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Public Information Series of the Bankruptcy Judges Division
Administrative Office of the United States Courts
June 2000
While the
information presented herein is accurate as of the date of publication, it
should not be cited or relied upon as legal authority. This
information should not be used as a substitute for reference to the
United States Bankruptcy Code
(title 11, United States Code) and the
Federal
Rules of Bankruptcy Procedure, both of which may be reviewed at local law
libraries, or to local rules of practice adopted by each bankruptcy court.
Finally, this fact sheet should not substitute for the advice of competent
legal counsel.
Chapter 7 of the United States Bankruptcy Code is the Bankruptcy Code's
"liquidation" chapter. Lawyers sometimes refer to it as a
"straight bankruptcy." It is used primarily by individuals
who wish to free themselves of debt simply and inexpensively, but may also
be used by businesses that wish to liquidate and terminate their business.
Debtors should be aware that there are several alternatives to chapter
7 relief. For example, debtors who are engaged in business, including
corporations, partnerships, and sole proprietorships, may prefer to remain
in business and avoid liquidation. Such debtors should consider filing a
petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the
debtor may seek an adjustment of debts, either by reducing the debt or by
extending the time for repayment, or may seek a more comprehensive
reorganization. Sole proprietorships may also be eligible for relief under
chapter 13 of the Bankruptcy Code.
In addition, individual debtors who have regular income may seek an
adjustment of debts under chapter 13 of the Bankruptcy Code. Indeed, the
court may dismiss a chapter 7 case filed by an individual whose debts are
primarily consumer rather than business debts if the court finds that the
granting of relief would be a substantial abuse of the provisions of
chapter 7. 11 U.S.C. § 707(b). A number of courts have
concluded that a chapter 7 case may be dismissed for substantial abuse
when the debtor has the ability to propose and carry out a workable and
meaningful chapter 13 plan.
Debtors should also be aware that out-of-court agreements with
creditors or debt counseling services may provide an alternative to a
bankruptcy filing.
The potential chapter 7 debtor should understand that a straight
bankruptcy case does not involve the filing of a plan of repayment as in
chapter 13, but rather envisions the bankruptcy trustee's gathering and
sale of the debtor's nonexempt assets, from which holders of claims
(creditors) will receive distributions in accordance with the provisions
of the Bankruptcy Code. Part of the debtor's property may be subject to
liens and mortgages that pledge the property to other creditors. In
addition, under chapter 7, the individual debtor is permitted to retain
certain "exempt" property. The debtor's remaining assets are
liquidated by a trustee. Accordingly, potential debtors should realize
that the filing of a petition under chapter 7 may result in the loss of
property.
In order to qualify for relief under chapter 7 of the Bankruptcy Code,
the debtor must be an individual, a partnership, or a corporation. 11
U.S.C. §§ 109(b); 101(41). Relief is available under chapter 7
irrespective of the amount of the debtor's debts or whether the debtor is
solvent or insolvent. An individual cannot file under chapter 7 or any
other chapter, however, if during the preceding 180 days a prior
bankruptcy petition was dismissed due to the debtor's willful failure to
appear before the court or comply with orders of the court or the debtor
voluntarily dismissed the previous case after creditors sought relief from
the bankruptcy court to recover property upon which they hold liens. 11
U.S.C. §§ 109(g), 362(d) and (e).
One of the primary purposes of bankruptcy is to discharge certain
debts to give an honest individual debtor a "fresh start."
The discharge has the effect of extinguishing the debtor's personal
liability on dischargeable debts. In a chapter 7 case, however, a
discharge is available to individual debtors only, not to partnerships or
corporations. 11 U.S.C. § 727(a)(1). Although the filing of an
individual chapter 7 petition usually results in a discharge of debts, an
individual's right to a discharge is not absolute, and some types of debts
are not discharged. Moreover, a bankruptcy discharge does not extinguish a
lien on property.
A chapter 7 case begins with the debtor's filing a petition with the
bankruptcy court.(1)
The petition should be filed with the bankruptcy court serving the area
where the individual lives or where the business debtor has its principal
place of business or principal assets. 28 U.S.C. § 1408. In
addition to the petition, the debtor is also required to file with the
court several schedules of assets and liabilities, a schedule of current
income and expenditures, a statement of financial affairs, and a schedule
of executory contracts and unexpired leases. Bankruptcy Rule 1007(b).
