Questions and Answers about Chapter 7 Bankruptcy
1. What is Chapter 7 and how does it work?
Chapter 7 is the part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is the part of the federal laws that deal with bankruptcy. A person who files under Chapter 7 is called a debtor. In a Chapter 7 case, the debtor must turn his or her nonexempt property, if any exists, over to a trustee, who then converts the property to cash and pays the debtor’s creditors. In return, the debtor receives a Chapter 7 discharge if he or she pays the filing fee, is eligible for such a discharge and obeys the orders and rules of the court.
2. What is a Chapter 7 discharge?
A Chapter 7 discharge is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. Some debts, however, are not dischargeable under Chapter 7, and some debtors are not eligible for a Chapter 7 discharge.
3. What debts are not dischargeable under Chapter 7?
All debts of any kind or amount, including out-of-state debts, are dischargeable under chapter 7 except the debts listed below. The following is a list of the most common debts that are not dischargeable under chapter 7:
- Most tax debts and debts that were incurred to pay federal tax debts
- Debts for obtaining money, property, services or credit by means of false pretenses, fraud or a false financial statement, if the creditor files a complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 90 days before the case is filed)
- Debts not listed on the debtor’s Chapter 7 forms
- Debts for fraud, embezzlement or larceny, if the creditor files a complaint in the case
- Debts for alimony, maintenance, support or equitable distribution
- Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the case
- Debts for certain fines or penalties
- Debts for educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents
- Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated
- Debts that were or could have been listed in a previous bankruptcy case in which the debtor did not receive a discharge
4. What persons are not eligible for a Chapter 7 discharge?
Those not eligible for a Chapter 7 discharge include:
- A person who has been granted a discharge in a Chapter 7 case filed within the last eight years
- A person who has been granted a discharge in a Chapter 13 case filed within the last six years, unless 70 percent or more of the unsecured claims were paid off in the Chapter 13 case
- A person who files a waiver of discharge that is approved by the court in the Chapter 7 case
- A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the Chapter 7 case
- A person who conceals, destroys or falsifies records of his or her financial condition or business transactions
- A person who makes false statements or claims in the Chapter 7 case, or who withholds recorded information from the trustee
- A person who fails to satisfactorily explain any loss or deficiency of his or her assets
- A person who refuses to answer questions or obey orders of the bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate or corporation with which he or she is associated
5. What persons are eligible to file under Chapter 7?
Any person who resides in, does business in or has property in the United States may file under Chapter 7, except a person who has been involved in another bankruptcy case that was dismissed within the last 180 days on certain grounds.
6. What persons should not file under Chapter 7?
A person who is not eligible for a Chapter 7 discharge or who has substantial debts that are not dischargeable under Chapter 7 should not file under Chapter 7. In addition, it may not be wise for a person with current income sufficient to repay a substantial portion of his or her debts within a reasonable period to file under Chapter 7 because the court may dismiss the case as constituting an abuse of Chapter 7. Although it is not a legal requirement, some experts say that a Chapter 7 case should not be filed unless a person’s dischargeable debts exceed the value of his or her nonexempt assets by at least $2,000.
7. How much is the Chapter 7 filing fee and when must it be paid?
The filing fee is $299 for either a single or a joint case. The fee charged by the debtor’s attorney for handling the Chapter 7 case is in addition to the filing fee.
8. Where is a Chapter 7 case filed?
A Chapter 7 case is filed in the office of the bankruptcy court clerk in the district where the debtor has resided or maintained a principal place of business for the greatest portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court.
9. May a husband and wife file jointly under Chapter 7?
Yes. A husband and wife may file a joint petition under Chapter 7. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged.
10. Under what conditions should both spouses file under Chapter 7?
Both husband and wife should file if one or more substantial dischargeable debts are owed by both spouses. If both spouses are liable for a substantial debt and only one spouse files under Chapter 7, the creditor may later attempt to collect the debt from the non-filing spouse, even if he or she has no income or assets. In community property states, it may not be necessary for both spouses to file if all substantial dischargeable debts are community debts. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.
11. When should a Chapter 7 case be filed?
The decision to file a Chapter 7 case depends on the status of the debtor’s dischargeable debts, the nature and status of the debtor’s nonexempt assets and the actions taken or threatened to be taken by the debtor’s creditors. The following rules should be followed:
- A debtor should not file under Chapter 7 until all anticipated debts have been incurred because it will be another eight years before he or she is again eligible for a Chapter 7 discharge. For example, a debtor who has incurred substantial medical expenses should not file under Chapter 7 until the illness or injury has either been cured or covered by insurance, as it will do little good to discharge, say, $50,000 of medical debts now and then incur another $50,000 in medical debts in the next few months.
