Chapter 7 Bankruptcy (Straight Liquidation)

If you are an individual (not available to partnerships or corporations) facing bankruptcy, you could qualify for one of the following cases: Chapter 7 filing (straight liquidation) or Chapter 13 Bankruptcy filing (debt consolidation).

What is Chapter 7 Bankruptcy?

Filing a Chapter 7 bankruptcy focuses on the discharge of debts by allowing an individual to gain a “fresh start.” A bankruptcy discharge, in addition to releasing a debtor from all personal liability from, prevents creditors from taking any further action against the debtor or his property in an effort to collect the debt. Most chapter 7 bankruptcy cases, approximately 99 percent, result in a discharge but it is not always guaranteed. It is important to remember a discharge does not eradicate liens on property.

In some cases filing chapter 7 bankruptcy may be dismissed as an abusive filing if the court finds an individual has the ability to pay a meaningful dividend to unsecured creditors in a chapter 13 case.

The Process

The first step in filing for a chapter 7 bankruptcy case is to file a petition with the bankruptcy court in the district where the individual lives or where the business debtor has its primary place of business or its assets. The debtor is required to file schedules of assets and liabilities, including current income and expenses, and a statement of financial dealings. A married couple may file a joint petition and pay one filling fee, or a spouse may choose to file individually.

Filing a petition "automatically stays" most creditor actions against the debtor and the debtor's property. This stay arises by operation of law and requires no judicial action. While the stay is in effect, creditors cannot initiate or continue lawsuits, repossessions, or wage garnishments.

In the filing process, a debtor completes a list of exempt property; this allows the individual to protect certain assets from creditor claims because this property is exempt under federal bankruptcy law or the laws of the debtor's state. Married couples may only claim one set of exemptions. When a case is filed, a bankruptcy trustee is appointed to observe and confirm the accuracy of the debtor's bankruptcy papers and to identify assets which are not exempt. The trustee sells the non-exempt assets which have value and distributes the net proceeds to the creditors. If an asset has a loan against it, the debtor can keep the asset if the equity is exempt.

The bankruptcy court clerk is in charge of issuing the discharge, usually after 60 days have passed from the date of the creditors meeting. A copy of the discharge is mailed to the debtor and all the creditors listed in the debtor's schedules.

Opposing a Discharge

A creditor has two options to oppose the discharge: one is to file a complaint opposing to the debtor's bankruptcy discharge; or secondly, to file a complaint to verify if the creditor's debt is excepted from the discharge. A creditor may pursue one or both of these adversary remedies by filing a complaint with the bankruptcy court 60 days from the first date of the creditors meeting, unless extended by court order. If a creditor or trustee objects to a discharge they have the burden of proving the case, therefore it is rare, in a chapter 7 case, to object a bankruptcy discharge.

A discharge may be denied, or if granted may be revoked by the trustee, creditor or the U.S. Trustee within a year, for the following reasons:

• the debtor failed to keep and provide sufficient financial records
• the debtor failed to explain adequately a loss of assets
• the debtor committed a bankruptcy crime
• the debtor failed to obey a lawful order of the bankruptcy court
• the debtor fraudulently transferred, concealed, or destroyed property that would have been property of the land

In a chapter 7 case certain categories of debt may not be discharged, such as alimony and child support, most taxes, student loans made or guaranteed by a governmental unit, debts for death or personal injury caused by the debtor's operation of a motor vehicle while intoxicated from alcohol or other substances, and debts for criminal restitution orders. The debtor is still responsible for them after the bankruptcy.

Debts for money or property obtained by deception, debts for fraud while acting in a fiduciary capacity, debts for willful and malicious injury to another or to the property of another, and debts arising from a property settlement agreement acquired during or in connection with a divorce will be discharged unless the creditor timely files an opposition. The creditor must file the complaint within 60 days from the first date of the creditors meeting.

Secured debts

Secured creditors hold the right to seize their loan collateral, even after a discharge is granted. The debtor must decide whether to keep the asset. If a debtor returns the collateral, and if a discharge is granted, the debtor will have no further liability to the creditor. A debtor inclined to keep the asset, may “reaffirm” the debt or redeem the property. A reaffirmation is an agreement between the debtor and the creditor in which the debtor promises to pay all or a percentage of the money owed. The reaffirmed debt will still be owed after the discharge. In return, the creditor promises as long as payments are made, to not repossess the property. If the debtor fails to make payments, the creditor may repossess and sell the collateral. Unfortunately, if the sale price is not a sufficient amount to pay off the debt, the debtor will still owe the difference to the creditor.

A debtor inclined to keep the asset, may “reaffirm” the debt or redeem the property. A reaffirmation is an agreement between the debtor and the creditor in which the debtor promises to pay all or a percentage of the money owed. The reaffirmed debt will still be owed after the discharge. In return, the creditor promises as long as payments are made, to not repossess the property. If the debtor fails to make payments, the creditor may repossess and sell the collateral. Unfortunately, if the sale price is not a sufficient amount to pay off the debt, the debtor will still owe the difference to the creditor.