A husband and wife may file a joint petition or individual petitions. 11
U.S.C. § 302(a). (Official Bankruptcy Forms can be purchased at a
legal stationery store or they may be downloaded from the
U.S. Court's website. They are not available at the courthouse.)
In order to complete the Official Bankruptcy Forms which make up the
petition and schedules, the debtor(s) will need to compile the following
information:
- A list of all creditors including addresses, and the amount
and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e.,
food, clothing, shelter, utilities, taxes, transportation, medicine,
etc.
Currently, the courts are required to charge a $155 case filing fee, a
$39 miscellaneous administrative fee, and a $15 trustee surcharge (a total
of $209). The fees should be paid to the clerk of the court upon filing or
may, with the court's permission, be paid by individual debtors in
installments. 28 U.S.C. § 1930(a); Bankruptcy Rule 1006(b); Bankruptcy
Court Miscellaneous Fee Schedule, Item 8. Rule 1006(b) limits to four
the number of installments for the filing fee. The final installment shall
be payable not later than 120 days after filing the petition. For cause
shown, the court may extend the time of any installment, provided that the
last installment is paid not later than 180 days after the filing of the
petition. Bankruptcy Rule 1006(b). The $30 administrative fee and
the $15 trustee surcharge may be paid in installments in the same manner
as the filing fee. If a joint petition is filed, only one filing fee, one
administrative fee, and one trustee surcharge are charged. Debtors should
be aware that failure to pay these fees may result in dismissal of the
case. 11 U.S.C. § 707(a).
The filing of a petition under chapter 7 "automatically
stays" most actions against the debtor or the debtor's property. 11
U.S.C. § 362. This stay arises by operation of law and requires no
judicial action. As long as the stay is in effect, creditors generally
cannot initiate or continue any lawsuits, wage garnishments, or even
telephone calls demanding payments. Creditors normally receive notice of
the filing of the petition from the clerk.
One of the schedules that will be filed by the individual debtor is a
schedule of "exempt" property. Federal bankruptcy law provides
that an individual debtor(2)
can protect some property from the claims of creditors either because it
is exempt under federal bankruptcy law or because it is exempt under the
laws of the debtor's home state. 11 U.S.C. § 522(b). Many states
have taken advantage of a provision in the bankruptcy law that permits
each state to adopt its own exemption law in place of the federal
exemptions. In other jurisdictions, the individual debtor has the option
of choosing between a federal package of exemptions or exemptions
available under state law. Thus, whether certain property is exempt and
may be kept by the debtor is often a question of state law. Legal counsel
should be consulted to determine the law of the state in which the debtor
lives.
A "meeting of creditors" is usually held 20 to 40 days after
the petition is filed. If the United States trustee or bankruptcy
administrator (3)
designates a place for the meeting that is not regularly staffed by
the United States trustee or bankruptcy administrator, the meeting may be
held no more than 60 days after the order for relief. Bankruptcy Rule
2003(a). The debtor must attend this meeting, at which creditors may
appear and ask questions regarding the debtor's financial affairs and
property. 11 U.S.C. § 343. If a husband and wife have filed a
joint petition, they both must attend the creditors' meeting. The trustee
also will attend this meeting. It is important for the debtor to cooperate
with the trustee and to provide any financial records or documents that
the trustee requests. The trustee is required to examine the debtor orally
at the meeting of creditors to ensure that the debtor is aware of the
potential consequences of seeking a discharge in bankruptcy, including the
effect on credit history, the ability to file a petition under a different
chapter, the effect of receiving a discharge, and the effect of
reaffirming a debt. In some courts, trustees may provide written
information on these topics at or in advance of the meeting, to ensure
that the debtor is aware of this information. In order to preserve their
independent judgment, bankruptcy judges are prohibited from attending the
meeting of creditors. 11 U.S.C. § 341(c).
