Chapter 7 consumer bankruptcy is designed for individuals, married couples and small business owners wishing to make a fresh start, but who are substantially unable to pay debts from current income. While an enterprise debtor in a business bankruptcy -- such as a partnership, corporation, or limited liability company -- may also file under Chapter 7, those debtors do not receive a discharge, nor may they protect personal property through federal and state exemption statutes. On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") which significantly overhauled the prior bankruptcy code. BAPCPA imposes a means test to determine eligibility for chapter 7.
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 automatic bankruptcy stay relief by a creditor or party-in-interest. Under BAPCPA, the automatic stay may not be available if multiple filings were made within 12 months prior to the petition date.
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 or if a creditor is able to demonstrate debtor fraud or dishonesty. Under current law a person may receive a Chapter 7 discharge only once every eight years. Accordingly, the decision to file a bankruptcy petition under Chapter 7 should be seriously considered.
Chapter 7 bankruptcy is typically best suited for those with little or no income beyond that necessary for food, shelter and other essential and necessary living expenses. The bankruptcy court has the ability to dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer, rather than business debts, if, among other things, the court finds that the debtor filed in bad faith or is substantially abusing the provisions of the Bankruptcy Code by not making his or her best effort to repay at least a portion of the debts through Chapter 13.
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, or where the business debtor has its main office or is incorporated, or where it maintains substantially all of its assets. A husband and wife who are legally married may together file one joint petition. Although married couples may file together, there may be some strategic advantage to filing individually in certain cases. Currently, the bankruptcy court collects a $306 filing fee to cover court costs. This fee is ordinarily paid in full upon filing. If a joint petition is filed, only one filing 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 the debtor's real and personal property; and
- The amounts of the debtor's monthly household income and living expenses, i.e., food, clothing, rent or mortgage payments, utilities, insurance, transportation, medical expenses, child care costs, etc.
The debtor must provide, among other things, the following to their attorney:
- Prior 6-months pay stubs;
- Past 4-years tax returns;
- Documentation supporting budget (e.g., rent bills, utility bills, etc.) for previous 12 months;
- Certificate of completion of an approved non-profit credit counseling course from approved provider within 180 days before petition is filed; and
- A record of any interest in an educational IRA.
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. New Jersey follows this approach. However, many states, such as New York, have taken advantage of a provision in the bankruptcy statute which permits a state to adopt its own exemption law, in place of federal exemptions. Thus, whether certain debtor property-such as a house, car, retirement plan, collections, 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.
Scheduled creditors 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 an automatic court 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. The debtor must attend this meeting and creditors are entitled to appear and ask questions regarding the debtor's financial situation and property. 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 these assets. Depending upon the amount of nonexempt equity in real or personal property, the non-filing spouse may sometimes be able to make an offer to purchase the trustee's interest in jointly held property. Any 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.
Under BAPCPA before a court discharge can be issued, debtor must provide proof of completion of a financial management course certified by a provider approved by the Office of the United States Trustee.
These latter actions are brought by the trustee to recover certain payments and transfers made by the business as much as a full year (and sometimes as long as six years) prior to the bankruptcy filing. If the trustee is successful in collecting assets for distribution, creditors will be invited to file claims with the court. The assets, after deducting trustee fees and costs, are then divided on a pro rata basis among the creditors. A Chapter 7 bankruptcy does not technically relieve or discharge pre-petition debts. Instead, the enterprise is generally dissolved at some point after the filing leaving nothing for the creditors but any estate created by the trustee.
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.
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