How about a brief overview of Chapter 7?

Chapter 7 is often referred to as a “straight” bankruptcy. It is located at 11 U.S.C. § 701 – 784 of the Bankruptcy Code. The official title of Chapter 7 is “Liquidation.” This is because a trustee is assigned whose job it is to “liquidate” a debtor’s property (selling it for cash) and then distributing the proceeds to creditors. In reality, only a very small percentage of cases ever result in liquidation of assets. In the vast majority of cases, the trustee quickly determines that it is a no-asset case (meaning there are no assets for the benefit of creditors). It is important to note that, even in a “no-asset” case, a debtor may have substantial "exempt" assets. Most of the time, debtors are surprised to find just how much they are permitted to keep under the law.

Chapter 7 debtors whose debts are primarily consumer debts are subject to a “means test.” The means test is designed to determine whether the case should be permitted to proceed under chapter 7 or whether a presumption of abuse arises which may require the debtor to convert the case to a Chapter 11/13 or to dismiss the case altogether. The means test is essentially an exercise to determine if the amount of a debtor’s income exceeds a certain threshold amount compared to authorized expenses, family size, secured debt, priority debt such as taxes and child support, and a host of other factors. It is VERY complicated and a thorough analysis may be required to determine if someone with high income can still pass the means test. The simple descriptions of the means test found all over the Internet are often too simplified to do it justice. Several examples of the means test can be found here.

Once it is determined by the attorney and client to go forward in a Chapter 7, the case is filed with the Bankruptcy Court. The court presently charges a fee of $299 just to file the Chapter 7 case. A filing consists of multiple documents numbering anywhere from 40 to 50 pages in total length. These documents usually include the a) Petition (which initiates the bankruptcy), b) a set of documents called “schedules” which describe the assets/property, the creditors/liabilities, the income and expenses of the debtor, c) Statement of Current Monthly Income and Means Test Calculation, d) Statement of Social Security Number, e) Statement of Intention (relative to secured property and contracts), f) Creditor Matrix, g) Disclosure of Compensation for the Attorney (amount changes in every case, depending on the complexity and other factors), h) Payment Advices and i) Certificate of Credit Counseling. I have prepared exemplars of these documents taken from a real case. I have merely changed some of the identifying information, account numbers and some creditor names in the interests of privacy. Just click on the documents to view.

The court will schedule a “meeting of creditors” about 30 days after the bankruptcy case is filed. Bankruptcy professionals refer to the meeting as the 341 meeting (after 11 U.S.C. § 341, the bankruptcy code provision which requires it.) It is very rare that a creditor actually appears at such a meeting. For the most part, institutional credit card creditors, medical providers, etc., are not interested in wasting their time at such a meeting. Rather, in the vast majority of bankruptcy cases, the 341 meeting consists of the trustee assigned in the case swearing the debtor in, inquiring as to whether to documents filed with the court are true, and whether there have been any changes since the petition was filed (i.e., landed a job and now rolling in $$$, for example). If a trustee knows the attorney does quality work and that the documents speak for themselves, this meeting often goes much faster. Sometimes, there are cases with assets or potential assets of interest to a trustee. Such assets might include property assets that exceed the amount that can be claimed as exempt, law suits that the debtor may have the right to, imminent inheritances, assets that were transferred without sufficient consideration (in certain circumstances, the trustee is permitted to recover assets fraudulently transferred – a parent giving a house to a child without the child have paid fair value is one example). In these types of cases, the trustee may have questions regarding the issue. Sometimes, a representative from the office of the United States Trustee will have questions. That office is particularly interested in ensuring that a debtor meets the criteria for filing a Chapter 7 and may have questions regarding expenses, income, etc.

The purpose of filing a chapter 7 case is to obtain a discharge of certain kinds of debts. Basically, the discharge is a federal injunction which prevents a creditor from taking any action to collect a debt (lawsuits, phone calls, letters to your mother, etc.) The “discharge” provisions of the bankruptcy code are found at 11 U.S.C. § 524. The discharge usually happens automatically, about 90 days after the case is filed. A debtor must complete an approved debtor education course in order to receive a discharge. We sometimes refer to the pre-bankruptcy credit counseling requirement as the “ticket into” bankruptcy, and the post- filing debtor education course as the “ticket out of” bankruptcy.

A discharge does not operate against all debts. The kind of debts that most often automatically survive the discharge are: recent taxes, student loans, debts incurred to pay nondischargeable taxes, domestic support (child support) and property settlement obligations, most fines, penalties, forfeitures, and criminal restitution obligations, certain debts which were not properly listed in your bankruptcy papers (note: even debts to omitted creditors are usually discharged in the ordinary no- asset chapter 7 case, this presents an area of confusion for many people), and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs.

Also, if a creditor can prove that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the bankruptcy court may determine that the debt is not discharged (these require an affirmative lawsuit in the bankruptcy court). The “exceptions to discharge” (i.e., those debts which survive a bankruptcy) are found in 11 U.S.C. § 523 of the bankruptcy code.

Finally, there are certain bad acts which will result in the denial of a discharge. You sign your bankruptcy documents under penalty of perjury. These are complicated sets of documents and innocent mistakes will not result in a denial. However, a) knowingly and fraudulently giving false oaths and accounts, b) concealing or destroying documents that could reveal a debtor’s true financial condition, c) hiding assets, or d) doing an act to hinder, delay or defraud a creditor or the trustee, are among the acts that could result in the denial of a discharge. The “denial of discharge” provisions are found in 11 U.S.C. § 727 of the bankruptcy code.