Chapter 7
Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes control of the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. When there is no nonexempt property in a chapter 7 case, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases" and in my experience comprise the majority of the chapter 7 bankruptcy cases filed. A creditor holding an unsecured claim will receive a distribution from the bankruptcy estate only if the case is an “asset” case and the creditor files a proof of claim with the bankruptcy court. Even in the event of an asset case, the distribution may be just a few cents on the dollar.
To qualify for relief under chapter 7 of the bankruptcy code, the debtor may be an individual, a partnership, or a corporation or other business entity. Amendments to the bankruptcy code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief (e.g. the debtor “fails” the means test). Also to qualify for any type of bankruptcy, consumer (e.g. non-business) debtors must seek credit counseling from an approved creditor counselor before filing for bankruptcy and secure a “credit counseling certificate.” If a debt management plan is developed during the credit counseling session, it must be filed with the court.
Filing a Chapter 7 Case
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the petition, the debtor must also file with the court certain schedules including income and expense information, information on any executory contracts, a statement of financial affairs, and consumer debtors must also file a copy of the debtor’s credit counseling certificate and any debt repayment plan that was recommended by the credit counseling agency. Debtors must also provide the following documents to the chapter 7 trustee, although the documents are not filed with the court: copy of the most recently filed federal tax return (and any returns filed later while the debtor is in bankruptcy); records of any income the debtor received within 60 days before the debtor filed bankruptcy (referred to as pay advices); and a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor has to disclose to the bankruptcy court through his/her bankruptcy schedules everything in the world that the debtor owns with estimated values. This is necessary so the relevant exemptions can be applied to the debtor’s property and the trustee can determine if there is any nonexempt property available for liquidation for the benefit of the creditors.
A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee, and creditors can evaluate the household's financial position – basically to ensure that the bankruptcy process is not being abused.
Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. However, certain actions listed under Section 362(b) of the Bankruptcy Code are not stayed which generally includes certain actions relating to domestic matters. Also, the stay may be effective only for a short time in some situations explained in detail in the bankruptcy code. If you retain Deshaies Law to represent you in a bankruptcy, Attorney Deshaies will tell you whether any stay exceptions are expected to apply to your case. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments for pre-petition claims. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor on the debtor’s bankruptcy schedules.
Between 21 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, subject to the pains and penalties of perjury, and the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the U.S. Trustee will report to the court whether the case should be presumed to be an abuse under the means test.
Administration of the Estate
The filing of bankruptcy creates what is known as the “bankruptcy estate.” The estate consists of all legal or equitable interests the debtor had in any property as of the commencement of the case. When a chapter 7 petition is filed, the U.S. Trustee appoints an impartial chapter 7 case trustee to administer the case and liquidate the debtor's nonexempt assets. The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor's nonexempt assets in a manner that maximizes financial return to the debtor's unsecured creditors. The trustee accomplishes this by selling the debtor's nonexempt property if it is free and clear of liens.
If all the debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. The trustee may also attempt to recover money or property under the trustee's "avoidance powers." The trustee's avoidance powers include the power to: set aside preferential transfers made to creditors within 90 days before the petition; undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation value of the estate.
The Discharge
The primary purpose of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start." In a chapter 7 case a discharge is only available to individual debtors, not to partnerships or corporations. (Partnerships and corporations simply liquidate their assets and dissolve.) Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged (e.g. 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). Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. The debtor will continue to be liable for any nondischargeable debts to the extent that they are not paid by the trustee in the chapter 7 case.
The court may revoke a chapter 7 discharge on the request of 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. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management.
Secured Debt
A bankruptcy discharge does not extinguish secured debts which still remain as liens on the property and can result in loss of the property if the debtor does not continue to make the payments. Therefore secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor 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 take back the automobile or other property so long as the debtor continues to make the agreed payments on the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in the bankruptcy code. Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated and that reaffirmation means that the debtor's personal liability for that debt will not be discharged in the bankruptcy. The disclosures also require the debtor to sign and file a statement of his or her current income and expenses which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor's dependants. The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.
After Bankruptcy
Immediately after you file bankruptcy, your credit scores will fall dramatically. However, after your discharge is issued there are ways to rebuild credit and increase your scores with patience. There are many companies that will lend you money after bankruptcy but at a higher rate of interest. Your job will be to make sure you pay all bills on time and limit your use of credit. Some experts suggest is that when rebuilding your credit you should keep your balances at no more than fifty percent of each available credit line (thirty percent is better). They suggest further that having multiple pieces of credit generally is not a problem but having high balances in relation to available credit is not helpful. Also, you absolutely must make all of your payments on time and be sure you are paying off principle and not just minimum interest payments.
