About Chapter 7
Board Certifed Bankruptcy Representation
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Mr. Cerbone is Board Certified Bus. Bankruptcy Attorney - American Board of Certification
A bankruptcy filing under Chapter 7 allows individuals to eliminate most unsecured debts. The main reason for filing any bankruptcy case is to obtain a "discharge" or release of debts. In a Chapter 7 case, the debtor is not required to pay any of the debts owed to most unsecured creditors.
In approximately 99 percent of all consumer Chapter 7 cases, the debtor will keep all property, and eliminate most debts. The entire process is normally over, and the case is closed, within approximately 4 months after it is filed.
After the bankruptcy is over, the debtor is legally entitled to selectively pay any or all of her debts, if she feels a moral obligation to pay. However, the debtor cannot be legally compelled to pay any discharged debt, and creditors are legally required to stop all collection efforts, including all collection calls, letters, lawsuits and garnishments.
Chapter 7 is commonly known as a "liquidation" proceeding because the trustee is entitled to seize and sell the debtor's non-exempt assets, and distribute the proceeds to creditors. However, in almost all consumer Chapter 7 cases, the debtor will keep all property because it is either: (a) exempt from seizure under federal or state law; or (b) so low in value that the trustee will elect to abandon it (i.e. not take it from the debtor). Therefore, the term "liquidation" proceeding is a misnomer since approximately 99 percent of all individuals keep all of their property.
Virtually All Property is Included in the Bankruptcy Estate. The filing of a bankruptcy case creates a "bankruptcy estate." All assets owned by the debtor on the date the case is filed become part of the bankruptcy estate." The bankruptcy estate includes all land, vehicles, and other personal property. It also includes all intangible property, such as damage claims the debtor may have against others (e.g., the debtor?s right to sue people - even if the debtor has not already filed the lawsuit), accounts receivable (debts owed to the debtor by others) or the debtor?s right to receive commissions. Virtually everything of any possible value which the debtor owns, holds or may be entitled to receive is property of the bankruptcy estate.
Trusts and Pension, Retirement and Profit Sharing Plans.
The assets contained in most trusts, and most pension, retirement and profit sharing plans, are not property of the bankruptcy estate and cannot be seized by the bankruptcy trustee. If the trust or retirement plan has a provision preventing the proceeds from being transferred or assigned, and the provision is enforceable under federal or state law, the assets are excluded from the bankruptcy estate. Almost all retirement plans and trusts have such a provision.
Possession of Property in Bankruptcy Estate.
As a technical legal matter, the bankruptcy trustee assumes legal control over all property of the bankruptcy estate immediately upon the filing of the case. The debtor cannot lawfully sell or transfer any property unless: (1) the court signs an order permitting the sale; or (2) the trustee abandons the assets back to the debtor, which normally occurs at or shortly after the creditor?s meeting. However, as a practical matter, in virtually all consumer cases, the trustee never takes actual physical possession of any property. The trustee will normally only take physical possession of property if it becomes clear that the property is not exempt and the debtor is not legally entitled to keep it.
Filing Date Rule.
In a Chapter 7 case, the bankruptcy estate is limited to property owned by the debtor on the date the case was filed. Any property that the debtor obtains after the case is filed does not become part of the bankruptcy estate, and the trustee is not entitled to take it.
Exceptions to Filing Date Rule.
There are only three exceptions to the filing date rule. If within 180 days (6 months) after the date the case is filed, the debtor becomes entitled to receive any property: (1) from an inheritance; (2) from a property settlement agreement reached with a former spouse or contained in a divorce decree; or (3) as a beneficiary of a life insurance policy or death benefit plan, the property becomes part of the bankruptcy estate and can be taken and sold to satisfy the claims of creditors, unless it is exempt.
Trustee’s Right to Inventory Assets.
In every bankruptcy case, the debtor is required to file a list of all property owned on the date the case was filed. As a technical legal matter, the trustee also has a legal right to visit the debtor and personally count her assets. However, in consumer cases, the trustee will almost never physically make an inventory of assets to determine if the debtor accurately disclosed all of her property.
I have handled over 2,000 bankruptcy filings for debtors. I have never been involved in any case nor heard of any consumer case in which the trustee or his representatives personally inspected a debtor’s assets.
Secured debts are debts on which the creditor holds a "security interest" or "lien" on specific property to secure payment of the debt. If the debt is not paid, the creditor can seize and sell the property to satisfy the debt. Most home loans and vehicle loans are secured debts because the contract documents will generally allow the creditor to repossess the property if the loan is not repaid. In business cases, the repayment of most bank loans are secured by a lien on the business assets, including the business equipment, inventory, furniture, vehicles and accounts receivable.
