 7 case.

19. Will a person lose all of his or her property if he or she files a chapter 7 case? Back to top

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.

20. What is exempt property? Back to top

Exempt property is property owned by the debtor that is protected by law from the claims of creditors. Your attorney can inform you as to the property that is exempt in your case.

 

21. When must a debtor appear in court in a chapter 7 case and what happens ? Back to top

The first court appearance is for a hearing called “ the meeting of creditors”. 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. In most cases this will be the debtor’s only court appearance, but if the bankruptcy court decides not to grant the debtor a discharge or if the debtor wishes to reaffirm a debt and is not represented by an attorney, there will be another hearing about three months later which the debtor will have to attend.

22. What happens after the meeting of creditors? Back to top

After the meeting of creditors, the trustee may contact the debtor regarding the debtor’s property, and the court may issue certain orders to the debtor. These orders are sent by mail and may require the debtor to turn certain property over to the trustee with certain information. If the debtor fails to comply with these orders, the case may be dismissed and the debtor may be denied a discharge.

23. What is a trustee in a chapter 7 case, and what does he or she do? Back to top

The trustee is an officer of the court, appointed to examine the debtor, collect the debtor’s non-exempt property, and pay the expenses of the estate and the claims of the 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 non-exempt property.

24. What are the debtor’s responsibilities to the trustee? Back to top

The law requires the debtor to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the debtor’s non-exempt property. If the debtor does not cooperate with the trustee, the chapter 7 case may be dismissed and the debtor may be denied a discharge.

25. What happens to the property that the debtor turns over to the trustee? Back to top

It is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay the claims of unsecured creditors.

26. What if the debtor has no non-exempt property for the trustee to collect? Back to top

If, from the bankruptcy forms filed by the debtor, it appears that the debtor has no non-exempt property, a notice will be sent to creditors advising them that there appears to be no assets from which to pay creditors, that it is unnecessary for them to file claims, and that if assets are later discovered they will then be given an opportunity to file claims. This type of case is referred to as a no-asset case. Most chapter 7 cases that are filed by consumers are no-asset cases.

27. How are secured creditors dealt with in a chapter 7 case? Back to top

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 a secured property. A 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 the secured creditor is called a secured claim and secured claims must be collected from or enforced against secure 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 a secured property. The debtor should not turn ant 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.

28. How are unsecured creditors dealt with in a chapter 7 case? Back to top

An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has non-exempt 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 non-exempt property and converted it to cash, and when the court has ruled on the trustee’s objections to improper claims, he 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 refunds of certain deposits, claims for alimony, maintenance support, and tax claims are given priority, and in that order, in the payments 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. In nearly all chapter 7 cases filed by consumers, unsecured creditors get nothing.

29. What secured property may a debtor retain or redeem in a chapter 7 case? Back to top

A debtor may retain and redeem certain secured personal and household property, such as household furniture, appliances and goods, wearing apparel, and tools of trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred for the purpose of financing the purchase of the property. A debtor may also retain and redeem without payment to the secured creditor any secured property that is both exempt and subject only to a judgment lien. Finally, a debtor may redeem certain exempt personal, family, or household property by paying to the secured creditor an amount equal to the value of the property, regardless of how much is owed to the creditor. Deadlines are imposed on the enforcement of these rights by the debtor during the bankruptcy case.


30. May a utility company refuse to provide service to a debtor if the company’s utility bill is discharged under chapter 7? Back to top

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.

31. What should the debtor do if he or she moves before the chapter 7 case is closed? Back to top

The debtor should immediately notify the bankruptcy court in writing of the new address. Because most communications between a debtor and the bankruptcy court are by mail, it is important that the bankruptcy court always have the debtor’s address. Otherwise, the debtor may fail to receive important notices and the chapter 7 case may be dismissed. Many courts have change-of-address forms for debtors to use when they move, and the debtor should obtain one if a move is planned.


32. How is a debtor notified when his or her discharge has been granted? Back to top

Usually by mail. Most courts send a form called “ Discharge of Debtor” to the debtor and all creditors. 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 about four months after a chapter 7 case has been filed.

33. What if a debtor wishes to repay a dischargeable debt? Back to top

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 obligate 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 the chapter 7 case, has agreed in writing to repay the debt, or has waived the discharge of the debt in a waiver that was not approved by the bankruptcy court.

34. How long does a chapter 7 case last? Back to top

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 non-exempt 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 non-exempt assets for 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.

35. What should a person do if a creditor later attempts to collect a debt that was discharged in his or her chapter 7 case? Back to top

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 his or her chapter 7 discharge and inform the creditor in writing that the debt was discharged in his or her chapter 7 case. 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.

36. 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?
Back to top

A chapter 7 discharge releases only the person or persons who filed the chapter 7 case. 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 even though the debtor receives a chapter 7 discharge with respect to the debt. The only exception to this rule is in the community property states where the spouse of a debtor is released from certain community debts by the debtors chapter 7 discharge.

37. What is the role of the attorney for a consumer debtor in a chapter 7 case? Back to top

The debtor’s attorney performs the following functions in the chapter 7 case of a typical consumer debtor:

(1) Analyze the amount and nature of the debts owed by the debtor and determine he best remedy for the debtor’s financial problems.
(2) 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.
(3) Assemble the information and data necessary to prepare the proper chapter 7 forms for filing.
(4) Prepare the petitions, schedules, statements, and other chapter 7 forms for filing with the bankruptcy court.
(5) 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.
(6) Filing the chapter 7 petitions, schedules, statements, and other forms with the bankruptcy court, and if necessary, notifying certain creditors of the commencement of the case.
(7) If necessary, assisting the debtor in reaffirming certain debts, redeeming personal property, setting aside mortgages or lies against exempt property, and otherwise carrying out the matters set forth in the debtor’s statements of intention.
(8) Attending the meeting of creditors with the debtor and appearing with the debtor at any other hearings that may be held in the case.
(9) If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor.
(10) If necessary, assisting the debtor in overcoming obstacles that may arise to the granting of a chapter 7 discharge.

The fee paid, or agreed to be paid, to an attorney representing a debtor in a chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Many attorneys collect all or most of their fee before the case is filed.


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