- A debtor should not file under Chapter 7 until the debtor has received all nonexempt assets to which he or she may be entitled. If the debtor is entitled to receive an income tax refund or a similar nonexempt asset in the near future, he or she should not file under Chapter 7 until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will become the property of the trustee.
- A debtor should not file under Chapter 7 if he or she expects to acquire property through inheritance, life insurance or divorce in the next 180 days because the property will have to be turned over to the trustee unless it is exempt.
- If hostile creditor action threatens a debtor’s exempt assets or future income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a Chapter 7 case. (See Question 12 below for more information.) If a creditor has threatened to attach or garnish the debtor’s wages or if a foreclosure action has been instituted against the debtor’s residence, it may be necessary to file a Chapter 7 case immediately in order to protect the debtor’s interest in the property.
12. How does Chapter 7 filing affect collection and other legal proceedings that have been filed against the debtor in other courts?
The filing of a Chapter 7 case automatically stays (stops) virtually all collection and other legal proceedings pending against the debtor except in certain cases involving residential landlord tenant evictions. A few days after a Chapter 7 case is filed, the court mails a notice to all creditors ordering them to refrain from any further action against the debtor. If necessary, this notice may be served earlier by the debtor or the debtor’s attorney. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable to the debtor in damages. Criminal proceedings and actions to collect alimony, maintenance or support from exempt property or property acquired by the debtor after the Chapter 7 case is filed are not affected by the automatic stay. Also, the automatic stay does not protect cosigners and guarantors of the debtor, and a creditor may continue to collect debts of the debtor from those persons after the debtor files a Chapter 7 case.
13. May a person file under Chapter 7 if his or her debts are being administered by a financial counselor?
Yes. A financial counselor has no legal right to prevent anyone from filing under Chapter 7.
14. How does filing under Chapter 7 affect a person’s credit rating?
Filing under Chapter 7 may worsen the debtor's credit rating, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under Chapter 7, apparently because it will be at least six years before they can again file under Chapter 7. If there are compelling reasons for filing under Chapter 7 that are not within the debtor’s control, such as an illness or an injury, some credit-rating agencies may take that into account in rating the debtor’s credit after filing.
15. Are the names of persons who file under Chapter 7 published?
When a Chapter 7 case is filed, it becomes a public record and the name of the debtor may be published by some credit-reporting agencies. However, newspapers do not usually report or publish the names of consumers who file under Chapter 7.
16. Are employers notified of Chapter 7 cases?
Employers are not usually notified when a Chapter 7 case is filed. However, the trustee in a Chapter 7 case may contact an employer fort information as to the status of the debtor’s wages or salary at the time the case was filed. If there are compelling reasons for not informing an employer in a particular case, the trustee should be informed and he or she may be willing to make other arrangements to obtain the necessary information.
17. Does a person lose any legal or civil rights by filing under Chapter 7?
No. Filing under Chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
18. May employers or government agencies discriminate against persons who file under Chapter 7?
No. It is illegal for either private or government employers to discriminate against a person as to employment because that person filed under Chapter 7. It is also illegal for local, state or federal government units to discriminate against a person as to the granting of licenses (including a driver’s license), permits, student loans and similar grants because that person filed under Chapter 7.
19. Does a person lose all of his or her property by filing under Chapter 7?
A person usually does not lose all of his or her property by filing for Chapter 7 bankruptcy. Certain property is exempt and cannot be taken by creditors, unless it is encumbered by a valid mortgage or lien. A debtor is usually allowed to retain his or her unencumbered (unsecured) exempt property in a Chapter 7 case. A debtor may also be allowed to retain certain encumbered exempt property. (See Question 28 below for more information.) Depending on the law of the local state, property that is exempt in a Chapter 7 case may be either property that is exempt under state law or property that is exempt under the Bankruptcy Code.
20. When must a debtor appear in court in a Chapter 7 case and what happens there?
The first court appearance is for a hearing called the meeting of creditors. This hearing usually takes place about a month after the case is filed. At this hearing, the debtor is questioned under oath by the hearing officer or trustee about his or her debts and assets. In most Chapter 7 consumer cases, creditors do not appear in court. Any creditor that does appear is usually allowed to question the debtor. If the bankruptcy court decides not to grant the debtor a discharge or if the debtor wishes to reaffirm a debt and is not represented by an attorney, there will be another hearing about three months later that the debtor will have to attend.
21. What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the debtor regarding the debtor’s property, and the court may issue certain orders to the debtor. These orders are sent by mail and may require the debtor to turn certain property over to the trustee or provide the trustee with certain information. If the debtor fails to comply with these orders, the case may be dismissed and the debtor may be denied a discharge.
