Chapter 7 - Background

In a Chapter 7 bankruptcy a debtor relinquishes their un-exempted assets to the bankruptcy trustee who then liquidates such property to satisfy the debtor’s unsecured creditors. The majority of individuals who are facing the level of financial distress that leads to filing bankruptcy only possess the types of property that can be exempted, such as household goods, retirement funds or older vehicles and therefore are protected from liquidation by the bankruptcy trustee. A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13.

Chapter 7 - Eligibility

To qualify for relief under chapter 7 of the Bankruptcy Code the debtor must be an individual, a partnership, a corporation or other business entity that satisfies the basic income limits established by the means test. This is true whether the debtor is financially solvent or not. Your eligibility for relief may be questioned if in the last 180 days you have had a bankruptcy petition dismissed due to a willful failure to fulfill the requirements of the bankruptcy. The debtor must also complete a credit counseling course from an approved agency within 180 days prior to their bankruptcy being filed.

The discharge of certain forms of debt is one of the primary purposes of bankruptcy. This gives an honest debtor the opportunity for a financial "fresh start", where the debtor has no further liability for discharged debts. In a chapter 7 bankruptcy, this discharge is only available to individual debtors, and is not available to partnerships or corporations. Although most individual chapter 7 cases result in a full discharge of applicable debts, the right to a discharge is not unqualified, and some types of debts are not discharged. Moreover, a bankruptcy discharge will not extinguish a lien on property; debts secured with collateral, or most tax debts.

Chapter 7 - How It Works

A chapter 7 case begins with the debtor filing a petition, along with the required schedules, statements and certificates, in the regional bankruptcy court for the area in which they live or where the business is organized or has it principal place of business.

Filing a petition under chapter 7 halts most collection actions against the debtor or their property. As long as the "automatic stay" remains in effect, creditors may not initiate or continue lawsuits, wage garnishments, or communication demanding payment. At the time that the petition and its associated schedules are filed with the bankruptcy court the clerk gives notice of the bankruptcy case to all creditors for whom the debtor has provided names and addresses.

Approximately 20 to 40 days after the petition has been filed, the court trustee will conduct a meeting of creditors. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. As it is during the entire process, it continues to be important for the debtor to cooperate with their chosen representative, as well as the trustee, in providing any financial documents or records that are requested.

Chapter 7 - The Discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any further collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult experienced legal counsel prior to filing to discuss the scope of the discharge. Excluding cases that are dismissed or converted, individual debtors receive a discharge 60 to 90 days after the date of the meeting of creditors.

Secured creditors may retain specific rights to seize property that secures an underlying debt, even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep the specified, secured property (like an automobile), he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the creditor and the debtor indicating that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or seek to take back the property so long as the debtor continues to meet the payment obligations for the debt.

An individual can expect to receive a discharge for most forms of debt in a chapter 7 bankruptcy case. 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 court may revoke a chapter 7 discharge based on the request of following interested parties; the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud by the debtor, if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee, or if the debtor (without a satisfactory explanation) makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor's case.