BANKRUPTCY UNDER CHAPTER 7

QUESTIONS AND ANSWERS ABOUT CHAPTER 7
BANKRUPTCY
Disclaimer

This web site is designed for general information only. The information presented at
this site should not be construed to be formal legal advice nor the formation of a
lawyer/client relationship.  Mark McClure is licensed to give legal advise in the state
of Washington only.  
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 non-exempt 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.

3.        What debts are not dischargeable under Chapter 7?
All debts of any kind of 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:
  • Most tax debts and debts that were incurred to pay federal tax debts.
  • 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).
  • Debts not listed on the debtor's Chapter 7 forms, unless the creditor
    knew of the case in time to file a claim
  • Debts for fraud, embezzlement, or larceny, if the creditor files a
    complaint in the case.
  • Debts for alimony, maintenance, or support and, certain other
    divorce-related debts including, potentially, property settlement debts.
  • Debts for intentional or malicious injury to the person or property of
    another, if the creditor files a complaint in the case.
  • Debts for certain fines or penalties.
  • Debts for educational benefits and student loans unless a court finds
    that not discharging the debt would impose and undue hardship on
    the debtor and his or her dependents.
  • Debts for personal injury or death caused by the debtor's operation
    of a motor vehicle while intoxicated.
  • 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.

4.        What persons are not eligible for a Chapter 7 discharge?
The following persons are not eligible for a Chapter 7 discharge:
  • A person who has been granted a discharge in a Chapter 7 case
    filed within the last 8 years.
  • A person who has been granted a discharge in a Chapter 13 case
    filed within the last six years, unless 70 percent or more of the
    unsecured claims were paid off in the Chapter 13 case.
  • A person who files a waiver of discharge that is approved by the
    court in the Chapter 7 case.
  • 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.
  • A person who conceals, destroys, or falsifies records of his or her
    financial condition or business transactions.
  • A person who makes false statements or claims in the Chapter 7
    case, or who withholds recorded information from the trustee.
  • A person who fails to satisfactorily explain any loss or deficiency of
    his or her assets.
  • 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 associates, or corporation
    with which he or she is associated.

4.        What persons are eligible to file under Chapter 7?
Any person who resides in, does business in, or has property in the United
States my 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.

5.        What persons should not file under Chapter 7?
A person who is not eligible for a Chapter 7 discharge should not file under
Chapter 7. Also, a person 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 a constituting an abuse of
Chapter 7. Although it is not a legal requirement, 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 non-exempt assets by at least two hundred
dollars.

6.        How much is the Chapter 7 filing fee and when must it be
paid?
The filing fee is $299 for either a single or joint case. If a debtor is unable to
pay the filing fee when the case is filed, it may be paid in installments, with
the final installment due within 120 days,
The period for payment may later be extended to 180 days by the court, if
there is a valid reason for doing so. The entire filing fee must ultimately be
paid, however, or the case will be dismissed and the debtor will not receive
a discharge. The fee charged by the debtor's attorney for handling the
Chapter 7 case is in addition to the filing fee.

7.        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 principle 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.

8.        May a husband and wife file jointly under Chapter 7?
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.

9.        Under what conditions should both spouses file under
Chapter 7?
Both husband and wife should file is 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.

10.     When should a Chapter 7 case be filed?
The answer depends on the status of the debtor's dischargeable debts, the
nature and status of the debtor's non-exempt assets, and the actions taken
or threatened to be taken by the debtor's creditors. The following rules
should be followed:

  • 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.
  • Don't file under Chapter 7 until the debtor has received all non-
    exempt assets to which he or she may be entitled. If the debtor is
    entitled to receive an income tax refund or similar non-exempt 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.
  • 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 turned over to the trustee unless it
    is exempt.
  • If 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 the Chapter 7 case
    (see Question 12,below). If a creditor has threatened to attach or
    garnish 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.

11.     How does the filing of a Chapter 7 case affect collection and
other legal proceedings that have been filed against the debtor in
other courts?
The filing of a Chapter 7 case automatically stays (or stops) virtually all
collection and other legal proceedings pending against the debtor.  
Exceptions to this stay have been made in the 2005 law.  More information
regarding these exceptions will be added at a later date.   

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.

12.     May a person file under Chapter 7 is his or her debts are
being administered by a financial counselor?
Yes. A financial counselor has no legal right to prevent anyone from filing
under Chapter 7.

13.     How does filing under Chapter 7 affect a person's credit
rating?
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.

14.     Are the names of persons who file under Chapter 7
published?
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.

15.     Are employers notified of Chapter 7 cases?
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.

16.     Does a person lose any legal or civil rights by filing under
Chapter 7?
No. Filing under Chapter 7 is not a criminal proceeding, and a person does
not lose any civil or constitutional rights by filing.