22. What is a trustee in a Chapter 7 case, and what does he or she do?
The trustee is an officer of the court, appointed to examine the debtor, collect the debtor’s nonexempt property and pay the expenses of the estate and the claims of creditors. In addition, the trustee has certain administrative duties in a Chapter 7 case and is the officer in charge of seeing that the debtor performs the required duties in the case. A trustee is appointed in a Chapter 7 case even if the debtor has no nonexempt property.
23. What are the debtor’s responsibilities to the trustee?
The law requires the debtor to cooperate with the trustee in the administration of a Chapter 7 case, including the collection by the trustee of the debtor’s nonexempt property. If the debtor does not cooperate with the trustee, the Chapter 7 case may be dismissed and the debtor may be denied a discharge.
24. What happens to the property a debtor turns over to the trustee?
Property turned over to a trustee is usually converted to cash, which is then used to pay the fees and expenses of the trustee and the claims of unsecured creditors. The trustee’s fee is usually $60 plus a percentage of the amount collected from the debtor.
25. What if the debtor has no nonexempt property for the trustee to collect?
If, from the debtor’s Chapter 7 forms, it appears that the debtor has no nonexempt property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay, that it is unnecessary for them to file claims and that they will be given an opportunity to file claims if assets are later discovered. This type of case is referred to as a no-asset case. Approximately one-half of all Chapter 7 cases are no-asset cases.
26. How are secured creditors dealt with in a Chapter 7 case?
Secured creditors are creditors with valid mortgages or liens against property of the debtor. Property of the debtor that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose secured property, unless the value of the secured property greatly exceeds the amount owed to the creditor. The claim of a secured creditor is called a secured claim. These claims must be collected from or enforced against secured property. Secured claims are not paid by the trustee. A secured creditor must prove the validity of its mortgage or lien and obtain a court order before repossessing or foreclosing on secured property. The debtor should not turn over any property over to a secured creditor until a court order has been obtained. The debtor may be permitted to retain or redeem certain types of secured personal property. (See Question 28 below for more information.)
27. How are unsecured creditors dealt with in a Chapter 7 case?
An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the first date set for the meeting of creditors. The trustee will examine these claims and file objections to those deemed improper. When the trustee has collected all of the debtor’s nonexempt property and converted it to cash and when the court has ruled on the trustee’s objections to improper claims, the trustee will distribute the funds in the form of dividends to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Administrative expenses, claims for wages, salaries and contributions to employee benefit plans, claims for the refund of certain deposits, claims for alimony, maintenance support and tax claims are given priority, in that order, in the payment of dividends by the trustee. If there are funds remaining after the payment of these priority claims, they are distributed pro rata (in proportion) to the remaining unsecured creditors.
28. What secured property may a debtor retain or redeem in a Chapter 7 case?
A debtor may retain and redeem certain secured personal and household property, such as household furniture, appliances and goods, wearing apparel and tools of trade, without payment to the secured creditor if the property is exempt and if the mortgage or lien against the property was not incurred for the purpose of financing the purchase of the property. A debtor may also retain and redeem without payment to the secured creditor any secured property that is both exempt and subject only to a judgment lien. Finally, a debtor may redeem certain exempt personal, family or household property by paying to the secured creditor an amount equal to the value of the property, regardless of how much is owed to the creditor. Deadlines are imposed on the enforcement of these rights by the debtor during the bankruptcy case.
29. May a utility company refuse to provide service to a debtor if the company’s utility bill is discharged under Chapter 7?
If the debtor furnishes a utility company with a deposit or other security to insure the payment of future utility services within 20 days after a Chapter 7 case is filed, it is illegal for a utility company to refuse to provide future utility service to the debtor, or to otherwise discriminate against the debtor, if its bill for past utility services is discharged in the Chapter 7 case.
30. What should the debtor do if he or she moves before the Chapter 7 case is closed?
If a debtor moves, he or she should immediately notify the bankruptcy court in writing of the new address. Because most communications between a debtor and the bankruptcy court are by mail, it is important that the bankruptcy court always know the debtor’s current address. Otherwise, the debtor may fail to receive important notices and the Chapter 7 case may be dismissed. Many courts have change-of-address forms for debtors to use when they move, and the debtor should obtain one if a move is planned.
31. How is a debtor notified when his or her discharge has been granted?
A debtor is usually notified by mail when a discharge has been granted. Most courts send a form called Discharge of Debtor to the debtor and to all creditors. This form is a copy of the court order discharging the debtor from his or her dischargeable debts, and it serves as notice that the debtor’s discharge has been granted. It is usually mailed about four months after a Chapter 7 case is filed.
