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Chapter 7 Bankruptcy Process. What Happens After Filing?
A Chapter 7 Bankruptcy is commenced by filing forms with the appropriate Bankruptcy Court. The main form is a called voluntary petition but there are a LOT of other forms that need to be field to make sure your case is properly filed. All of these forms can now be filed electronically. Where the debtor chooses to file a case depends on where the proper venue for the debtor is. Venue for most consumer cases is going to be where the debtor has lived for the 91 days prior to the filing date. The current filing fee for a Chapter 7 case as of the date of this writing is $335. That fee is typically paid when the case is filed.
The filing of the case creates what the Bankruptcy Code calls an “order for relief” and puts in place what is called an Automatic Stay. The Automatic Stay is a big deal because it’s the automatic stay that prevents creditors from taking any further action against the debtor. Garnishment, foreclosure, repossession, lawsuits, collection activities, harassment related to debts…. It all must stop immediately upon the filing of the case! It’s the Automatic Stay that allows debtors to save their homes, possessions and start the process of moving towards a Fresh Start.
The commencement of the case also creates what is called a “Bankruptcy Estate”. The Bankruptcy Estate is basically all the debtor’s property as of the date of filing the petition. There are a few things that can be pulled back into the estate of the debtor if the debtor becomes entitled to them within 180 days of the filing date, such as an inheritance or life insurance proceeds. So, upon filing the case all of a debtor’s property technically becomes property of the bankruptcy estate. This is a strictly legal entity… nobody shows up to pack all your stuff up because the vast majority of a debtors’ assets can be exempted from the estate (more on exemptions below).
After the case is filed, the Court will assign the panel Trustee. The Trustee will conduct what is a called a “Meeting of Creditors” about a month or so after the case is filed. The Debtor is required to attend this hearing and for most cases that is the only appearance that is required of the debtor. Creditors are allowed to attend the hearing and question the debtor if they would like, but it rarely happens. Most creditor meetings last about five minutes and just involve the Trustee asking the Debtor a handful of questions. The debtor will usually be represented by his or her attorney at the creditor meeting and your lawyer will prepare you for the meeting beforehand. My clients are usually pretty nervous but I always try and relax them. The creditor meeting isn’t a big deal. The Bankruptcy Judge is not there. The judge is not allowed to attend the hearing. It’s fairly casual. For most cases, it really is a check the box thing. But… for some more complicated cases, creditors will show up and question the debtor about assets, transfers of property, payments, etc. The average creditor meeting lasts five minutes… so that should tell you something. Primarily, the Trustee is looking to see if there are any non-exempt assets that belong to the Bankruptcy Estate so the Trustee can liquidate them and provide a payout to the creditors.
There are various deadlines that come due after the creditor meeting. The most important is the deadline for creditors or the UST to object to the debtor’s discharge. They have to have a valid reason to object and I’ll cover those possibilities in another section. Creditors and the UST have 60 days after the creditor meeting to raise the objections. Another deadline is the deadline to object to exemptions that the debtor claimed. I’m going to cover exemptions below but creditors or the Trustee have 30 days after the creditor meeting to object to the claim of exemptions.
Now, in some cases there are enough non-exempt assets that belong to the bankruptcy estate and in those cases the Trustee will open up what is called an “Asset Case.” To open up an asset case there needs to be enough assets to provide a meaningful distribution to the creditors. There’s no magic number to what is “meaningful” and it can vary by Trustee but usually the total value of non-exempt assets needs to be around at least $1500. The debtor is almost always first given the opportunity to buy back the non-exempt assets from the Trustee. (EXAMPLE: Debtor owns a boat – It’s easier for Trustee to just sell it back to the debtor. No need to pick it up, no need to pay for an auctioneer, they’d prefer to sell it back to the debtor than deal with all that stuff.) Debtors can make an offer to buy back a non-exempt asset. ***LAWYER’S TIP*** If you potentially have a lot of non-exempt assets that you don’t want to lose, don’t file Chapter 7. File Chapter 13 and pay the value of those non-exempt assets over 3-5 years and keep them!
If a Chapter 7 case is going to be an asset case, the Trustee will send out a notice to all creditors so that the creditors can file a claim. In this case, the debtor is going to want to keep an eye on the claims that get filed because there may be non-dischargeable debts in the case (taxes, student loans) and if they don’t file claims the debtor will want to file a claim on their behalf so they share in the payout. Claims get paid out in a certain order of priority.
DISCHARGE! It’s important to remember and I’ll repeat it several times… the Discharge is the main goal of a consumer bankruptcy filing. There are other benefits that we’ve discussed, but the Discharge is what you really want. It’s a piece of paper, signed by a federal judge that you’ve never met, that wipes out a lot of debt. Not necessarily all of your debt, but a good portion of it. Your discharge typically comes about four to five months after you file the case and for most cases… That’s the end! The Discharge is typically the finish line of the bankruptcy. The Discharge is your Fresh Start!
Which Debts Can I Wipe Out in a Chapter 7 Bankruptcy?
