CHAPTER 7 BANKRUPTCY
The Chapter 7 bankruptcy is known as the “liquidation” bankruptcy.
How Chapter 7 Bankruptcy Works
A Chapter 7 case begins with the debtor filing a petition with the bankruptcy court. The debtor is required to also file “schedules” of assets and liabilities, and schedules of estimated monthly income and expenses. A husband and wife may file a joint petition.
A “meeting of creditors” is usually held 20 to 40 days after the petition is filed. The debtor must attend this meeting. The trustee will also attend this meeting. At the meeting, creditors may appear and ask limited questions. The trustee will also ask a few questions to ensure the debtor is aware of the consequences of filing the bankruptcy, and reaffirming certain debts.
The debtor usually receives a discharge from the court about 120 days after the meeting of the creditors. Most claims against an individual are discharged. Among the types of debts which are not discharges usually are: Child support and alimony, most taxes, student loans, overpayments made by a government unit, debts for willful and malicious injury, debts for criminal restitution and debts incurred as a result of fraud or bad faith.
One of the primary purposes of bankruptcy is to discharge certain debts and give an honest individual a “fresh start.”
Basically, the debtor relinquishes his property to the bankruptcy trustee, and receives a discharge of his debts.
However, there are exceptions to this basic rule. A debtor is allowed to claim some property as “exempt” and therefore keep that property. For example, most household items and clothing, property used in the debtor’s business, most retirement accounts, one motor vehicle, and $35,000 in equity in the debtor’s home (the homestead exemption), are considered “exempt”, and the debtor may be able to file a Chapter 7 bankruptcy and keep these items. However, if these items are mortgaged as collateral by a creditor, the debtor may have to surrender them or pay the fair market value of them.
A debtor can choose to “reaffirm” or keep particular debts.
A debtor sometimes chooses to reaffirm a debt, in order to keep the collateral that secures the debt. For example, sometimes a debtor will choose to reaffirm his car note, in order to keep the car that was given as collateral for the car note. If a debtor puts his television as collateral for a loan with a finance company, he can reaffirm with that finance company in order to keep the television. The trustee will usually agree and consent to the “reaffirmation”, allowing the debtor to keep the collateral, if the loan roughly equals or exceeds the fair market value of the collateral. The trustee may have an objection, for example, if the debtor reaffirms on a small loan in order to keep a valuable asset that would not be “exempt” from seizure.
Some debts cannot be discharged in a Chapter 7 bankruptcy.
Ordinarily, child support and alimony obligations, most taxes and student loans, debts incurred by fraud, damages caused by intentional acts, and criminal fines cannot be discharged, but there are exceptions to the basic rule.
Chapter 7 is referred to as “straight” or “liquidation bankruptcy”. In a liquidation, the debtor turns all of his non-exempt assets over to a trustee who then liquidates (sells) all the assets and distributes the proceeds to the debtor’s creditors.
The debtor is then discharged of all pre-filing debts (those debts incurred before the filing of the bankruptcy). The creditors must look solely to the assets held by the trustee for payment. Creditors are thereafter prohibited from attempting to collect their claims from the discharged debtor. A debtor may receive a Chapter 7 discharge once every eight years.
Every state allows a debtor to keep some amount of property/assets. These assets are exempt from seizure by the trustee or the creditors. In Louisiana, debtors can keep most household items, clothes, assets used in his trade or business, most pension plans, and $35,000 in equity in his home.
One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual a “fresh start”. The discharge has the effect of extinguishing the debtor’s personal liability on dischargeable debts. A bankruptcy does not extinguish a lien on property.
Once a person files for bankruptcy, an “automatic stay” is put in place that prevents creditors from attempting to collect on any debts incurred before filing. Creditors may petition the court for relief from the automatic stay and permission to continue. Often, creditors whose loans are secured by a pledge of property/assets are permitted to take possession of that property.
After the bankruptcy proceedings are completed, the bankruptcy results in a discharge of the personal debts. The discharge acts as a forgiveness of personal liability for all debts incurred prior to the filing for bankruptcy. In most instances, creditors are prohibited from suing or attempting to collect debts that have been discharged. Once a discharge is granted, former creditors also have no claim on future income.
The potential Chapter 7 debtor should understand that a Chapter 7 bankruptcy does not involve the filing of a plan of repayment as in Chapter 13, but rather envisions the trustee gathering and selling the debtor’s non-exempt assets, from which creditors will receive distribution in accordance with bankruptcy law.