In order to accord the debtor complete relief, the Bankruptcy Code
allows the debtor to convert a chapter 7 case to either a chapter 11
reorganization case or a case under chapter 13,(4)
as long as the debtor meets the eligibility standards under the chapter to
which the debtor seeks to convert, and the case has not previously been
converted to chapter 7 from either chapter 11 or chapter 13. Thus, the
debtor will not be permitted to convert the case repeatedly from one
chapter to another. 11 U.S.C. § 706(a).
Upon the filing of the chapter 7 petition, an impartial case trustee is
appointed by the United States trustee (or by the court in Alabama and
North Carolina) to administer the case and liquidate the debtor's
nonexempt assets. 11 U.S.C. §§ 701, 704. If, as is often
the case, all of the debtor's assets are exempt or subject to valid liens,
there will be no distribution to unsecured creditors. Typically, most
chapter 7 cases involving individual debtors are "no asset"
cases. If the case appears to be an "asset" case at the outset,
however, unsecured creditors(5)
who have claims against the debtor must file their claims with the clerk
of court within 90 days after the first date set for the meeting of
creditors. Bankruptcy Rule 3002(c). In the typical no asset chapter
7 case, there is no need for creditors to file proofs of claim. If the
trustee later recovers assets for distribution to unsecured creditors,
creditors will be given notice of that fact and additional time to file
proofs of claim. Although secured creditors are not required to file
proofs of claim in chapter 7 cases in order to preserve their security
interests or liens, there may be circumstances when it is desirable to do
so. A creditor in a chapter 7 case who has a lien on the debtor's property
should consult an attorney for advice.
The commencement of a bankruptcy case creates an "estate."
The estate technically becomes the temporary legal owner of all of
the debtor's property. The estate consists of all legal or equitable
interests of the debtor in property as of the commencement of the case,
including property owned or held by another person if the debtor has an
interest in the property. Generally speaking, the debtor's creditors are
paid from nonexempt property of the estate.
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 the
return to the debtor's unsecured creditors. To accomplish this, the
trustee attempts to liquidate the debtor's nonexempt property, i.e.,
property that the debtor owns free and clear of liens and the debtor's
property which has market value above the amount of any security interest
or lien and any exemption that the debtor holds in the property. The
trustee also pursues causes of action (lawsuits) belonging to the debtor
and pursues the trustee's own causes of action to recover money or
property under the trustee's "avoiding powers." The trustee's
avoiding powers include the power to set aside preferential transfers made
to creditors within 90 days before the petition, the power to undo
security interests and other prepetition transfers of property that were
not properly perfected under nonbankruptcy law at the time of the
petition, and the power to 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 debtor's business for a limited period of time,
if such operation will benefit the creditors of the estate and enhance the
liquidation of the estate. 11 U.S.C. § 721.
The distribution of the property of the estate is governed by section
726 of the Bankruptcy Code, which sets forth the order of payment of all
claims. Under section 726, there are six classes of claims, and each class
must be paid in full before the next lower class is paid anything. The
debtor is not particularly interested in the trustee's disposition of the
estate assets, except with respect to the payment of those debts which for
some reason are not dischargeable in the bankruptcy case. The debtor's
major interests in a chapter 7 case are in retaining exempt property and
in getting a discharge that covers as many debts as possible.
A discharge releases the debtor from personal liability for discharged
debts and prevents the creditors owed those debts from taking any action
against the debtor or his property to collect the debts. The bankruptcy
law regarding the scope of a chapter 7 discharge is complex, and debtors
should consult competent legal counsel in this regard prior to filing. As
a general rule, however, excluding cases which are dismissed or converted,
individual debtors receive a discharge in more than 99 percent of chapter
7 cases. In most cases, unless a complaint has been filed objecting to the
discharge or the debtor has filed a written waiver, the discharge will be
granted to a chapter 7 debtor relatively early in the case, that is, 60 to
90 days after the date first set for the meeting of creditors. Bankruptcy
Rule 4004(c).
The grounds for denying an individual debtor a discharge in a chapter 7
case are very narrow and are construed against a creditor or trustee
seeking to deny the debtor a chapter 7 discharge. Among the grounds for
denying a discharge to a chapter 7 debtor are that the debtor failed to
keep or produce adequate books or financial records; the debtor failed to
explain satisfactorily any loss of assets; the debtor committed a
bankruptcy crime such as perjury; the debtor failed to obey a lawful order
of the bankruptcy court; or the debtor fraudulently transferred,
concealed, or destroyed property that would have become property of the
estate. 11 U.S.C. § 727; Bankruptcy Rule 4005.