Let’s talk specifically about creditors. Whether a debt is Discharged… whether a debt goes away or not will depend on the nature of the debt and which Chapter of bankruptcy that you filed under. To start with, assume a debt goes away! Assume that the discharge is going to wipe out a debt. BUT….then you have to get into whether or not a debt is “excepted” from the Discharge. The code gives a list of debts that are “excepted” from discharge, but again, some debts will be discharged in Chapter 13 but then not discharged in a Chapter 7. It can get confusing which is all the more reason to hire a competent bankruptcy attorney.
Specifically the Bankruptcy Code mandates that the following debts survive a Chapter 7 Bankruptcy Discharge: Taxes owed for the last three years; Taxes that were assessed in the 240 days prior to the case being filed; Taxes owed for years where there was no return filed; Any debts incurred via FRAUD (fraud is a broad category and there are a lot of different fact patters that can fall under the fraud umbrella); Unlisted debts (although in a no asset case even unlisted debts can be discharged in some instances); Domestic Support Obligations (child support, alimony); Willful or malicious injury by the debtor to another or another’s property; Court fines and fees; STUDENT LOANS; Injury to another while operating a vehicle while intoxicated; Restitution; Court ordered property settlement agreements via divorce decree; Post-petition HOA fees. There are a few others but those are the main ones and the obvious major debts that we see surviving a Chapter 7 are child support (as it should), taxes and student loans. FRAUD is a big issue and I’m going to cover that in another section. It’s important to note that most of these debts are automatically excepted from discharge which means they survive the bankruptcy without the creditor needing to take any action. However, with some debts, specifically the false pretenses, fraud or false financial statement, the creditor needs to raise the issue and contest the dischargeability of the debt and ultimately prevail on the issue for the debt to survive. The creditor has sixty days from the creditor meeting to raise the issue. The main debts that people walk away from are the credit cards, medical bills, pay day loans, lines of credit, repo deficiency, foreclosure deficiency, misc collections for retail cards, etc.
Chapter 7 Bankruptcy Discharge!
Again, the final step to a Chapter 7 case is typically the Discharge. The Discharge is the finish line that you are trying to get to when you file for bankruptcy. The Discharge is the Order that wipes out the debt. The Discharge is your FRESH START! Now, before you can get that Discharge, a debtor has to complete a financial management course within 60 days after the creditor meeting. With some limited exceptions, you are not eligible for a Discharge unless you complete the class. It’s done on the internet or over the phone. It takes about an hour… not a big deal to complete but a big deal if you don’t.
If a creditor timely objects to their debt being discharged that lawsuit can go forward and will continue even after a Discharge is entered. The litigation related to the dischargeability of that debt will continue past the Discharge Order entering.
Once the Discharge Order enters… for many cases that is it. If it’s a no asset case, the case will then close shortly after Discharge and there’s nothing else to do. If it’s an asset case, the Trustee will still need to administer the assets of the estate. It’s very important that if the debtor enters into an agreement with the Trustee to turn over assets (often times it can be part of your tax refund) that the debtor follows through. Often times the debtor is supposed to turn these assets over after the Discharge enters. If the debtor doesn’t follow through, the Discharge can actually be revoked. If you have a Discharge revoked…you can NEVER get out of the debt in a subsequent bankruptcy.
Another thing to remember is that there are certain types of assets that a debtor can come into, after the bankruptcy is filed, that can be pulled back into the bankruptcy estate. If you come into an inheritance, property settlement from a divorce or life insurance proceeds within 180 days of the filing of the case…those assets can be pulled back into the case and become property of the estate, even if they are received after the filing and even if they are received after the discharge.
As previously mentioned, individual creditors can object to their debts being discharged… the most common objection being false pretenses, fraud or false financial statement. I’m going to cover those issues in more detail in the litigation section. Also, the UST, panel Trustee or a creditor can object to the debtor getting a discharge at all. It’s rare, but it can happen. The most common reason this might happen is if the debtor has intentionally transferred, concealed or destroyed assets to prevent them from being turned over to the creditors. If a debtor knowingly makes false statements in connection with the bankruptcy case the debtor can be denied a Discharge. You can’t come into the bankruptcy system seeking relief and at the same absolutely disrespect the system and it’s rules and processes. Bankruptcy isn’t a cafeteria plan where you pick and choose what you want and disregard the rest.
For secured debts the discharge can be a bit confusing. The Discharge eliminates the personal liability that a debtor has against secured property but the lien that the creditor has survives the discharge (unless the lien was avoided, modified or redeemed). For example, lets say a debtor is buying a house and has a mortgage. That debtor can discharge his or her personal liability in a Chapter 7. Technically, the debtor doesn’t owe the mortgage company. The personal liability (typically called a promissory note) is Discharged in the bankruptcy. BUT, the lien the mortgage company has against the house is still valid. If the debtor doesn’t continue to pay the mortgage company, the mortgage company can still enforce the lien and eventually take the house back. There is no free house or free car in bankruptcy!
There’s also a section in the Bankruptcy Code that states the Discharge also operates as an injunction against any act to collect on a debt that was discharged. If a creditor violates the discharge injunction that is considered contempt and a debtor can be awarded damages and fees against the creditor for such actions.