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Chapter 7 Bankruptcy Overview

Bankruptcy proceedings

A Chapter 7 case begins with the debtor’s filing of the petition with the bankruptcy court, which triggers the automatic stay — bankruptcy terminology for the termination of debt-collection activity. Filing a petition does not stay certain types of actions, and the stay may only be in place for a limited period of time. As long as the automatic stay is in place, creditors may not initiate or continue lawsuits against the debtor, garnish wages or call the debtor demanding payments.

The debtor must also file a schedule 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. Fed. R. Bankr. P. 1007. There are additional filing requirements for individual debtors with primarily consumer debts. These debtors must file a certificate of credit counseling and a copy of any debt repayment plan; evidence of any payments from employers made 60 days before filing; a statement of monthly net income and any anticipated increases in income or expenses after filing; and a record of any interest the debtor has in state or federal qualified education or tuition accounts. 11 U.S.C. § 521.

The court appoints a trustee who oversees the Chapter 7 case and liquidates the debtor’s assets in order to pay off the debts. In many cases, however, the debtor’s assets are exempt or already subject to valid liens, so there will be no assets to liquidate. Most consumer bankruptcies are “no asset” cases in which there is nothing available for the creditors. The trustee can also try to recover money for the estate under the trustee’s “avoiding powers.” These powers include the power to set aside preferential transfers to creditors within 90 days of filing; undo security interests and pre-petition transfers that were not properly perfected; and pursue fraudulent conveyance and bulk transfer claims under state law. 11 U.S.C. § 544. If there are assets, the trustee collects the sale proceeds in a fund from which the debts are paid to the extent possible. Under section 726 of the Bankruptcy Code, property is distributed according to six classes of claims; each class must be paid in full before creditors in the next lower class are paid anything.

The trustee holds a meeting of creditors “[w]ithin a reasonable time” after the debtor files the petition. 11 U.S.C. § 341(a). During this meeting, the trustee and creditors may ask the debtor, who is under oath, questions. The debtor must attend the meeting of creditors and answer questions about his or her property and financial matters. 11 U.S.C. § 343.

When a debtor wants to keep certain secured property (such as a car) after bankruptcy, he or she may choose to reaffirm the debt. In a reaffirmation agreement, the debtor and creditor agree that the debtor will pay all or part of an otherwise dischargeable debt after bankruptcy. The creditor promises that it will not repossess the property as long as the debtor continues to pay the debt. Reaffirmation agreements must be entered into before discharge is entered and they must be signed by the debtor and filed with the court. 11 U.S.C. § 524(c).

When all of the proceeds are distributed, most remaining unpaid debts are discharged, meaning that they no longer exist and the debtor has no further obligation to pay them. Some debts, such as student loans, damages resulting from the debtor’s willful or malicious acts, debts incurred by giving false financial information, domestic support obligations and some debts incurred just prior to filing for bankruptcy, are non-dischargeable. 11 U.S.C. § 523. A court may deny a discharge if the debtor failed to keep or produce financial records; failed to satisfactorily explain any loss of assets; committed perjury; failed to follow an order of the court; fraudulently transferred or hid property; or failed to complete the required financial management course.

Chapter 7 bankruptcies may be “voluntary” or “involuntary”

Most Chapter 7 bankruptcy cases are filed by the debtor and are thus considered “voluntary bankruptcies.” Not all bankruptcy proceedings are voluntary, however. Under Chapter 7, creditors have the option of filing for relief against the debtor, in which case the proceeding is called an “involuntary bankruptcy.” Involuntary bankruptcies are allowed only when certain minimum thresholds are met; for instance, there must be a minimum number of creditors and a minimum amount of debt. 11 U.S.C. § 303. The debtor has the right to file a response to an involuntary petition, after which the court will determine whether the creditors are actually entitled to relief. If the court dismisses an involuntary bankruptcy filing because it has no merit, the creditors may be ordered to pay the debtor’s reasonable attorneys fees, damages for any losses the debtor experienced because of the bankruptcy and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition. 11 U.S.C. § 303(i).

Speak to a bankruptcy lawyer

A bankruptcy lawyer can help debtors overcome obstacles to the repayment of debt. Because the Bankruptcy Code affords various forms of relief, including liquidation under Chapter 7, it is recommended that you seek the advice of a lawyer before making major financial and legal decisions. Call today to schedule a consultation with a bankruptcy attorney to discuss your options.