Chapter 7 Bankruptcy
In a chapter 7 case, 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.
Am I Eligible For Chapter 7?
Subject to the “means test” for individual debtors, relief is available under chapter 7 irrespective of the amount of your debts or whether you are 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 Arizona bankruptcy court to recover property upon which they hold liens. 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. Links to approved credit counseling agencies are found on the Bankruptcy Resources page of our website. There are limited exceptions to this requirement.
One of the primary purposes of bankruptcy is to discharge certain debts to give you a “fresh start.” You have no liability for discharged debts. 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. A bankruptcy discharge does not extinguish a lien on property.
How Chapter 7 Works.
A chapter 7 case begins with filing a petition with the Arizona bankruptcy court. 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. 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). 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 Arizona bankruptcy petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.
In order for our Flagstaff or Phoenix bankruptcy attorneys and legal staff to prepare your chapter 7 case, you must provide the following information:
- A list of all creditors including addresses, and the amount and nature of their claims;
- The source, amount, and frequency of the your income;
- A list of all of your property; and
- A detailed list of your monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Among the schedules that we will prepare and file is a schedule of “exempt” property. The Bankruptcy Code allows you to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under Arizona bankruptcy state law.
Filing a petition under chapter 7 “automatically stays” (stops) most collection actions against the you or your property. 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 of the creditors whose names and addresses are provided.
Between 20 and 40 days after your case is filed, the case trustee will hold a meeting of creditors, sometimes called a 341 meeting. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The Judge is not present at this meeting. You are required to attend the meeting and answer questions regarding your financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions. In most cases the 341 meeting lasts fewer than 10 minutes, and your Flagstaff or Phoenix bankruptcy attorney will be there with you.
It is important for 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.
Role of the Trustee
The primary role of a chapter 7 trustee in an asset case is to liquidate the nonexempt assets in a manner that maximizes the return to your unsecured creditors. The trustee accomplishes this by selling any nonexempt property if it is free and clear of liens 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.
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.
Obtaining a 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. There are some exceptions to discharge. However, 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 someone files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order, generally, 60 to 90 days after the date first set for the meeting of creditors.
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.
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 debt 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.
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. 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.