32. What if a debtor wishes to repay a dischargeable debt?
A debtor may repay as many dischargeable debts as desired after filing under Chapter 7. By repaying one creditor, a debtor does not become legally obligated to repay any other creditor. The only dischargeable debt a debtor is legally obligated to repay is one for which the debtor and the creditor have signed a reaffirmation agreement. If the debtor was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid. If the debtor was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and their statement with the court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, a debtor is not legally obligated to repay the debt, even if the debtor has made a payment on the debt since filing under Chapter 7, has agreed in writing to repay the debt or has waived the discharge of the debt.
33. How long does a Chapter 7 case last?
A Chapter 7 case begins with the filing of the case and ends with the closing of the case by the court. If the debtor has no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the debtor receives his or her discharge, which is usually about four months after the case is filed. If the debtor has nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most consumer cases with assets last about six months, but some last considerably longer.
34. What should a person do if a creditor later attempts to collect a debt that was discharged under Chapter 7?
When a Chapter 7 discharge is granted, the court enters an order prohibiting the debtor’s creditors from later attempting to collect any discharged debt. Any creditor who violates this court order may be held in contempt of court and may be liable to the debtor in damages. If a creditor later attempts to collect a discharged debt from the debtor, the debtor should give the creditor a copy of the order of discharge and inform the creditor in writing that the debt has been discharged under Chapter 7. If the creditor persists, the debtor should contact an attorney. If a creditor files a lawsuit against the debtor on a discharged debt, it is important not to ignore the matter because, even though a judgment entered against the debtor on a discharged debt can later be voided, voiding the judgment may require the services of an attorney. This can be costly to the debtor.
35. How does a Chapter 7 discharge affect the liability of cosigners and other parties who may be liable to a creditor on a discharged debt?
A Chapter 7 discharge releases only the debtor. The liability of any other party on a debt is not affected by a Chapter 7 discharge. Therefore, a person who has cosigned or guaranteed a debt for the debtor is still liable for the debt regardless of the debtor’s Chapter 7 discharge. The only exception to this rule is in community property states where the spouse of a debtor is released from certain community debts by the debtor’s Chapter 7 discharge.
36. What is the role of the attorney for a consumer debtor in a Chapter 7 case?
In a typical consumer debtor Chapter 7 case, the debtor’s attorney usually:
- Analyzes the amount and nature of the debts owed by the debtor and determines the best remedy for the debtor’s financial problems
- Advises the debtor of the relief available under both Chapter 7 and Chapter 13 of the Bankruptcy Code and of the benefits of proceeding under each chapter
- Assembles the information and data necessary to prepare and file the Chapter 7 forms
- Prepares the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court
- Assists the debtor in arranging his or her assets so as to enable the debtor to retain as many of the assets as possible after the Chapter 7 case
- Files the Chapter 7 petitions, schedules, statements and other forms with the bankruptcy court and, if necessary, notifies certain creditors of the commencement of the case
- If necessary, assists the debtor in reaffirming certain debts, redeeming personal property, setting aside mortgages or liens against exempt property and otherwise carries out the matters set forth in the debtor’s statement of intention
- Attends the meeting of creditors with the debtor and appears with the debtor at any other hearings that may be held in the case
- If necessary, prepares and files amended schedules, statements and other documents with the bankruptcy court in order to protect the rights of the debtor
- If necessary, assists the debtor in overcoming obstacles that may arise to the granting of a Chapter 7 discharge
The fee paid, or agreed to be paid, to an attorney representing a debtor in a Chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Many attorneys collect all or most of their fee before the case is filed.
37. What if a debtor’s bankruptcy forms are not prepared by an attorney?
It is not legally required that a debtor’s bankruptcy forms be prepared by or under the direction of an attorney. However, it is difficult to properly prepare bankruptcy forms without giving legal advice to the debtor. Because many non-attorney bankruptcy preparers attempt to give legal advice to debtors without having the legal training and knowledge necessary to give such advice, Congress passed an amendment to the Bankruptcy Code that deals with non-attorney bankruptcy preparers. This law requires all non-attorney bankruptcy preparers to sign and print their names on the documents they prepare and to give copies of all filed documents to the debtor. This law also provides that if a bankruptcy case is later dismissed because of fraud or incompetence of the preparer, or if the preparer commits an inappropriate or deceptive act, the debtor may recover actual damages from the preparer, plus statutory damages or twice the amount paid to the preparer — whichever is greater — and attorney fees and costs. A bankruptcy preparer may also be enjoined from further work in the bankruptcy preparation business and may be criminally prosecuted if a bankruptcy case is dismissed because the he or she disregarded the requirements of bankruptcy laws or rules.