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What is Chapter 7 Bankruptcy? Chapter 7 Bankruptcy also called "straight" or "liquidation" bankruptcy, is a way to legally discharge which is a legal term meaning wipe out or cancel your debts. When a person or married couple file a Chapter 7 bankruptcy, they are basically seeking a fresh start financially. Most of my clients complain that creditors and collection agencies are calling them at home and at work, utility companies have shut them off or are threatening to do so, or perhaps their wages are being garnished.  Filing a Chapter 7 bankruptcy can stop all of these dead in there tracks. Basically filing a Chapter 7 is accomplished by filing papers with the United States Bankruptcy Court asking for protection.  As soon as your case is filed (stamped with the date and time) an Order for relief is entered.  The Order for relief creates the "automatic stay" described in more detail below. Most people who file a Chapter 7 are seeking to wipe out debts like credit cards, medical bills, utility bills, bank and credit union loans, car loans for which the car was repossessed, in an accident with no insurance or just  broke down before it was paid off. A Chapter 7 discharge will wipe out or extinguish all of these debts. Chapter 7 involves an exchange between the person filing and the US Trustee, whose job it is to gather any non-exempt property of the debtor for the benefit of creditors. The person filing the Chapter 7 in exchange for getting all of their dischargeable debts wiped out, must disclose all of their assets (things and rights they own) to the Trustee.  In the vast majority of Chapter 7 cases that are filed, nothing is taken and sold by the Trustee, most cases are no asset cases. Remember, Chapter 7 is designed to leave you with a fresh start.  This means that the law is very generous in what you are allowed to keep or claim exempt. The most important thing is to list or disclose everything you own in your  bankruptcy petition. Most, but not all debts are dischargeable in Chapter 7 bankruptcy. Chapter 7 gives you a fresh start on your economic life within certain limitations. A person cannot file a Chapter 7 more than once every 6 years and certain types of debts are not dischargeable.  Student loans, most taxes, alimony and child support and debts for death or personal injury caused as a result of drunk driving or other intoxication are not dischargeable as a matter of public policy. Also, some people may have used credit in a fraudulent manner. For example, Chapter 7 bankruptcy is not for people who run up their credit cards with the intent of shortly thereafter going into bankruptcy. Chapter 7 bankruptcy is also not for people who charge much more than they could ever afford to pay just to discharge those debts. Moreover, it is not for anyone who basically acts in a dishonest or fraudulent manner. It is for the honest debtors, who, for circumstances they cannot control, find themselves overwhelmed in debt. Chapter 7 is also generally not appropriate for someone trying to save his house from a mortgage foreclosure. Generally, if you are about to lose your home for any reason, a Chapter 13 should be filed. Further, Chapter 7 is not for someone with the ability to make some reasonable payment on a month basis to unsecured creditors. For instance, if your budget would allow you to pay even ten cents on a dollar to creditors, you should generally file a Chapter 13 instead. See attorney Walter Metzen for a professional analysis of your financial situation and a thorough discussion of which Chapter may be best for you. What is the "automatic stay"?  THE AUTOMATIC STAY IS THE COURT ORDER THAT STOPS CREDITORS IMMEDIATELY, even if they don't yet know you filed bankruptcy. The automatic stay is one of the most powerful tools you as the debtor get when you file your bankruptcy petition. It happens automatically upon the filing of your case either Chapter 7 or Chapter 13.  It is so powerful that it can stop a foreclosure, a car repossession a utility shut-off and even a wage garnishment. I have even had the repo man return a car that he took from my client because a bankruptcy had been filed even though the repo man did not know. Most creditors who are regularly in the business of lending money know and respect the power of the automatic stay in bankruptcy and will abide by the law. The automatic stay is an automatic injunction against most continued collection activities. The automatic stay goes into effect as soon as your bankruptcy case is filed with the bankruptcy court. The automatic stay is important because it protects you from continued harassment from your creditors. The automatic stay applies to virtually everyone and stops virtually all activities that are calculated to collect money from you, or make it uncomfortable or embarrassing on you so that you want to pay. It stops everyone except for criminal courts demanding fines or restitution. It does not get you out of paying child support. It does not get you out of spousal support. It does not stop you for being arrested for not paying a fine. It does not give you criminal immunity. The automatic stay is "automatic". The automatic stay goes into effect immediately upon the filing of your bankruptcy petition.  