17.     May employer or governmental agencies discriminate against
persons who file under Chapter 7?

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.

18.     Does a person lose all of his or her property by filing under
Chapter 7?
Usually not. Certain property is exempt and cannot be take by creditors,
unless it its 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 my 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.

19.     When must a debtor appear in court in a Chapter 7 case and
what happens there?
The first court appearance is for a hearing called the "meeting of creditors."
This hearing is 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
decided not to grant the debtor a discharge of 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.

20.     What happens after the meeting of creditors?
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 turn 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.

21.     What is a trustee in a Chapter 7 case, and what does he or
she do?
The trustee is an officer of the court, appointed to examine the debtor,
collect the debtor's non-exempt 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 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 non-exempt
property.

22.     What are the debtor's responsibilities to the trustee?
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 non-exempt property. If the debtor does not cooperate with the
trustee, the Chapter 7 case my be dismissed and the debtor may be denied
a discharge.

23.     What happens to the property that the debtor turns over to
the trustee?
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 $60 plus a percentage of the amount collected from the
debtor.

24.    What if the debtor has no non-exempt property for the trustee
to collect?
If, from the debtor's Chapter 7 forms, it appears that the debtor has no non-
exempt 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 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.

25.     How are secured creditors dealt with in a Chapter 7 case?
Secured creditors are creditors with valid mortgages or liens against
property of the debtor.  These creditors maintain their interest in the
property even after the bankruptcy has been filed.  Basically, this means
that if you want to keep the secured property (house, car, boat, tools, etc.)
you will need to keep paying the creditor.  Otherwise, it is their right to seek
to regain possession of the property.  However, the creditor will not be able
to seek payment.  Some creditors may demand that a reaffirmation
agreement be entered with the court or they will regain possession of the
property regardless of your intent to keep paying.

26.       How are unsecured creditors dealt with in a Chapter 7 case?
An unsecured creditor is a creditor without a valid lien or mortgage against
the 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.  

27.       What secured property may a debtor retain in a Chapter 7
case?
A debtor may retain 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 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 that impairs
an exemption.  Finally, a debtor may redeem certain exempt personal,
family, or household property by paying 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.

28.       How can a debtor minimize the amount of money or property
that must be turned over to the Trustee in a Chapter 7 case?
In a Chapter 7 case the debtor is required to turn over to the Trustee, if
requested, only nonexempt money or property that he or she possesses at
the time the case was filed.  If the debtor is close to exceeding his personal
property exemption ($9,850.00 for each person for property that is owned
free and clear of any liens, please advise your attorney so that he can
discuss what action, if any, needs to be taken so as not to risk the loss of
your property.

*REMEMBER*  Each person can claim $9,850.00 of personal property
exempt that cannot be taken by the Trustee.  The value of the property
claimed exempt is listed in your Schedules at market value.  This means the
value you would receive if you sold the property (you do not have to sell the
property, but if it was sold).  Please estimate the values at market value not
replacement value or original cost value when providing the information
about your personal property.

29.       May a utility company refuse to provide service to a debtor if
the company's utility bill is discharged under Chapter 7?
Generally, No.  However, the utility may ask for a security deposit or
terminate service.  Also, if the utility is a sewer utility, they will have a lien
against any real property owned by the debtor that the utility provides
service to until that bill (discharged or not) is paid.  This means that the
sewer company could foreclose.

30.       What should the debtor do if he or she moves before the
Chapter 7 case  is closed?
The debtor should immediately notify our office so that we can notify the
bankruptcy court, in writing, of a new address.  Because most
communications between a debtor and the bankruptcy court are by mail, it
is important that the court always have the debtor's current address.  
Otherwise, the debtor may fail to receive important notices and the Chapter
7 may be dismissed.  

31.       How is a debtor notified when his or her discharge has been
granted?
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 the Chapter 7 case is filed.

32.       What if a debtor wishes to repay a dischargeable debt?

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" and this
document has been properly filed with the Court.  

33.       How long does a Chapter 7 last?

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 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 to perform his or her other duties in the case.  Most
consumer Chapter 7 cases last about four (4) months from the time they
are filed, but some last longer if there are assets to recover and sell.

34.       What should a person do if a creditor attempts to collect a
debt that was discharged under Chapter 7?

When a Chapter 7 discharge is granted, the court enters an order
prohibiting the debtor's creditors from later attempting to collect any
dischargeable 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 discharge and
inform the creditor in writing that the debt has been discharged under
Chapter 7.  If the creditor persists, the debtor should contact our office.  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.

35.       How does a Chapter 7 discharge affect the liability of
cosigners and other parties who may be liable to a creditor on a
discharged debt?

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 discharge.
Chapter 7 Bankruptcy Facts
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