In certain jurisdictions, secured creditors may retain some rights to
seize pledged property, even after a discharge is granted. Depending on
individual circumstances, a debtor wishing to keep possession of the
pledged property, such as an automobile, may find it advantageous to
"reaffirm" the debt. A reaffirmation is an agreement between the
debtor and the creditor that the debtor will pay all or a portion of the
money owed, even though the debtor has filed bankruptcy. In return, the
creditor promises that, as long as payments are made, the creditor will
not repossess or take back the automobile or other property. Because there
is a disagreement among the courts concerning whether a debtor whose debt
is not in default may retain the property and pay under the original
contract terms without reaffirming the debt, legal counsel should be
consulted to ensure that the debtor's rights are protected and that any
reaffirmation is in the debtor's best interest.
If the debtor elects to reaffirm the debt, the reaffirmation should be
accomplished prior to the granting of a discharge. A written agreement to
reaffirm a debt must be filed with the court and, if the debtor is not
represented by an attorney, must be approved by the judge. 11 U.S.C. §
524(c). The Bankruptcy Code requires that reaffirmation agreements
contain an explicit statement advising the debtor that the agreement is
not required by bankruptcy or nonbankruptcy law. In addition, the debtor's
attorney is required to advise the debtor of the legal effect and
consequences of such an agreement, including a default under such an
agreement. The Code requires a reaffirmation hearing only if the debtor
has not been represented by an attorney during the negotiating of the
agreement. 11 U.S.C. § 524(d). The debtor may repay any debt
voluntarily, however, whether or not a reaffirmation agreement exists. 11
U.S.C. § 524(f).
Most claims against an individual chapter 7 debtor are discharged. A
creditor whose unsecured claim is discharged may no longer initiate or
continue any legal or other action against the debtor to collect the
obligation. A discharge under chapter 7, however, does not discharge an
individual debtor from certain specific types of debts listed in section
523 of the Bankruptcy Code. Among the types of debts which are not
discharged in a chapter 7 case are alimony and child maintenance and
support obligations, 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 criminal restitution
orders under title 18, United States Code. 11 U.S.C. § 523(a). To
the extent that these types of debts are not fully paid in the chapter 7
case, the debtor is still responsible for them after the bankruptcy case
has concluded. Debts for money or property obtained by false pretenses,
debts for fraud or defalcation while acting in a fiduciary capacity, debts
for willful and malicious injury by the debtor to another entity or to the
property of another entity, and debts arising from a property settlement
agreement incurred during or in connection with a divorce or separation
are discharged unless a creditor timely files and prevails in an action to
have such debts declared excepted from the discharge. 11 U.S.C. §
523(c); Bankruptcy Rule 4007(c).
The court may revoke a chapter 7 discharge on the request of the
trustee, a creditor, or the United States trustee if the discharge was
obtained through fraud by the debtor or 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. 11 U.S.C. § 727(d).
Notes
1. An involuntary
chapter 7 case may be commenced under certain circumstances by the filing
of a petition by creditors holding claims against the debtor. 11 U.S.C.
§ 303.
2. Each debtor in a
joint case (both husband and wife) can claim exemptions under the federal
bankruptcy laws. 11 U.S.C. § 522(m).
3. United States
trustees and bankruptcy administrators are responsible for establishing a
panel of private trustees to serve as trustees in chapter 7 cases and for
supervising the administration of cases and trustees in cases under
chapters 7, 11, 12, and 13 of the Bankruptcy Code. Bankruptcy
administrators serve in the judicial districts in the states of Alabama
and North Carolina.
4. A fee of $645 is
charged for converting, on request of the debtor, a case under chapter 7
to a case under chapter 11. There is no fee for converting from chapter 7
to chapter 13.
5. Unsecured debts
generally may be defined as those for which the extension of credit was
based purely upon an evaluation by the creditor of the debtor's ability to
pay, as opposed to secured debts, for which the extension of credit was
based upon the creditor's right to seize pledged property on default, in
addition to the debtor's ability to pay.
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