Liens Survive Bankruptcy.
In a Chapter 7 case, a "lien" against property will survive the bankruptcy, but the debt will be discharged. This means that the creditor can never attempt to recover the debt as a personal liability of the debtor. However, after bankruptcy, if the debt is not paid, the creditor can enforce the lien by repossessing the property, selling it, and applying the proceeds to satisfy the debt.
Options for Dealing with Secured Debt.
The debtor will have four options for dealing with secured debt:
- give the property back and owe nothing;
- keep the property and reaffirm the debt;
- redeem the property by paying the creditor, in cash, the full market value of the property; or
- renegotiate the contract in an attempt to lower the payments or interest rate.
The bankruptcy code contains a list of 9 different types of unsecured debts which have "priority" status over other unsecured debts. If money is available for distribution to creditors (a rare occurrence in a consumer Chapter 7 case), creditors holding priority claims will receive payment before any other unsecured creditors. All priority debts are "unsecured" because no specific property secures repayment of the debt. Priority claims receive payment in accordance with their rank in the priority scheme. Priority claims with a higher rank must be paid in full before priority claims of a lesser rank will receive any payment.
Most priority classifications are not relevant in consumer Chapter 7 cases. The most important types of priority debts, and their rank, are as follows:
Claims for expenses incurred by the trustee or debtor in preserving estate property, including wages, salaries or commissions for services rendered after the case has been filed. This category includes attorney?s fees incurred by the trustee or debtor in preserving estate property, or bringing property into the estate.
Child Support, Alimony and Support.
Debts owed for accrued but unpaid support or alimony payments owed to a spouse, former spouse or child.
Debts owed to governmental units for certain unpaid taxes. The following tax claims are considered priority debts:
Any income tax if: (1) less than 3 years elapse between the date the bankruptcy is filed and the date the tax return was last due, including all extensions; (2) the tax is assessed within 240 days of the date the bankruptcy is filed; or (3) the tax has not been assessed, but is legally assessable after the bankruptcy is filed (e.g. additional taxes assessed as a result of an audit).
Most employment taxes owed by employers.
A sales tax owed to a governmental entity.
General Unsecured Debts.
All debts other than secured and priority debts are classified as "general unsecured debts. Unsecured debts are debts which do not entitle the creditor to repossess any specific property if the debt is not paid. A "general" unsecured debt is an unsecured debt which is not entitled to priority.
Most credit card debts and medical bills are general unsecured debts. Debts obtained through the entry of a court judgment are also general unsecured debts, but can become secured against specific property if the judgment holder takes steps to secure the judgment in accordance with state law.
Appointment. Immediately upon the filing of the bankruptcy petition, a bankruptcy trustee will be randomly assigned from a pool of "panel trustees." Panel trustees are individuals that have been pre-screened and hired to act as Chapter 7 trustees by the U.S. Trustee of the district in which they serve. The panel trustee will receive a copy of all bankruptcy paperwork after it is filed.
Role of the Trustee.
The basic purpose of the panel trustee is to serve as an investigator for the court. In 99 percent of all Chapter 7 cases, the debtor will never see a bankruptcy judge. The debtor will appear before a judge only if a serious question is raised about the case. In virtually all Chapter 7 cases, the trustee is the only person that will review the case. The trustee has two basic investigatory roles:
- Asset Investigation. The trustee?s main role is to determine whether the debtor has any non-exempt assets which the trustee is entitled to seize from the debtor. If the debtor has non-exempt assets, the trustee may seize and sell the assets, and distribute the proceeds to creditors on a pro rata basis.
- Income / Expense Investigation. A second important role of the trustee is to determine if the debtor is abusing the bankruptcy process. A Chapter 7 case involving mostly consumer debts will be considered abusive if the debtor has sufficient income to pay a significant portion of the unsecured debt.
In every Chapter 7 bankruptcy case, the debtor is required to make one appearance at a creditor’s meeting.
Date. The creditor’s meeting is normally held between 30 and 45 days after the bankruptcy petition is filed. The meeting can never be scheduled at the convenience of the debtor or his attorney. The court will issue a notice specifying the date and time of the meeting. The debtor must attend the meeting on the scheduled date and time. If the debtor cannot attend on the scheduled date, the trustee will normally agree to reschedule the meeting at least once. However, the new meeting date will be reset to one of the next available trustee panels for that particular trustee. The trustee will never agree to appear at the courthouse and conduct a meeting for a single case.
Length of Meeting In consumer cases, most creditor?s meetings last 5 minutes or less. In complex or contentious cases the meeting can last 30 minutes or more.
Presiding Officer - Who Comes to Meeting?