I owe a lot of money to DTE Energy or SBC Ameritech, will they shut off my utilities if I file a bankruptcy? No, a utility may not deny you service because you exercised your constitutional privilege to file a bankruptcy petition seeking relief from your creditors. In fact, I have filed many cases for individuals or couples for the only reason that they have huge utility bills and have been shut-off. The filing of a Chapter 7 will wipe-out all the past debt owed to the utility and the company has to start you fresh as if you just moved to Detroit from Timbuktu.  The utility companies by law cannot deny you service simply because you filed bankruptcy.  The law recognizes them as a public monopoly because you can't simply go to Meijer's and buy electricity or natural gas for your home. The way it works is this: You file your bankruptcy petition, being sure to list whichever utility company you owe on your list of creditors (schedule F and Matrix).  Approximately 10 days to 2 weeks later, the Bankruptcy Court mails out notices to all of the creditors you listed in your case.  All of the utility companies regularly get bankruptcy notice and most even have a bankruptcy department.  The company looks up all the accounts in your name, sometimes using a combination of your name and social security number.  Any and all accounts in your name are then wiped out and started fresh back to the date your petition was filed. Note: You are responsible for paying the new utility debts you incur after filing your bankruptcy (either Chapter 7 or 13).  If your utilities were cut off prior to your filing bankruptcy, tell my office and a fax will be sent to the utility company with proof of your filing and instructions asking them to restore service.  They will always restore the service unless it was turned on illegally (which is fraud and may not be dischargeable) or it turns out that the utility service was in some other person's name (who did not file bankruptcy). Your utility company may not discriminate against you because you have filed a bankruptcy case. This means they must continue supplying you with service and may not cut you off. Please note that your utility company will probably request a deposit from you for continued service. The deposit remains your money, but is held by the utility company as security for service. The deposit is usually equal to approximately twice your average monthly bill. If you owe no money to your utility company and do not list them as a debt, then utility companies may waive the requirement for a deposit. Note: Some services such as cable tv, internet or cell phone services are not considered utilities since you can go to another service provider (i.e. they are not a monopoly) or they are not considered essential utilities (yet). How quickly can I or we (joint husband and wife cases) file a Chapter 7 Bankruptcy ? Very quickly depending on your situation. I have literally filed a bankruptcy case within the same hour that the person came to see me.  This was an emergency situation to prevent the foreclosure of the person's home.  Filing the bankruptcy before the sheriff's sale was concluded stopped the sale and gave the debtor a breathing spell. Usually depending on your situation and the difficulty of your case, I prepare your case and file it within a matter of a few weeks of your initial consultation. In cases where a person's wages are being garnished, I will file the case the same week.  How quickly the case gets filed also depends on you. All documents required must be supplied to my office and all Court and attorney fees required must be paid before the filing. My office generally files cases every week. If your case requires an urgent filing, please come see me in my office to make arrangements to get your automatic stay in place as soon as possible. I'm married and want to file alone. How will my filing Bankruptcy affect my spouse? There is no requirement to file jointly if you are married.  Many of my cases are filed for only one spouse of the married couple. If you are married and need to file by yourself the other spouse's credit report is usually not affected, because it is separate and distinct from yours, especially if there are no joint creditors.  If both husband and wife are joint on a debt (such as a credit card or medical bill), I would normally recommend a joint bankruptcy filing.   How much debt do I need to be in to file a Chapter 7 Bankruptcy? There is no minimum debt requirement in order to be able to file a Chapter 7.  The analysis of whether to file a Chapter 7 depends more on your present ability to repay your creditors.  Other factors to consider are the level of creditor harassment (i.e. calling you at home and work), utility shut offs, wage garnishments or other creditor actions.  I usually don't recommend a Chapter 7 Bankruptcy for any individual unless there is at least $10,000 in debt to wipe out or discharge, making the filing worthwhile.  However, I have filed Chapter 7 cases for individuals with less debt but were being garnished by one or more creditors and made only minimum wage therefore making it impossible to file a Chapter 13 repayment plan.  