Bankruptcy Law Explained

Chapter 7 Bankruptcy

[You do not need to study bankruptcy laws or to review this section if you have chosen to have us prepare your bankruptcy for you.]

Index:

Bankruptcy Law Summary
Chapter 7 bankruptcy laws
Chapter 13 bankruptcy laws
Property and Exemptions
Structure of bankruptcy laws
Case administration
Types of bankruptcy
How to file bankruptcy
 

Overview - Personal and Business Chapter 7

Chapter 7 bankruptcy, also known as liquidation in the code and often referred to as straight bankruptcy, is the most common type of bankruptcy. When people generically refer to bankruptcy, they are most likely referring to Chapter 7 bankruptcy. The purpose of Chapter 7 bankruptcy is to protect you the debtor from your creditors. If you are overburdened by debt, Chapter 7 bankruptcy is your friend, not your enemy. It is effective against a host of debts including credit cards and for this reason it is sometimes thought of as credit card bankruptcy.

When a person files Chapter 7, their goal is to wipe out most if not all of their debts. You file under Chapter 7 if your debts are largely unsecured or if you want to wipe out most of your debts and never repay them again. If your debts are mostly loans or credit cards and judgments, you would most likely want to file Chapter 7. Imagine that for six months or more you have been suffering terribly under the heavy burden of debt and all of a sudden, all that load gets lifted off you and you are a free person. One person likened it to being declared not guilty after a long trial without bail. That is what debtors report experiencing when they file Chapter 7 bankruptcy.

The laws and rules governing personal and business Chapter 7 bankruptcies can be found in Chapter 7 of the bankruptcy code, also know as Title 11 of the United States code. This chapter is divided into four subchapters. Subchapter 1 deals with the duties of the trustee as applied to a filing under Chapter 7, Subsection II deals with collection, liquidation and distribution of the bankrupt estate, Subchapter III deals with stockbroker liquidation and Subchapter IV deals with commodity broker liquidation.

Subchapter II (Section 721 through 728) is of particular importance to debtors because it deals with your right to operate a business while in bankruptcy, redemption of property, rights of partnerships, treatment of certain liens, disposition of property, the discharge of debts and certain tax provisions.

From the debtor's point of view, the goal is to obtain the discharge which is essentially a court order declaring all of ones dischargeable debts discharged. Any debts that are discharged are never ever repaid by the debtor or by anyone else. Legally, it is as if the debtor never owed the debt. You can file Chapter 7 no sooner than every six years, (seven years under the new bankruptcy laws) or more accurately, you cannot get a discharge any sooner than every six years. The ability to discharge one's debts every six (or seven years under the new law) is crucial to the realization of personal liberty that is at the core of our democracy. It is also strikes a balance between the interests of big business, (the lenders) and the individuals who collectively make up this country.

The process starts with the preparation and filing of the documents. After that, a trustee is appointed to administer the bankrupt estate and to ensure the smooth and equitable application of the law. Approximately four weeks after the commencement of the case, the debtor appears for the meeting of the creditors. If the debtor does not have non-exempt assets, the discharge is issued about four months after the commencement of the case. If there are non-exempt assets the trustee is empowered by law to liquidate them and disburse the proceeds to the creditors.

Essentials of Chapter 7 Law

Anyone (person or corporation) can file chapter 7 bankruptcy but not every filer will obtain a discharge of debts. To obtain a discharge, the debtor must be insolvent. Insolvency is marked by inadequate disposable income to pay one's creditors. The requirement of insolvency ensures that the process is not abused and that only debtors who need to file bankruptcy do so.
Bankruptcy law requires that the moment you file bankruptcy, there is an automatic stay that prohibits virtually all creditors from initiating or continuing any efforts, legal or otherwise, to collect debts you owe or to seize property of the bankrupt estate. This is know as the Automatic Stay and is one of the most powerful of all Federal laws. This means that the moment you file, evictions, repossessions and foreclosures must stop, at least for a while; you cannot be sued and existing lawsuits must come to a halt; creditors and collection companies cannot harass you or enforce money judgments against you. Even the government itself cannot come after you for civil debts that you owe including income taxes.

When a personal bankruptcy is filed, a legal fiction know as the bankruptcy estate is created and it is comprised of all the property that the debtor owned at the time of the filing of the case. The bankruptcy trustee is appointed by the United States Department of Justice, is charged with administering the case and is given temporary control of the bankrupt estate.

There is a mandatory meeting that all debtors must attend and it is called the meeting of the creditors or the 341(a) hearing (since it is contained in Section 341a of the bankruptcy code) The bankruptcy trustee presides at this meeting which is held approximately 4 weeks after filing. If you fail to appear at the meeting of creditors, the court can and will dismiss your case.

You are allowed to amend any documents to correct any information or to add creditors or assets that were omitted in the initial filing. Also, you are allowed a maximum of 15 days to file any of the initial documents that you failed to file at the commencement of the case.

