Obama's Economy

Chapter 7 Explained

Chapter 7 is one of two forms of personal bankruptcy. The other form of personal bankruptcy is Chapter 13. Chapter 7 is a liquidation bankruptcy, whereas Chapter 13 is a form of bankruptcy in which the Bankruptcy Court approves a plan that permits the debtor to payoff creditors over a 3 to 5 period, and then to discharge most unsecured debts that have not been paid off. Contact a debt defense lawyer Raleigh or bankruptcy lawyer Raleigh.

Chapter 7 generally is for people with large amounts of unsecured debt, and few assets. Chapter 13 is generally for people who have significant assets – a home, cars, etc. – that they wish to keep and who have an income that they can use to finance the bankruptcy plan. Chapter 13 is also for people who wish to file bankruptcy, but do not qualify for Chapter 7 bankruptcy.

Chapter 13 gives people opportunity to save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan.

Overview

Unlike Chapter 13 which focuses on a bankruptcy plan, Chapter 7 does not involving filing a plan with the court. Instead, the bankruptcy trustee in a Chapter 7 case will gather and sell the debtor’s non-exempt assets and use those proceeds to pay creditors. The bankruptcy code instructs the trustee about the amounts and order in which creditors are paid. For instance, some assets may be subject to liens or mortgages. In that case, the secured creditor – the company holding the home loan or car loan secured by the home or the car – get paid first up to the amount of the secured debt or the proceeds of the sale.

People filing for Chapter 7 should realize that the filing of a petition under chapter 7 may result in the loss of property.

Meeting Chapter 7 Eligibility Requirements

To qualify for Chapter 7, a person must not have had a bankruptcy petition in the past 180 days due to the person’s failure to appear before court or comply with orders of the court, or if the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover propery upon which they hold liens. In addition, a person must undergo credit counseling from an approved credit counseling agency within 180 days before filing.

What’s the Purpose of Chapter 7?

The primary purpose of a Chapter 7 bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” Once a debt has been discharged, the debtor has no liability for it anymore. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute. Some types of debt are not discharged. For instance, back taxes, student loan debt, and child support are three types of debt that are probably not going to be discharged even following a successful Chapter 7 petition.

How Chapter 7 Works

Chapter 7 formally begins with the filing of a petition with the bankruptcy court. The bankruptcy court for Wake County is in at the federal courthouse in Raleigh. If you live in Wake County, you will likely file in that court. The bankruptcy court is a federal court, and a filing in the bankruptcy court has legal effect on all civil actions filed against you in state or federal court. So, for instance, if a creditor has filed suit against you in Wake County District or Superior Court (both state courts), your decision to file for bankruptcy will “stay” (or temporarily stop) those creditor suits in state court.

In addition to the actual bankruptcy petition, the debtor must also file:

1) schedules of assets and liabilities, listing all assets and liabilities
2) schedule of current income and exepnditure
3) statement of financial affairs
4) schedule of executory contracts and unexpired leases

In addition, the debtor must also provide the trustee with a copy of the tax return for the most recent year as well as any tax returns filed during the case.

Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts.

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.

Bankruptcy petition court costs include a $245 filing fee, plus additional smaller fees for a total of $303, which must be paid to the clerk of the court upon filing. In certain cases, the court can either extend the time during which the debtor can pay the filing fee, or waive the fee altogether.

The debtor must provide the following information:

1. A list of all creditors and the amount and nature of their claims;
2. The source, amount, and frequency of the debtor’s income;
3. A list of all of the debtor’s property; and
4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Even if the married debtor is filing individually, he or she must gather this information about the spouse as well.

What property is exempt from creditors claims?

Federal law allows debtors to claim certain property as exempt in certain amounts. There is a single federal set of exemptions, or the debtor may opt to adopt North Carolina’s set of exemptions. In either case, those exemptions are used to exclude certain property from the reach of the creditors.

What is an automatic stay?

Filing a petition under chapter 7 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. But filing the petition does not stay certain types of actions, and the stay may be effective only for a short time in some situations. 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.

The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

If you are contacted by a creditor while the stay is in effect, the creditor may be subject to certain sanctions by the Bankruptcy Court. You should keep a log of all contacts made by creditors, especially during this period when the stay is in effect.

Between 21 and 40 days after the petition is filed, the case trustee (described below) will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, and both 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.

The Chapter 7 Discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor.

However, a chapter 7 discharge is subject to many exceptions. Someone filing for bankruptcy should talk to bankruptcy lawyer to discuss how the discharge will affect varies debts. For instance, a discharge is almost always denied for student debt. Those debts will remain obligations, and the debtor will need to continue to make payments on those debts following the end of the bankruptcy case.

In most cases, unless a creditor files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order within 60 to 90 days after the date first set for the meeting of creditors.

About the Author

Damon Chetson is a bankruptcy lawyer Raleigh who helps people filing bankruptcy cases under the United States Bankruptcy Code and helps people defend against abusive and harassing creditors and debt collectors. Damon Chetson is also a debt defense lawyer Raleigh.