I have also filed cases for people whose utilities were shut off and needed the Bankruptcy Court protection of the automatic stay to get turned back on. Do I have to file Bankruptcy on all of my Credit Cards? What if I want to keep one? Yes, if you owe a balance, list the debt. The law requires you to list all of your creditors on your bankruptcy petition. I tell my clients that even if they owe the local video store $3.79 for an overdue video, to list it on your bankruptcy schedules.  Many of my clients are worried that they cannot live without their Mastercard.  Trust me, life is possible without credit cards.  If you truly must have a credit card, there are options. If you have a credit card with a zero balance, it does not have to be listed and you may use it after you file bankruptcy. If you have a credit card with a low balance, you may wish to pay it off before filing your case.  Some creditors, particularly Sears, offer to cut your current balance to $500, even if you owe them $10,000 or more, if you reaffirm (sign an agreement that says you promise to pay them despite the bankruptcy) with them. Many of my clients are reporting to me that they are receiving pre-approved credit card applications shortly after filing their Chapter 7 case.  These are solicitations from credit card companies, even some of the same that were just discharged, enticing you to get back into the game. If used wisely and frugally (i.e. paying the balance in full each month), these may help you re-establish your credit.  Remember though, in many cases, overspending and overuse of credit cards are what often lead to the bankruptcy in the first place.  Be careful! Where does my Chapter 7 Bankruptcy case get filed? If you live in the Metro Detroit Area it will be filed in the US Bankruptcy Court for the Eastern District of Michigan, Southern Division located at 211 West Ford, Downtown Detroit.  Remember, bankruptcy law is a federal law and is therefore assigned to the Federal District Courts.  The Bankruptcy Courts are a subset of the Federal District Courts and hear all cases assigned to them.  All cases filed in Wayne, Oakland, Macomb, Monroe, St. Clair and Washtenaw Counties must all be filed in the Detroit Bankruptcy Court. If you live in the Flint or Bay City area, your case may be filed in there own jurisdiction. What happens after my case is filed with the Bankruptcy Court in Detroit? After your case is filed, the Court clerk usually mails out the "Notice of Commencement of Chapter 7 Bankruptcy" to you, your attorney, the Trustee assigned to your case and most importantly, all of your creditors.  This is why it is important to try your best to list all of your creditors in your bankruptcy.  They need to have "Notice" that you filed. The Notice of Commencement contains information about you such as your name, address and social security number so that the creditors can enter the fact that you filed a bankruptcy in your system and end collection activities.  The notice contains instructions and explanations regarding the automatic stay and penalties for violating the stay (i.e. trying to collect a debt from you).  The notice also tells you when and where your Meeting of Creditors will take place.  This is your Court date and you must attend it otherwise your case will be dismissed.  I as your attorney am also  required to attend  your "meeting of creditors." This "meeting" is actually not much of a meeting at all. You (and your spouse if this is a joint filing) must attend. I will be there because I include this in your fee, and the Interim Trustee will be there. The trustee is an attorney who is appointed to ask you questions about your case, which you will be required to answer under oath. The trustee then reports to the bankruptcy judge as to whether he recommends a discharge. All this may sound scary, but it is actually a brief and routine procedure. Most people are amazed at how easy it is. You will learn more of this later in the case. Naturally, your creditors may attend the meeting, but they rarely do. Once the meeting of creditors is concluded, the trustee will make his report to the court and will usually recommend a discharge. After the trustee makes his recommendation, the court will enter a "discharge" within about three months. The reason you will not be granted a discharge immediately, is that the creditors are given some time to object to your discharge (approximately 60 days after your .341 meeting of creditors unless an extension is granted), or to make application to the Court why their particular debt should not be discharged.    See the "Required Documents" link for a list of what you need to bring to this Court hearing with you. What about my credit report, how will it look after filing Chapter 7 Bankruptcy? My friends tell me that I won't get credit for seven years after I file, is this true?  I get this one all the time. First of all, understand that there is no law that says a future creditor or some other lender cannot give you credit after you file bankruptcy. In fact, these days with well over 1 million personal bankruptcies being filed every year, there is an entire credit industry that has evolved that solicits actively to individuals and couples who have recently filed a case.  