The Chapter 7 trustee will preside at the creditor’s meeting. All creditors are invited to attend and ask the debtor questions about his debts and assets. In 99 percent of all cases, no unsecured creditors will appear at the meeting. Unsecured creditors normally come to the meeting only if they believe that the debtor is guilty of misconduct sufficient to warrant a denial of discharge. The only creditors that will normally appear with any frequency at a creditor?s meeting are secured creditors seeking to determine the debtor?s intentions with respect to their collateral, and whether the debtor will sign a reaffirmation agreement.
Focus of Trustee’s Investigation. The trustee will begin the meeting by asking the debtor various questions about his debts, assets and budget. The trustee’s questions are normally focused on two areas:
(a) Sufficient Property to Administer? Does the debtor have any non-exempt property, and if so, is the property valuable enough for the bankruptcy estate to realize a substantial dividend for creditors? In other words, does the debtor own sufficient non-exempt property to justify taking it, selling it, and distributing the proceeds to creditors. The trustee may ask questions directed at verifying whether the debtor has disclosed all of his property, and the accuracy of the estimated values given for the property.
Substantial Abuse of Bankruptcy Process? The trustee’s second major focus is normally directed at whether the debtor is abusing the bankruptcy process by filing under Chapter 7, instead of proposing a repayment plan under Chapter 13. There are many ways that a debtor can be deemed to have abused the bankruptcy process. However, the main inquiry is usually whether the debtor?s budget shows that he can afford to pay at least some of the unsecured debt. If the debtor?s income exceeds her monthly expenses, the trustee may conclude that the debtor is abusing the process by attempting to discharge her debts without making any payment, rather than proposing a repayment plan under Chapter 13.
Most court opinions on the subject agree that if the debtor?s monthly income exceed her reasonable monthly expenses to any significant degree, the case should be dismissed as an abuse of the bankruptcy process. The only way to avoid this result is if the debtor?s reasonable monthly expenses, as shown on the budget submitted to the court, equal or exceed monthly income. High income debtors (doctors, lawyers, engineers, etc.) attempting to file under Chapter 7 pose a much greater challenge for the debtor?s attorney, and have a much higher risk of drawing scrutiny from the trustee.
Conclusion of Meeting.
Potential Asset Recovery for Creditors. If the trustee believes that significant non-exempt assets may be available for creditors, he will keep the case open and further investigate the debtor?s assets. This could include requesting additional documents from the debtor, a personal inspection of assets, or any other action the trustee believes is necessary to properly investigate the debtor?s assets.
If the trustee believes that the bankruptcy filing might be abusive, he may keep the case open to further investigate the debtor?s budget. If there is a question concerning the accuracy of any income or expense numbers on the budget, he may request the debtor to provide proof that they are accurate. If the trustee, after further investigation, believes that the debtor can afford to repay a portion of the unsecured debt, he will refer the case to the U.S. Trustee?s office for a second review. If the U.S. Trustee agrees that the case is abusive, he has the option to file a motion to dismiss the case. Under current law, the U.S. Trustee or the court on its own initiative, are the only persons that may request a case to be dismissed as an abusive filing. Neither the panel trustee nor any creditor are entitled to file a motion to dismiss a Chapter 7 case as an abusive filing.
If the U.S. Trustee files a motion to dismiss the case, the court will conduct a hearing. The U.S. Trustee and the debtor will be able to present evidence at the hearing. If the court believes that the filing was abusive, the debtor will normally have two options: (a) convert the case to a Chapter 13 case, and propose a plan to repay some or all of the unsecured debt; or (b) the case will be dismissed. If the case is dismissed, the debtor will be back in the same position he was in before the case was filed.
A discharge contest is a lawsuit filed by a creditor or panel trustee seeking to prevent the debtor from receiving a discharge of one or more debts. A discharge contest must be filed within 60 days after the creditor's meeting is first scheduled to start. The trustee and all creditors are legally prohibited from filing a discharge contest after the 60 day time period.
A discharge contest must allege specific misconduct on the part of the debtor justifying the denial of a discharge. If a timely discharge contest is filed, the bankruptcy case will be kept open until the discharge contest has been decided.
Most discharge contests are filed by a single creditor claiming that the debtor should not receive a discharge of the debt owed to him.
After the creditor’s meeting is adjourned, the debtor is waiting for the passage of time until the court enters a discharge order. If neither a dismissal motion nor discharge contest are filed, the court will enter a discharge order declaring that all of the debts have been discharged (i.e. released, forgiven). The discharge order will normally be issued approximately 60 days after the creditor’s meeting is first scheduled. At the same time the court issues the discharge order, it will also normally issue and order closing the case. The order closing the case is the last event that will occur in the case.