Chapter 7 is known as liquidation bankruptcy. The debtor must turn his or her nonexempt property 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 obeys the orders and rules of the court.
In this State a debtor is allowed to exempt no more than $12,000 worth of personal property including equity in cars and other personal property. The debtor is also entitled to a homestead exemption to exempt equity in a principal residence in the amount of $21,625, is also allowed to exempt a total of $5,000 for tools used in work or profession, and is typically allowed an unlimited exemption for IRS recognized retirement plans such as a 401 k, IRA, SEP IRA, Roth IRA, 457 (a & b) and 403 plans. Other types of retirement plans are also exempt but again you should ask your lawyer to see whether your specific retirement account is exempt.
It 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 ever again. A debt that is discharged is one that the debtor is released from and does not have to repay. Some debts, however, are not dischargeable under Chapter 7, and some persons are not eligible for a Chapter 7 discharge.
All debts of any kind or amount, including out-of-state debts, are dischargeable under Chapter 7 except those listed below. The following types of debts are not dischargeable under Chapter 7:
Any person who resides in, who does business in, or who 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. In order to file in Maryland you must have lived in this State for the greater part of the last 180 days.
A person who is not eligible for a Chapter 7 discharge, a person who has substantial debts that are not dischargeable under Chapter 7, and 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. Although it is not a legal requirement, some experts say that a person’s dischargeable debts should exceed the value of his or her nonexempt assets by at least a thousand dollars before it is wise to file under the chapter.
The answer 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 apply:
Yes. A financial counselor has no legal right to prevent anyone from filing under Chapter 7.
It will usually worsen it, if that is possible. Still, if a person’s credit rating is bad to begin with, then many times the Chapter 7 Case actually will help to improve a person’s creditworthiness. Some financial institutions openly solicit business from persons who have recently filed under Chapter 7, apparently because it will be a least eight years before they can again file under Chapter 7 and they know they can collect from you without you being able to file another Chapter 7 Case to eliminate them. 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. back to questions
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.
Employers are not usually notified when a Chapter 7 case is filed. However, in rare cases the trustee in a Chapter 7 case may contact an employer if he is needing information as to the status of the debtor’s wages or salary at the time the case was filed.
No. Filing under Chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
Usually not. 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 (or unsecured) exempt property in a Chapter 7 case up to the established exemption limits.
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under Chapter 7. It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses (including driver’s license), permits, and similar grants because that person has filed under chapter 7.
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.
The filing fee is $306.00 for either a single or a joint case. The fee charged by the debtor’s lawyer for handling the Chapter 7 case is in addition to the filing fee and must be paid prior to the filing of a Chapter 7 Case as the attorney cannot become a creditor of the debtor.
In the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the greater portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States District Court. There are 2 Federal Courts in Maryland, the Norther Division in Baltimore City, and the Southern Division in Greenbelt.
The first court appearance is usually about a month after the case is filed for a hearing called the “meeting of creditors.” At this hearing the debtor is put under oath and questioned about his or her debts and assets by the hearing officer or trustee. In most Chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the debtor. This is typically the only meeting that you will have.
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.
Typically 8-10 weeks after the meeting of creditors, the Court issues a Discharge Order which acts as a permanent injunction against any and all collection activities regarding any and all of the debts that have been included within your bankruptcy case. Sometimes the trustee may require that additional documents be sent to him regarding for example, mortgage statements, pay stubs, deeds to homes, or titles to vehicles. It is important that the debtor timely comply with any of the trustee’s requests. But remember, within 45 days of the meeting, the debtor must complete a financial management course and be issued a certificate of completion that then gets filed with the Court in order for you to receive your discharge.
The trustee is an officer of the court, appointed to gather the debtor’s nonexempt property, convert it to cash, and pay what are called dividends to creditors. In addition, the trustee has certain administrative duties in a Chapter 7 case, and is the officer in charge of seeing to it 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.
It is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay dividends to creditors. The trustee’s fee is usually $60.00 per case plus a percentage of the value of any assets collected from the debtor.
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 will not receive a discharge.
If, from the debtor’s chapter 7 forms, it appears that the debtor has no nonexempt property, then the trustee files a report of no distribution and your case proceeds its way to discharge and closing of the 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 its secured property when the debtor is either not current on his loan obligations to the secured creditor as of the date of the filing of the case or does not continue with payments after the filing of a case. A secured creditor must prove the validity of its mortgage or lien and obtain a court order before repossessing or foreclosing on secured property.
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 the debtor’s nonexempt property and converted it to cash, and when the court has ruled on the trustee’s objections, the trustee will distribute the funds (it’s called paying 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, 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 to the remaining unsecured creditors.
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. Certain deadlines are imposed on the enforcement of these rights by the debtor.
In a Chapter 7 case the debtor is required to turn over to the trustee only the nonexempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets of consumer debtors are liquid in nature and tend to vary in size or amount from day to day. It is wise, therefore, for the debtor to engage in some negative estate planning so as to minimize the value or amount of these liquid assets, and the assets that the trustee will be most likely to look for, are the following :
Unless there is an exemption that applies to property of any kind, the debtor should take steps to insure that the value of each of these assets is low as possible on the day and hour that the chapter 7 case is filed. By doing this the debtor will not be cheating or acting illegally; the debtor will simply be using the law to his or her best advantage, much the same as an investor who takes advantage of tax laws.
Sporting Goods. If the debtor owns guns, fishing gear, skis, cameras, or similar items of value that are not exempt, he or she will later have to turn them, or their cash equivalent, over to the trustee.
If, within 20 days after a Chapter 7 case is filed, the debtor furnishes a utility company with a deposit or other security to insure the payment of future utility services, 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.
Usually by mail. 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.
The debtor should immediately notify the bankruptcy court in writing of the new address. Because most communication between a debtor and the bankruptcy court are by mail, it is important that the bankruptcy court always have 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.
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 that a debtor is legally obligated to repay after filing under Chapter 7 is one for which the debtor and the creditor have entered into what is called 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 negotiation the reaffirmation agreement, the lawyer must file the agreement and a 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, or has agreed in writing to repay the debt, or has waived the discharge of the debt.
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 filed under chapter 7, the creditor may later attempt to collect the debt from the nonfiling spouse, even if he or she has no income or assets.
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 from the debtor. 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 a lawyer. If a creditors 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, which could be costly to the debtor.
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. The only exception to this rule is in community property states where the spouse of a debtor may also be released from certain community debts.
The debtor’s lawyer performs the following functions in the chapter 7 case of a typical consumer debtor:
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. Baltimore bankruptcy attorneys must collect all of their fee before the case is filed because the attorney cannot become a creditor of the person filing the Chapter 7 Bankruptcy Case.
Contact Belsky, Weinberg & Horowitz, LLC at (410) 234-0100 if you have additional questions.