My clients call me all the time just a few months after their bankruptcy and want to know what is going on, why are they getting all of these pre-approved credit card applications in the mail and how come all these finance companies want to sell them a car? Well the short answer is that these potential creditors want to be first in line to be your new credit cards after your fresh start. They no that most people will only file one bankruptcy in their life. That if the original bankruptcy was filed just because of bad financial planning (i.e. not loss of job, disability, divorce etc.) that the debtor probably has learned something from the experience and will be more careful with the way they use credit in the future. Finally, the creditor knows that you may not file another Chapter7 bankruptcy seeking the discharge of new debt for a period of six years. There is no question that a bankruptcy will hurt your ability to get credit in the future. But by the time a person comes into my office, their credit is already very bad.  The benefits of the bankruptcy discharge will greatly outweigh any negative impact on the credit report in the vast majority of cases that are filed. The fact that you filed a chapter 7 will appear on your credit record for ten years. Generally, the best (and probably the only) way to get good credit is to pay your bills on such terms as you originally agreed when they become due, i.e., pay at least the minimum payment. Bankruptcy, as you probably have figured out already does not pay your bills, it only releases you from personal liability or responsibility on them. In effect, the debt will still exist, but your creditors will be legally stopped from collecting anything from you, forever. Even if a year later you will $100 million in the lottery.  In other words, and for all intents and purposes, the indebtedness is canceled. While the bankruptcy will be listed on your credit record, you may be fortunate enough to find a creditor willing to overlook this, but then again, you may not; this question is entirely left up to the creditor. No one can be forced to give you credit and you should not contract for credit while your bankruptcy case is pending. Be careful with new credit card or other credit offers, remember, credit card are what got you here in the first place. If you pay your post-bankruptcy case bills after the case is closed, you may find some creditors that are willing to give you credit -- possibly as soon as a year or two after you get your discharge. When you use credit again, it is in your best interests to use it with great restraint. In order to reduce the risk that you will have to ask the court for relief again, it is better to pay cash until you are very certain that circumstances are substantially changed from the way they were when you filed. Since you cannot ask the court for a Chapter 7 discharge more than once every six years (Chapter 13 may still be available though), you may put yourself and your family into jeopardy unintentionally and unnecessarily.     My incorporated business is ceasing operations, should it file for chapter 7 bankruptcy?   It depends.  A corporation is entitled to no exemptions and receives no discharge.  Good reasons to file a corporate chapter 7 would include: to stop a creditor from executing on valuable assets that could otherwise be utilized to pay debts for which the principals are liable (e.g. trust fund taxes or other personally guaranteed debts); to recover preference payments that could be used to pay debts for which the principals are liable; to insulate the principals from allegations that the liquidation of the corporation was handled improperly; the principals would rather turnover liquidation of the corporation to a trustee instead of handling it themselves.  Good reasons for the corporation to not file for bankruptcy might include the time and expense of the bankruptcy and the scrutiny of past dealings between the corporate insiders and the corporation.  There is no requirement that a insolvent corporation file for bankruptcy and state law dissolutions or simply "shutting the doors" are common alternatives.     Why would a debtor choose chapter 13 over chapter 7?  The primary reasons include: the debtor owns nonexempt property that the debtor would like to retain but could not in chapter 7; a debtor is behind on car or house payments and needs to cure the arrearages over time; a debtor seeks to "strip-down" the amount of a secured debt to the value of the collateral (not available as to first mortgages on a debtor's residence); the debtor has received a prior  bankruptcy discharge within 6 years; the debtor has debts that are not dischargeable in chapter 7 (e.g. certain taxes, fraud, defalcation of fiduciary duty, or willful and malicious injury); a debtor is seeking to protect a co-debtor; or a debtor likely has need of bankruptcy relief in the future.  In some cases, a debtor with a high income and an ability to repay debts over a period of time, may be not be permitted a discharge in chapter 7 and therefore chapter 13 will be his only option.     More Chapter 7 Frequently Asked Questions 1. What is chapter 7 and how does it work? Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is that 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? 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. 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 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 the debts listed below. The following is a list of the most common debts that are not dischargeable under chapter 7:

