Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is that part of the federal laws that deal with bankruptcy. A person who files under Chapter 7 is called a debtor. In a Chapter 7 case, the debtor must turn his or her nonexempt 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 such a discharge, and obeys the orders and rules of the court.
All debts of any kind or amount, including out-of-state debts, are dischargeable under Chapter 7 except the debts listed below. The following is a list of the most common debts that are not dischargeable under Chapter 7:
- Most tax debts less than 3 years old and debts that were incurred to pay federal tax debts.
- Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor files a complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 90 days before the case is filed).
- Debts not listed on the debtor’s Chapter 7 forms.
- Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the case.
- Debts for alimony, maintenance, support or equitable distribution.
- Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the case.
- Debts for certain fines or penalties.
- 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.
- Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated.
- 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.
The following persons are not eligible for a Chapter 7 discharge:
- A person who has been granted a discharge in a chapter 7 case filed within the last eight years.
- A person who has been granted a discharge in a chapter 13 case filed within the last six years, unless 70 percent or more of the unsecured claims were paid off in the chapter 13 case.
- A person who files a waiver of discharge that is approved by the court in the chapter 7 case.
- 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.
- A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.
- A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee.
- A person who fails to satisfactorily explain any loss or deficiency of his or her assets.
- A person who refuses to answer questions or obey 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.
Any person who resides in, does business in, or has property in the United States may file under chapter 7, except a person who has been involved in another bankruptcy case that was dismissed within the last 180 days on certain grounds.
A person who is not eligible for a chapter 7 discharge should not file under Chapter 7. Also, a person who has substantial debts that are not dischargeable under Chapter 7 should not file under Chapter 7. In addition, it may not be wise for a person with current income sufficient to repay a substantial portion of his or her debts within a reasonable period to file under Chapter 7, because the court may dismiss the case as constituting an abuse of Chapter 7. Although it is not a legal requirement, some experts say that a Chapter 7 case should not be filed unless a person’s dischargeable debts exceed the value of his or her nonexempt assets by at least two thousand dollars.
A Chapter 7 should be filed when the debtor has a fixed income or earns less than the median income level for their household size, when the value of their assets do not exceed the exemptions provided under state or federal law, and when they have a large portion of unsecured debt which cannot be managed.
The filing fee is $335 for either a single or a joint case. The fee charged by the debtor’s attorney for handling the Chapter 7 case is in addition to the filing fee. Debtors are also required to complete a pre-bankruptcy credit counseling course and a personal financial management course. These courses are provided by approved credit counseling agencies who charge separate fees for these services. The fee for these courses varies among the providers but generally is between $25-$45 per course. The fee for these courses can be waived under certain circumstances.
The filing of a Chapter 7 case automatically stays (or stops) virtually all collection and other legal proceedings pending against the debtor except in certain cases involving residential landlord tenant evictions. A few days after a Chapter 7 case is filed, the court mails 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 or 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 debtor files a chapter 7 case.
For most people considering bankruptcy, their credit scores will actually improve as a result of the bankruptcy. The reason is that a major component of your FICO score is how much debt you have. Once the bankruptcy is finished, the debt decreases. For other debtors, it may worsen, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under Chapter 7, apparently because it will be at least eight years before they can again file under Chapter 7. If there are compelling reasons for filing under Chapter 7 that are not within the debtor’s control (such as an illness or an injury), some credit rating agencies may take that into account in rating the debtor’s credit after filing.
When a chapter 7 case is filed, it becomes a public record and the name of the debtor may be published in the Legal Intelligencer, Philadelphia’s legal journal and in the classified section of the Philadelphia Inquirer.
Employers are not usually notified when a Chapter 7 case is filed.
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. Depending on the law of the local state, property that is exempt in a Chapter 7 case may be either property that is exempt under state law or property that is exempt under the Bankruptcy Code.
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 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 or the debtor continues to maintain monthly payments on the mortgage or secured loan. The claim of a secured creditor is called a secured claim and secured claims must be collected from or enforced against secured 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 secured property. The debtor should not turn any 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.
An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has nonexempt 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 nonexempt property and converted it to cash, and when the court has ruled on the trustee’s objections to improper claims, the 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 refund of certain deposits, claims for alimony, maintenance support, and tax claims, are given priority, in that order, in the payment 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.
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.
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.
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 current 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.
Usually by mail. Most courts send a form called “Discharge of Debtor” to the debtor and to 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 is filed.
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 obligated 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 under Chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt.
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 nonexempt 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 nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes 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.
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 the order of discharge and inform the creditor in writing that the debt has been discharged under Chapter 7. 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. 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.