One of the best methods to rebuild credit may be to obtain a secured credit card. These cards are fairly easy to obtain and are available through most major banks. Banks generally will allow you to open a secured credit account with a minimum of $500.00. Your credit scores will eventually rise as your positive credit builds and the bankruptcy effect lessens with the passing of time.
The most important payment to make each month is your mortgage payment. However, usually when you file for a personal bankruptcy, whether it is a chapter 7 or a chapter 13, even if you make all of your mortgage payments on time, your credit report will not reflect this. This is because generally debtors choose not to reaffirm a mortgage. The result is that they are no longer personally liable on the note but the lien remains on the property and the mortgagee can foreclose if you do not pay on time. If you are no longer personally liable, they generally will not report your payments to the credit bureaus. One of the best ways to rectify the fact that the mortgagee is no longer reporting is by refinancing the current mortgage and beginning fresh with a new lender. This allows the old, negative mortgage history to slowly slide to the back of the credit report, losing significance over time, and ultimately falling off the report altogether. You should reaffirm or refinance a mortgage only if you will be comfortable making the payments and there is real equity in the property. A reaffirmation or refinance will make you personally liable again which would include continuing personal liability if the property goes to foreclosure after reaffirmation or refinance and the foreclosure sale price is not high enough to pay the debt in full. You should discuss these issues with your bankruptcy counsel as part of the chapter 7 process and proceed with a refinance or reaffirmation only have careful consideration.
More Questions? Check out our Chapter 7 FAQ's
Deshaies Law has extensive experience in all aspects of the bankruptcy process and has guided many debtors to a brighter future. Deshaies Law would like to help you through your difficult situation.
Please call (603) 580-1416 to schedule your free initial consultation.
The above summary (with the exception of the section entitled “After Bankruptcy”) was derived from a publication of the Bankruptcy Judges Division of the Administrative Office of the United States Courts 2011 Edition entitled Bankruptcy Basics. It has been modified by removing legal citations and select sections to condense the materials. Some of the content has been re-worded and rearranged to suit the needs of Deshaies Law. The full, unabridged version can be found at the Court’s website at: http://www.nhb.uscourts.gov by clicking on “Filing Resources” then “Filing without a Lawyer,” and then “Bankruptcy Basics.”
To qualify for relief under chapter 7 of the bankruptcy code, the debtor may be an individual, a partnership, or a corporation or other business entity. Amendments to the bankruptcy code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief (e.g. the debtor “fails” the means test). Also to qualify for any type of bankruptcy, consumer (e.g. non-business) debtors must seek credit counseling from an approved creditor counselor before filing for bankruptcy and secure a “credit counseling certificate.” If a debt management plan is developed during the credit counseling session, it must be filed with the court.
Filing a Chapter 7 Case
A chapter 7 case begins with the debtor filing a petition with the bankruptcy court where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the petition, the debtor must also file with the court certain schedules including income and expense information, information on any executory contracts, a statement of financial affairs, and consumer debtors must also file a copy of the debtor’s credit counseling certificate and any debt repayment plan that was recommended by the credit counseling agency. Debtors must also provide the following documents to the chapter 7 trustee, although the documents are not filed with the court: copy of the most recently filed federal tax return (and any returns filed later while the debtor is in bankruptcy); records of any income the debtor received within 60 days before the debtor filed bankruptcy (referred to as pay advices); and a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor has to disclose to the bankruptcy court through his/her bankruptcy schedules everything in the world that the debtor owns with estimated values. This is necessary so the relevant exemptions can be applied to the debtor’s property and the trustee can determine if there is any nonexempt property available for liquidation for the benefit of the creditors.
A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee, and creditors can evaluate the household's financial position – basically to ensure that the bankruptcy process is not being abused.
Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. However, certain actions listed under Section 362(b) of the Bankruptcy Code are not stayed which generally includes certain actions relating to domestic matters. Also, the stay may be effective only for a short time in some situations explained in detail in the bankruptcy code. If you retain Deshaies Law to represent you in a bankruptcy, Attorney Deshaies will tell you whether any stay exceptions are expected to apply to your case. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments for pre-petition claims. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor on the debtor’s bankruptcy schedules.
Between 21 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, subject to the pains and penalties of perjury, and the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the U.S. Trustee will report to the court whether the case should be presumed to be an abuse under the means test.
