WHAT IS CHAPTER 7?

BASIC INFORMATION

Chapter 7 is the most common form of bankruptcy. It is often referred to as "Straight Bankruptcy". Its when the debtor throws the keys on the table and looks for a "fresh start." Although it is a liquidation proceeding, in the vast majority of consumer Chapter 7 bankruptcy cases no asset are liquidated.

When a bankruptcy is filed, a bankruptcy estate is created. The bankruptcy estate is comprised of all property owned by the debtor as of the time of the commencement of the case. It does not include the post-petition earnings of the debtor. In every Chapter 7 bankruptcy proceeding, a Chapter 7 Trustee is appointed. The Chapter 7 Trustee's role is to administer the bankruptcy estate. This includes selling the non-exempt property of the estate (if there is any) and paying the proceeds to the creditors. However in the vast majority of cases, the Chapter 7 Trustee will not sell any property because all of the debtor's property is "exempt" and/or subject to mortgages or other liens. Non-exempt property is sold by the trustee and the proceeds paid to creditors.

AUTOMATIC STAY

According to the Bankruptcy Code, the filing of the bankruptcy creates and automatic stay preventing (among other things) any action by a creditor to enforce a debt. The Automatic Stay prohibits all creditor from any acts to collect a debt including calls to the debtor, dunning letters, repossession of collateral (such as an automobile), continuing with a mortgage foreclosure proceeding or otherwise attempting to collect a debt. The bankruptcy court can for certain reasons terminate the automatic stay to allow a secured creditor to enforce its claim against the collateral.

DISCHARGE

In most Chapter 7 cases, personal debtors are discharged from their debts. There are exceptions and certain debts are not subject to discharge. For example student loans are rarely discharged and domestic support obligations are not discharged. Some income taxes are not discharged. Debts related to the malicious injury to property may not be discharged. There are other types of debts which are not subject to discharge, so if you are a debtor contemplating bankruptcy, you should discuss the nature of your debts with an attorney. Most common debts such as credit card debts, medical bills, etc. will be discharged.

If the debtor has committed certain bad act, such as hiding assets, or lying on his bankruptcy schedules on in the bankruptcy proceedings, or if the debtor has failed to maintain certain records concerning his financial affairs, he can be denied a discharge. Denial of discharge in bankruptcy proceedings is rare.

The discharge is available only to persons in a Chapter 7 proceeding, not to corporations or other entities.

SECURED DEBTS

SURRENDER-REAFFIRM-REDEEM

Creditors who have a valid lien on property of the debtor maintain that lien during and after the bankruptcy. This would ordinarily apply to automobile loans and to mortgage loans. With respect to secured debts, debtors normally have several options. First, the debtor can surrender, i.e. give back, the collateral to the secured creditor and receive a discharge of that debt. Second (subject to certain conditions) they can "reaffirm" the debt and keep the collateral. If the debtor reaffirms the secured debt, it is not discharged in the bankruptcy. In order to reaffirm a debt, the debtor may have to show that he is capable of making the debt payments. Third, the debtor can "redeem" the property by paying the secured creditor the value of the property. There are limits to what a creditor must accept for collateral which is an automobile purchased within 910 days of the filing of the bankruptcy. Sometimes a debtor can keep possession of the collateral by keeping current on the debt obligation but not reaffirming the loan.

As an example, assume debtor files a Chapter 7 bankruptcy. He owns a 2005 automobile which has a value of $7,000 but has a secured automobile loan with a balance of $10,000. His monthly payments are $200. Debtor's choices with respect to the automobile are:

1. He can surrender the automobile to the lender and receive a discharge of that debt;
2. If his budget will support the $200 monthly payment, he can reaffirm the debt with the lender and continue to make the monthly payments; or
3. He can redeem the automobile by paying the lender its value, i.e. $7,000 (note this option is limited depending on such factors as how old the debt is, etc. - he needs to discus this in more detail with his attorney).

EXEMPTIONS

When a Chapter 7 bankruptcy is filed, a bankruptcy estate is created. The debtor's property becomes property of that bankruptcy estate. Property that is "exempt" however ceases to be property of the bankruptcy estate and reverts back to the debtor. Exemptions are treated in more depth on a separate page on this website. However a few comments regarding exemptions are below.

The source of the exemptions a debtor can claim depend on where the debtor has lived in the 2 to 2 ½ year period preceding the bankruptcy. In the event the debtor has lived in the same state for the entire two year period preceding the bankruptcy, the following rules apply:

In Kentucky, a debtor can claim exemptions under either federal law or Kentucky law. Since federal law is more generous than Kentucky law, most debtors elect to use the federal exemptions. The federal exemptions applicable in Kentucky include such things as a homestead exemption of $20,200, an automobile exemption of $3,225 and, household furnishings. In addition, if the debtor does not have a homestead exemption of $20,200, he can claim up to $10,000 of that unused exemption in any property. In most bankruptcy cases, everything debtors own is exempt; therefore they keep all of their assets and the Chapter 7 Trustee gets nothing.

In Indiana, a debtor can claim exemptions only according to Indiana law. Indiana exemptions include the following: Up to $7,500 of real or personal property constituting the personal or family residence of the debtor, up to $4,000 of other real or personal property of the debtor, real estate held as tenants by the entireties.

MEANS TEST

Individuals whose debts are primarily consumer debts are subjected to a Means Test to determine if they qualify for Chapter 7 bankruptcy. The Means Test is explained in more sufficient detain on a separate webpage, see Means Test. Individuals whose debts are not primarily consumer debts, corporations and partnerships qualify for Chapter 7 relief without being subjected to the Means Test. Individuals whose debts are primarily consumer debts and who do not qualify for Chapter 7 relief still qualify for Chapter 13 of Chapter 11 relief.

CREDIT COUNSELING AND FINANCIAL EDUCATION

Also, in order to qualify for Chapter 7 (and for Chapter 13 and 11 relief), the debtor must take a qualified credit counseling course within 180 days prior to his filing bankruptcy. Additionally, the Debtor must take a qualified debtor financial education course after he files bankruptcy.

TIME LINE FOR CHAPTER 7

For most individuals, the Chapter 7 process last from three to four months in total. Prior to the bankruptcy, the debtor must complete his credit counseling. At the time the bankruptcy is filed (or shortly thereafter), the debtor (with his attorney's assistance) needs to file his petition, schedules and Statement of Financial Affairs and supply the Trustee with pertinent documents. Also, after the bankruptcy is filed, the debtor is required to complete his financial education course. The section 341 meeting is held approximately a month subsequent to the bankruptcy filing. The case is then held open for a period of 60 days from the date of the section 341 meeting during which period creditors or the US Trustee may challenge the debtor's discharge or attempt to get the case dismissed. If there are no challenges to discharge, no attempts of the US Trustee to dismiss the case, and no property to be administered, the discharge should be granted and the case closed shortly thereafter.

However, if there are challenges to the debtor's discharge, or if there are non-exempt assets which the trustee will liquidate, or if the US Trustee takes steps to dismiss the case for abuse or other reason, then the administration of the case can take a lot longer, possibly in excess of a year. However, if there are no challenges to the discharge, the debtor may still receive a discharge of his debts while the case is being administered (e.g. to allow the Trustee to liquidate assets).

DEBTOR'S CREDIT REPORT

A Chapter 7 bankruptcy proceeding will be carried on a debtor's credit report for 10 years.