(1) Most tax debts and debts that were incurred to pay federal tax debts.

(2) 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 60 days before the case is filed).

(3) Debts not listed on the debtor's chapter 7 forms, unless the creditor knew of the case in time to file a claim.

(4) Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the case.

(5) Debts for alimony, maintenance, or support and, if the creditor files a complaint in the case, certain other divorce-related debts including property settlement debts.

(6) Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the lease.

(7) Debts for certain fines or penalties.

(8) Debts for educational benefits and student loans are not dischargeable unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents.

(9) Debts for personal injury or death caused by the debtor's operation of a motor vehicle while intoxicated.

(10) Debts that were or could have been listed in a previous bankruptcy case of the debtor in which the debtor did not receive a discharge.

The following persons are not eligible for a chapter 7 discharge:

(1) A person who has been granted a discharge in a chapter 7 case filed within the last eight years.

(2) A person who has been granted a discharge in a chapter 13 case filed within the last eight years, unless 70 percent or more of the unsecured claims were paid off in the chapter 13 case.

(3) A person who files a waiver of discharge that is approved by the court in the chapter 7 case.

(4) 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.

(5) A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.

(6) A person who makes false statements or claims in the chapter 7 case, or who withholds recorded information from the trustee.

(7) A person who fails to satisfactorily explain any loss or deficiency of his or her assets.

(8) 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.

(9)  A person who fails the MEANS TEST, in that his or her currently monthly income (CMI) is such that would allow that person to pay at least $100.00 per month for 60 months to a trustee for the payment of unsecured creditors.

Any person, who satisfies the MEANS TEST, 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.

A person who is not eligible for a chapter 7 discharge should not file under chapter 7. Also, a person 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 or convert the case to a Chapter 13 case.  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 two thousand dollars and the (assisted person) debtor is unable to pay a trustee, from the current monthly income (CMI), at least $100.00 per month, over a period of 60 months, to be applied to the general creditors..

The filing fee is $209, however effective 10-17-05 shall be $274, 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?

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 greatest portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court.

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.

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.

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 should be followed:

(1)Don't file under chapter 7 until all anticipated debts have been incurred, because it will be another six years before the debtor 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.

(2)Don't 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.

(3)Don't file under chapter 7 if the debtor 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 a 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), if a creditor has threatened to attach or garnishee 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.

The filing of a chapter 7 case automatically stays (or stops) collection and other legal proceedings, in most cases, that are pending against the debtor. 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 was filed are not affected by the automatic stay. The automatic stay also 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.

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. 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.

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, the trustee in a chapter 7 case often contacts an employer seeking 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 so informed and he or she may be willing to make other arrangements to obtain the necessary information.

No. Filing under chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.

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 a driver's license), permits, student loans, and similar grants because that person has filed under chapter 7.

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. A debtor may also be allowed to retain certain encumbered (or secured) exempt property (see Question 28, below). 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.

The first court appearance is for a hearing called the "meeting of creditor." This hearing usually takes place about a month after the case is filed. 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. 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 which the debtor will have to attend.

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 mm 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.

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 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.

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.

It is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay the claims of unsecured creditors. The trustee's fee is usually $45 plus a percentage of the amount collected from the debtor.

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 creditors, that it is unnecessary for them to file claims, and that if assets are later discovered they will then be given an opportunity to file claims. This type of case is referred to as a no-asset case. Approximately one-half of all chapter 7 cases that are filed are no-asset cases.

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 per-mired to repossess or foreclose its 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 and secured 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 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).

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 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. Deadlines are imposed on the enforcement of these rights by the debtor during the bankruptcy case.

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 on the day and hour that the chapter 7 case is filed. The most common nonexempt liquid assets, and the assets that the trustee will be most likely to look for, include the following:

(1) cash,

(2) bank accounts,

(3) prepaid rent,

(4) landlord and utility deposits,

(5) accrued earnings and benefits,

(6) tax refunds, and

(7) sporting goods.

It is usually advantageous for the debtor to take steps to insure that the value of each of these assets is as 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 advantage, much the same as a person who takes advantage of loopholes in the tax laws.

Cash. If possible, the debtor should have no cash on hand when the chapter 7 case is filed. Further, if the debtor has received cash or the equivalent of cash in the form of a paycheck or the closing of a bank account shortly before the filing of the case, the debtor should obtain receipts when disposing of the funds in order to prove to the trustee and the court that the funds were disposed of prior to the filing of the case. Money possessed by the debtor shortly before the filing of a chapter 7 case may be spent on such items as food and groceries, the chapter 7 filing fee, the attorney's fee in the chapter 7 case, and the payment of up to $600 to creditors whom the debtor intends to continue paying after the filing of the chapter 7 case. Payments should not be made to friends or relatives, however, as the trustee may later recover these payments.

