Chapter 7 Basics for Individuals
Following is general information on the chapter 7 bankruptcy process for individuals. It is intended for general information purposes only and should not be taken as legal advice. This information is not intended to establish an attorney-client relationship.
What is Chapter 7 Bankruptcy?Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a way for individuals who can no longer bear the burden of their debts to achieve a fresh start by discharging some or all of their debts. Both individuals and businesses can file a petition under chapter 7 of the Bankruptcy Code if they meet certain qualifications, but this Legal Guide focuses on individuals. Individuals must meet the requirements of a means test, which effectively places a cap on income for the filer. Individuals need not qualify under the means test if more than 50% of their debt is derived from business expenses. This is helpful for many individuals who own small businesses.
What is the Chapter 7 Lifecycle?A typical individual chapter 7 case can be completed in under six months. When an individual files a petition for relief under chapter 7 of the Bankruptcy Code, the automatic stay goes into effect estopping all creditors actions to collect against the debtor. This means creditors can no longer call, send mail, commence or continue litigation. Creditors are listed on your bankruptcy schedules, so they will be aware of your bankruptcy case.
Shortly after filing, a chapter 7 trustee is appointed to oversee the debtor’s case. The chapter 7 trustee will meet with the debtor early on in the case in what is commonly termed a “Section 341 Meeting,” or meeting of creditors. The term “meeting of creditors” is somewhat misleading because, in most instances, no creditors appear. During the Section 341 Meeting, the trustee asks the debtor about their bankruptcy petition, schedules and statement of financial affairs. These documents generally contain a complete accounting of all of the debtor’s assets and liabilities as of the petition date, as well as other information such as transfers the debtor made in the past year and 90 days and causes of action currently pending against the debtor or which the debtor may have the right to bring against another party. The trustee may request additional information to investigate whether the debtor has truly disclosed all their assets and turned over any assets that are not exempt (more on exemptions later!). The trustee generally will continue the Section 341 Meeting until they are certain as to the scope of the debtor’s assets.
At the close of the trustee’s investigation of the debtor’s estate, they will determine whether or not the debtor has assets to distribute to creditors (and “asset case”) or not (a “no asset case”) and officially close the Section 341 Meeting. If the case is a no asset case, the trustee will issue a “report of no distribution” to advise all creditors that the debtor has no assets to distribute and, generally, the debtor’s debts will be deemed discharged. If the trustee finds assets that are not exempt, they will distribute such assets pro rata to all general unsecured creditors of the debtor after paying any secured creditors from their collateral as well as administrative expenses (such as the trustee’s fees and those of their professionals) and priority claims (such as certain tax claims).
After the case has been fully administered the trustee will issue a final report and the court will close the case. At this point, the “discharge injunction” applies and no creditor whose debt has been discharged may make any effort to collect against the debtor going forward.
Can I Keep Any of My Assets?Yes! In fact, many chapter 7 debtors get to keep all or most of their assets. For example, you will likely get to keep all of your clothes, furniture, and jewelry that is not expensive. You can usually keep your car if it is not a luxury car, and if you have equity in your home you can keep a significant amount of that equity. How much equity in your home you are allowed to keep depends on where you file, but in New York it may be close to $187,000! These amounts are increased from time to time. If you have a rent-controlled apartment, you get to keep that too. There are many other valuable exemptions, so it is very important to have a good lawyer help you determine what you are entitled to keep, however, because you must claim exemptions to keep exempt property.
You may, however, have to give up some assets. If you own valuable jewelry, quality furs in good condition, stocks or bonds outside of a retirement account, valuable art or collectibles the trustee may sell them to pay your creditors.
Can a Creditor Object to My Discharge?Yes, creditors have a period of 60 days from the initial date of your Section 341 Meeting to object to the discharge of your debt to them. Some common reasons a creditor may object to discharge are:
· You purchased luxury items before filing for bankruptcy;
· You took out a cash advance before filing for bankruptcy;
· You incurred debts through fraud;
· You used your credit card to pay a nondischargeable debt;
· You lied in your bankruptcy case, or misrepresented material facts;
You should note that, depending on the facts, the above actions could rise to the level of a bankruptcy crime which could result in fines, imprisonment, and the denial of your discharge. You should ALWAYS be completely honest with your lawyer, the trustee and the court.
Can People Collect Against Me After the Bankruptcy Case is Closed?Provided the debtor listed the asset on their schedules, is not a nondischargeable debt (such as certain tax debts), and was not excepted from discharge for any reason (see above), the creditor may not attempt to collect the debt after the debtor’s case is closed. The only exception is if your case is reopened and your discharge is revoked. This could occur, for example, if it is determined at a later date that you obtained your discharge by fraud. Otherwise, any creditor who attempts to collect is in violation of the discharge injunction and is subject to civil sanctions.