Administration of the Estate
The filing of bankruptcy creates what is known as the “bankruptcy estate.” The estate consists of all legal or equitable interests the debtor had in any property as of the commencement of the case. When a chapter 7 petition is filed, the U.S. Trustee appoints an impartial chapter 7 case trustee to administer the case and liquidate the debtor's nonexempt assets. The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor's nonexempt assets in a manner that maximizes financial return to the debtor's unsecured creditors. The trustee accomplishes this by selling the debtor's nonexempt property if it is free and clear of liens.
If all the debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. The trustee may also attempt to recover money or property under the trustee's "avoidance powers." The trustee's avoidance powers include the power to: set aside preferential transfers made to creditors within 90 days before the petition; undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation value of the estate.
The Discharge
The primary purpose of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start." In a chapter 7 case a discharge is only available to individual debtors, not to partnerships or corporations. (Partnerships and corporations simply liquidate their assets and dissolve.) Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged (e.g. 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). Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. The debtor will continue to be liable for any nondischargeable debts to the extent that they are not paid by the trustee in the chapter 7 case.
The court may revoke a chapter 7 discharge on the request of 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. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management.
Secured Debt
A bankruptcy discharge does not extinguish secured debts which still remain as liens on the property and can result in loss of the property if the debtor does not continue to make the payments. Therefore secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor 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 take back the automobile or other property so long as the debtor continues to make the agreed payments on the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in the bankruptcy code. Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated and that reaffirmation means that the debtor's personal liability for that debt will not be discharged in the bankruptcy. The disclosures also require the debtor to sign and file a statement of his or her current income and expenses which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor's dependants. The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.
After Bankruptcy
Immediately after you file bankruptcy, your credit scores will fall dramatically. However, after your discharge is issued there are ways to rebuild credit and increase your scores with patience. There are many companies that will lend you money after bankruptcy but at a higher rate of interest. Your job will be to make sure you pay all bills on time and limit your use of credit. Some experts suggest is that when rebuilding your credit you should keep your balances at no more than fifty percent of each available credit line (thirty percent is better). They suggest further that having multiple pieces of credit generally is not a problem but having high balances in relation to available credit is not helpful. Also, you absolutely must make all of your payments on time and be sure you are paying off principle and not just minimum interest payments.
One of the best methods to rebuild credit may be to obtain a secured credit card. These cards are fairly easy to obtain and are available through most major banks. Banks generally will allow you to open a secured credit account with a minimum of $500.00. Your credit scores will eventually rise as your positive credit builds and the bankruptcy effect lessens with the passing of time.
The most important payment to make each month is your mortgage payment. However, usually when you file for a personal bankruptcy, whether it is a chapter 7 or a chapter 13, even if you make all of your mortgage payments on time, your credit report will not reflect this. This is because generally debtors choose not to reaffirm a mortgage. The result is that they are no longer personally liable on the note but the lien remains on the property and the mortgagee can foreclose if you do not pay on time. If you are no longer personally liable, they generally will not report your payments to the credit bureaus. One of the best ways to rectify the fact that the mortgagee is no longer reporting is by refinancing the current mortgage and beginning fresh with a new lender. This allows the old, negative mortgage history to slowly slide to the back of the credit report, losing significance over time, and ultimately falling off the report altogether. You should reaffirm or refinance a mortgage only if you will be comfortable making the payments and there is real equity in the property. A reaffirmation or refinance will make you personally liable again which would include continuing personal liability if the property goes to foreclosure after reaffirmation or refinance and the foreclosure sale price is not high enough to pay the debt in full. You should discuss these issues with your bankruptcy counsel as part of the chapter 7 process and proceed with a refinance or reaffirmation only have careful consideration.
More Questions? Check out our Chapter 7 FAQ's
Deshaies Law has extensive experience in all aspects of the bankruptcy process and has guided many debtors to a brighter future. Deshaies Law would like to help you through your difficult situation.
Please call (603) 580-1416 to schedule your free initial consultation.
The above summary (with the exception of the section entitled “After Bankruptcy”) was derived from a publication of the Bankruptcy Judges Division of the Administrative Office of the United States Courts 2011 Edition entitled Bankruptcy Basics. It has been modified by removing legal citations and select sections to condense the materials. Some of the content has been re-worded and rearranged to suit the needs of Deshaies Law. The full, unabridged version can be found at the Court’s website at: http://www.nhb.uscourts.gov by clicking on “Filing Resources” then “Filing without a Lawyer,” and then “Bankruptcy Basics.”
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NASHUA:
603-882-3223
CONCORD:
603-223-0063
TEXT:
603-490-3177