If you have secured debts such as a car payment or a mortgage, you can still file Chapter 7 and retain the collateral by continuing to make the payments as usual. You are under no obligation to surrender any securing property that you want to retain. You are in control and it is up to you to decide what you want to keep and what you want to surrender. There are several ways to retain a collateral depending on the nature of the debt. There is reaffirmation where you agree to continue making payments; there is redemption where you pay only the current market value of the collateral while wiping out the excess and there are various forms of lien avoidance where you obtain a court order converting the secured debt to an unsecured one, thereby wiping it out in the discharge.

Upon the recommendation of the trustee, the court orders the dischargeable debts discharged. These debts are usually the unsecured debts as well as secured debts where the debtor does not intend to retain the collateral after bankruptcy.

After the job of the trustee is finished, usually in about six months from the commencement of the case, your case will be closed. Closure of the case de-appoints the trustee and ends the automatic stay. You can reopen a closed case for any valid reason within 12 months of the closure by filing a motion with the court.

Student Loans and Personal Bankruptcy

In order to discharge student loans in a personal bankruptcy, you need to first file bankruptcy and you will need to file a complaint with the court. A complaint is essentially a lawsuit filed in bankruptcy court and it is beyond the scope of most attorneys. The rules for the discharge of a student loan require either the proving of hardship or that it be at least seven years since the loan became due or since the end of the last deferment. The complaint provides the parties the forum to examine the facts that affect qualification for discharge.

The Documents

Chapter 7 bankruptcy is filed by preparing and submitting to the court, documents conforming substantially to the official Federal bankruptcy documents prescribe by the Federal Bankruptcy Rules. It consists of a petition, Schedules A to J , a creditor mailing list and various statements.

Bankruptcy forms are the same nationwide, so technically, a bankruptcy document set can be file in any state. In reality, that is not quite true and this is because of exemption laws. Exemption laws vary from state to state and determine what you are allowed to keep after filing bankruptcy.

There are many hundreds of laws to keep in mind and numerous calculations to perform and if you have never done this before, you have now way to know if what looks good to your eyes is actually what the court wants. You can save a few dollars typing the forms yourself or even using software but it is not worth it. To be on the safe side, you are best off hiring us to do everything for you.

Property Laws

Obviously there are limits on what assets you can keep and still discharge your debt. Imagine for a moment that you are a small time contractor and that you have just completed a remodeling job for a home owner. You were just informed that the homeowner has filed bankruptcy and that you were not going to get any money for your work. You would certainly consider it unfair if the court allowed the homeowner to keep $120,000 in his bank account and a $58,000 Mercedes that was paid for while wiping out the $1,700 that you were owed. This fictional scenario obviates the need for laws governing what amounts of property a person can keep after filing bankruptcy. Any amounts above the limits should be converted to cash and paid to the creditors. That is what exemption laws are about.

Bankruptcy laws specify limits for most categories of assets that you can keep after filing bankruptcy and it is the job of the trustee to liquidate any amounts above those limits for the benefit of the creditors. Would you like to know what those limits are for your case? Click on the details link for more information.

Get Details - Property laws

The Trustee 

The day to day functions of the trustee and the court depends on the type of bankruptcy that you file. For example, in Chapter 7 cases, the debtor never sees the judge or appears in a court room. His or her only contact with the government is usually one short meeting with the trustee that could last about one minute. In contrast, in a Chapter 11 case, the debtor is in continually contact with the court and the trustee and has to file many case reports.

The principal role of the trustee is to act as the custodian of the bankrupt estate. What this means in lay person terms is that when you file bankruptcy, legal control to everything you own as of the moment of filing is transferred by law to the trustee. Except for normal daily living or the day to day operation of a business, you cannot sell or transfer ownership of any property of the bankrupt estate until the case is closed. For most cases, you will need the authorization of the trustee in order to sell your house, boat or automobile. Since selling any of these mentioned property is not a regular occurrence, for most individuals this power of the trustee will have little or no effect on your freedom during the process.

The Trustee is also charged with the duty to sell non-exempt property in cases where a discharge is sought and to void certain types of liens on property of the bankrupt estate and certain types of transfers of property. 

If you file a Chapter 7 bankruptcy, you will deal almost exclusively with the trustee. Before you panic, note that dealing with the trustee is easy and nothing to be nervous about. In most cases, you encounter the trustee only once, and that is at the meeting of creditors or the 341(a) hearing.

The Judge 

The bankruptcy judge plays very little role in the process of a Chapter 7 case and that is because, as noted above, the process is mostly administrative in nature. The judge plays a significant role only when there are disputes between the debtor and others parties such as creditors or the trustee. If yours is a Chapter 7 case, except as noted above, you will never meet the judge or hear directly from him or her.

For information on the structure of the bankruptcy law, click the details link below.

Get Details - Structure of Bankruptcy laws