Chapter 7 - Background

The biggest fundamental difference between a chapter 13 and a chapter 7 bankruptcy is that where a chapter 13 bankruptcy includes the filing of a repayment plan for certain non-dischargeable debts, a chapter 7 bankruptcy does not. In a Chapter 7 bankruptcy, the code authorizes the bankruptcy trustee to gather any nonexempt property the debtor holds so that it may be liquidated with the proceeds distributed to pay creditors in line with the Bankruptcy Code. That said, the Bankruptcy Code also allows for the debtor to keep specific "exempt" assets. Debtors need to be aware that when filing a petition under chapter 7 they may be required to surrender assets if their value cannot be shielded through the available exemptions. In the majority of cases where people are facing significant financial distress, such that they are seriously considering chapter 7 bankruptcy protections, they will primarily hold assets which can be protected. Some examples of these items are household items, older vehicles and retirement funds.

Chapter 7 - Eligibility

The primary qualification necessary to receive a discharge under chapter 7 of the bankruptcy code is that the debtor must either be an individual, a partnership, or corporation. In addition to this, regardless of whether the debtor is insolvent or not, the debtor must also satisfy the income limits outlined within the means test and complete a credit counseling course from an approved agency within 180 days prior to filing. No individual will be allowed to file for protection under any chapter of the bankruptcy code if the debtor voluntarily dismissed a prior case once creditors pursued relief from the bankruptcy court to recuperate property on which they hold liens or if during the last 180 days a bankruptcy case was dismissed due to the debtor's willful failure to comply with or appear before the court.

One fundamental reason that the Bankruptcy Code was created is to afford an honest individual a “fresh start” by discharging certain forms of debt. When a discharge of debts is granted, the debtor will no longer be liable for any debt covered by their bankruptcy. It is only the debts of an individual debtor that can be discharged through a chapter 7 bankruptcy, the debts of a corporation or partnership cannot. Most individual chapter 7 bankruptcies will result in the discharge of debts, but the debtor needs to be aware that the right to a discharge of all debts is not definite. There are certain forms of debt are not dischargeable. One particular example of this is that a lien on property will not automatically be eliminated by a bankruptcy discharge.

Chapter 7 - How It Works

A chapter 7 case begins in the regional bankruptcy court for the area where the debtor lives, their business is organized or has it principal place of business. The initial action of the debtor is to file a bankruptcy petition accompanied by all the required certificates, statements and schedules.

With the act of filing a bankruptcy petition the majority of collection activities against the debtor or their property will halt. And for as long as the “automatic stay” that is triggered by the filing of the bankruptcy remains in place, creditors are barred from continuing or initiating such actions as wage garnishment, lawsuits or even telephone calls demanding payment. As part of the filing of the petition and its associated documents, all creditors listed within the bankruptcy case will be given notice by the clerk of the bankruptcy court.

Roughly 20 to 40 days following the filing of the petition a meeting of creditors will be held by the trustee. The purpose of this meeting is to allow the debtor’s creditors and the trustee to ask questions of the debtor while they are under oath. It is required that the debtor attend this meeting, answering truthfully any questions posed regarding the debtor's financial matters and property holdings. It is vital to the success of the case that the debtor cooperates with their chosen representative, as well as the trustee throughout the process, including the release of any documents or records that are requested.

Chapter 7 - The Discharge

It is the definitive goal of any bankruptcy case to achieve a discharge that relieves the individual debtor from personal liability for most types of debt, thus preventing the creditors who are otherwise owed those debts from continuing to pursue any further actions against the debtor in the pursuit of the collection of these debts. Due to the fact that the discharge of a chapter 7 bankruptcy is affected by a number of exceptions, it is very much encouraged that debtors seek the advice of qualified legal counsel prior to filing to gain a comprehensive understanding of the scope of the discharge available to you. Debtors should expect to receive a discharge within 60 to 90 days from the date of their meeting of creditors (341 hearing) unless their case has been dismissed or converted.

It should be expected that even after a discharge is granted creditors for whom a debt is secured by material possessions will retain certain rights to seize the property which secures the underlying debt. Contingent on the financial standing of the debtors, a debtor may ask to preserve certain secured possessions (such as a vehicle, major appliance or home). In pursuit of this, the debtor may decide to "reaffirm" this debt by entering into a Reaffirmation agreement. The Reaffirmation Agreement, entered into by the debtor and the creditor specifies that the debtor wishes to continue their liability with regard to this debt with the objective of paying all or an agreed upon share of the money owed. In exchange for entering into such an agreement the creditor promises to stop any attempts to repossess the securing property, for as long as the debtor satisfies the obligations associated with the debt.

There are certain types of debt that cannot be discharged through a chapter 7 bankruptcy. These debts include; court-ordered payments or fees for support of others, punitive fees for willful and malicious injury or death by the debtor and those for specified criminal restitution orders, most taxes, and student loans.

If it is revealed that the debtor secured a discharge through deception or fraud it is fully within the power of the court to rescind a chapter 7 discharge at the request of the trustee, a creditor, or the U.S. trustee.  Some common examples of activity the court would find irregular are, the acquisition by the debtor of property that is rightfully the property of the estate while knowingly and fraudulently failing to report this acquisition or to surrender it to the trustee or if the debtor without a satisfactory explanation or the debtor makes a substantial misstatement or fails to provide documents or other information in connection with an audit of the debtor's financial affairs.