Is Chapter 7 Bankruptcy for me?
Chapter 7 bankruptcy is designed for individuals, married couples and businesses wishing to make a fresh start, but who are unable to pay their debts from current income. The ideal Chapter 7 candidate will have primarily unsecured debt (ex. credit cards, medical bills, utility bills, payday loans, etc…) and be current with any secured debt payments such as mortgage and car/lease payments. Prior to your first meeting with us, you should assemble certain papers so that we can confirm at our first meeting whether Chapter 7 is right for you. For a printable list of the papers you should assemble prior to our first meeting, click here.
A consumer debtor filing for relief from creditors under Chapter 7 is typically permitted to exempt (or keep) most or all of his or her property. Any remaining nonexempt property is available to be liquidated, that is, offered for sale by a court-appointed trustee. Net proceeds would then be available for distribution to creditors after deducting commissions and costs. An individual may not file a Chapter 7 case if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to his or her failure to appear or comply with court orders, or if the debtor requested and obtained a voluntary dismissal of the case following the filing of a request for relief from the automatic stay filed by a creditor or party-in-interest.
At the end of the Chapter 7 case, the individual debtor hopes to receive a discharge, which cancels the debtor’s legal obligation to pay most consumer debts listed in the bankruptcy petition. There are some special debts which might not be discharged. These are discussed below. A discharge may be denied if the debtor received a discharge in a previous Chapter 7 case within the past eight years, if the debtor received a discharge in a Chapter 13 filed within the past 6 years, or if a creditor is able to demonstrate that the debtor committed fraud or an act of dishonesty that allowed the debtor to obtain money or property for which the debtor has not paid.
How Chapter 7 Works
A Chapter 7 case begins with the filing, under oath, of a petition, schedules of assets and liabilities, and a statement of financial affairs. The petition is typically filed with the bankruptcy court serving the area where the debtor lives. A husband and wife who are legally married may file a joint petition, or one spouse may file alone, which is commonly referred to as a non-filing spouse case. Although married couples may file together, there may be some strategic advantage to filing individually in certain cases. Currently, the bankruptcy court collects a $299 filing fee to cover court costs. This fee is paid in full upon filing. If a joint petition is filed, only one $299 fee is charged. Upon the filing of the petition an impartial trustee is appointed by the Office of the United States Trustee to administer and investigate the case, question the debtor under oath, and liquidate any nonexempt assets, if any.
In order to obtain Chapter 7 relief, a debtor must compile the following information:
- A schedule of all creditors and collection agents (including agencies, attorneys and law firms), containing complete addresses, account numbers, amounts claimed due, and dates each debt was incurred
- A schedule of all of the debtor’s real and personal property, including accurate values for each asset (largely created with the assistance of your attorney), and
- The amounts of the debtor’s monthly household income (including a complete 6-month history of all paystubs) and living expenses, i.e., food, clothing, rent or mortgage payments, utilities, insurance, transportation, medical expenses, child care costs, etc.
The Chapter 7 petition includes a schedule of exempt property. Exempt property is retained by the consumer debtor and is not available to the Chapter 7 trustee or the creditors. Federal bankruptcy law fixes dollar values for exemption of certain types of property. In addition, Wisconsin has taken advantage of a provision in the bankruptcy statute which permits a state to adopt its own exemption laws, in place of federal exemptions. Thus, whether certain property — such as a house, car, retirement plan, antiques, household goods, jewelry, cash, business equipment, or even a pending lawsuit or claim — is exempt from the reach of the trustee and the creditors, can be a question of state law.
All creditors listed in the bankruptcy case will receive notice of the filing of the petition from the bankruptcy court. Once the petition is filed, most actions by creditors to collect money is subject to a court imposed automatic stay and must stop. Creditors, by law, are no longer permitted to initiate or continue their lawsuits, wage garnishments, attachments or other collection activity — including telephone calls from collection agencies demanding payment.
After the petition is filed, a meeting of creditors under section 341 of the Bankruptcy Code is noticed out to the debtor and to all creditors listed in the bankruptcy case. The debtor must attend this meeting and creditors are entitled to appear and ask questions regarding the debtor’s financial situation and property, however In most cases, no creditors attend the hearing). If both a husband and wife filed together, they both must attend the meeting of creditors. The trustee will preside at this meeting and question the debtor about the matters contained in the petition. It is important for the debtor to cooperate with the trustee. In order to preserve their independent judgment, bankruptcy judges decide questions of law but do not attend the meeting of creditors.
If the debtor has assets over and above what may be claimed as exempt, the trustee has the right to demand turnover of such assets to sell them. Depending upon the amount of nonexempt equity in the property, the debtor may sometimes be able to make an offer to purchase the trustee’s interest in such property. The money received at a public or private sale would then be available to pay claims of creditors. If, as is often the case, all of the debtor’s assets are exempt, there would be no distribution to creditors and the debtor will retain all pre- and post-bankruptcy property, subject to any security interest or lien held by a secured creditor or leasing company. Certain transfers of property made by the debtor within 90 days before filing (within one year in the case of relatives or other “insiders”) can be recovered by the trustee for the benefit of creditors through bankruptcy court litigation.
Chapter 7 Discharge
Approximately three months following the meeting of creditors, the individual consumer debtor can typically expect to receive a discharge. The discharge is a court order which extinguishes the debtor’s legal obligation to repay many unsecured debts that cannot be paid by the trustee. Unsecured debts may generally be defined as money obligations based solely on future ability to pay. Secured debts, on the other hand, are based on a creditor’s right to repossess pledged property upon default, regardless of a debtor’s ability to pay. Certain debts — such as sales taxes and other trust-fund taxes (e.g., employer withholding tax), debts created by a debtor’s intentional conduct (e.g., assault, defamation, embezzlement or fraud), parking violations, fines, penalties and criminal restitution, alimony and child support obligations, and guaranteed student loans, among other items — are not discharged in most cases and are unaffected by a Chapter 7 bankruptcy filing. More typically, however, most garden-variety consumer debt is released and discharged through Chapter 7 .
Because secured creditors retain significant rights which may permit them to seize pledged property, even after a discharge is granted, it is sometimes advantageous for the debtor to reaffirm a debt when property, such as a truck or automobile, has been pledged to the creditor as collateral. A reaffirmation is an agreement between the debtor and the creditor that the debtor will pay the money owed, even though the debtor filed bankruptcy. In return, the creditor promises that as long as payments are made, the creditor will not seek to repossess, or take back, the car or other property. The written agreement to reaffirm a debt must be filed with the court and approved by the bankruptcy judge before the debtor is discharged in a Chapter 7 bankruptcy.
In the event of debtor fraud during the bankruptcy proceeding, such as hiding assets, making false oaths in connection with a bankruptcy petition, failing to cooperate with the trustee, failing to appear at a meeting of creditors, or failing to obey bankruptcy court orders, the Chapter 7 discharge can be denied or revoked. Bankruptcy fraud is a felony under federal criminal law, and carries serious penalties including fines or imprisonment, or both, in addition to the denial of discharge.