Bank Accounts. The best practice is to close out all bank accounts before filing under chapter 7. If a bank account is not closed, the balance of the account should be as close to zero as the bank will allow and all outstanding checks must clear the account before the case is filed. If the debtor has written a check to someone for, say, $50 and if the check has not cleared the account when the case is filed, the $50 in the account to cover the outstanding check will be deemed an asset of the debtor and will have to be paid to the trustee.

Prepaid Rent. If the debtor's rent is paid on the first day of the month and if the debtor's chapter 7 case is filed on the tenth day of the month, the portion of the rent covering the last 20 days of the month, if not exempt, will be deemed an asset of the debtor and will later have to be paid to the trustee. If possible, the debtor should make arrangements with the landlord to pay rent only through the date that the case is to be filed and to pay the balance of the rent from funds acquired after the case is filed. If this is not possible, the case should be filed near the end of the rent period.

Landlord and Utility Deposits. Unless they are exempt, the debtor should attempt to obtain the refund of all landlord and utility deposits before filing a chapter 7 case. Otherwise, the deposits, or their cash equivalents, will have to be paid to the trustee.

Accrued Earnings and Benefits. In most states, and under the federal law, only a certain percentage (usually 75%) of a debtor's earnings are exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25%) of any accrued and unpaid wages, salary, commissions, vacation pay, sick leave pay, and other accrued and nonexempt employee benefits. Normally, then, the best time to file a chapter 7 case is the morning after payday. Even then, if the pay period does not end on payday, the debtor may have accrued earnings unless special arrangements are made with the employer. If annual leave or vacation pay is convertible to cash, it should be collected by the debtor before the chapter 7 case is filed, as should any other nonexempt employee benefits that are convertible to cash.

Tax Refunds. In most states, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the debtor prior to the filing of a chapter 7 case. Therefore, if the debtor is scheduled to receive a tax refund, a chapter 7 case should not be filed until after the refund has been received and disposed of. Even if the case is filed before the end of the tax year, if the debtor later receives a refund, the trustee may be entitled to the portion of the refund earned prior to the filing of the case. The best practice, then, is to either file the chapter 7 case early in the tax year (but after the refund from the previous year has been received) or make arrangements to insure that there will be no tax refund for that year.

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 mm them, or their cash equivalent, over to the trustee. Such items should be disposed of prior to the filing of the case, especially if they are of considerable value.

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.

The debtor 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 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.

Usually by mail. Most courts send a form eared "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 ease is filed.

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 is one for which the debtor and the creditor have signed 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 negotiating the reaffirmation agreement, the attorney must file the agreement and the attorney's 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.

A chapter 7 case begins with the filing of the case and ends with the dosing of the case by the court. If the debtor has no nonexempt assets for the trustee to collect, the case will most likely be dosed 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.

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 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, 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. 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.

37. What is the role of the debt relief agency attorney for a consumer debtor in a chapter 7 case?

The debtor's attorney performs the following functions in the chapter 7 case of a typical consumer debtor..

(1) Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor's financial problems.

(2) Advise the debtor of the relief available under both chapter 7 and chapter 13 of the Bankruptcy Code, and of the advisability of proceeding under each chapter.

(3) Assemble the information and data necessary to prepare the chapter 7 forms for filing.

(4) Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court.

(5) Assist 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.

(6) Filing the chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.

(7) If necessary, assisting the assisted person (debtor) in reaffirming certain debts, redeeming personal property, setting aside mortgages or liens against exempt property, and otherwise carrying out the matters set forth in the debtor's statement of intention.

(8) Attending the meeting of creditors with the debtor and appearing with the debtor at any other hearings that may be held in the case.

(9) If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor.

(10) If necessary, assisting 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.

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 has 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 that 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 the fraud or incompetence of the preparer, or if the preparer commits an inappropriate or deceptive act, the debtor may recover actual and statutory damages from the preparer, plus 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 preparer disregarded the requirements of the bankruptcy laws or roles.

Williamson, John H. The Attorney 's Handbook on Consumer Bankruptcy and Chapter 13. 23rd ed. Lakewood, Colorado: Argyle Publishing Company, 1999. 5-13.

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