Chapter 7 Bankruptcy
Introduction
Chapter 7 of the Bankruptcy Code is available to individuals,
partnerships and corporations. 11 U.S.C. § 109(b). The purpose of chapter 7 is
to provide the honest individual debtor with a “fresh start” by discharging
most, if not all, of the debtor’s debts. A chapter 7 discharge is available only
to individuals and not to partnerships or corporations. 11 U.S.C. § 727(a)(1).
Although most individual chapter 7 cases result in a discharge of all debts,
some types of debts are not discharged (i.e. student loans and certain taxes).
Moreover, some individual chapter 7 bankruptcy cases run the risk of dismissal
if the Office of the United State's Trustee believes the debtor’s net
disposable income is sufficient to fund a chapter 13 plan.
Chapter 7 Process
A chapter 7 Bankruptcy case begins with the filing of a petition for
relief pursuant to the United States Bankruptcy Code (the “bankruptcy
petition”). 11 U.S.C. § 301(a). The bankruptcy petition is filed with the
Bankruptcy Court in the district where the individual lives or where the
business debtor has its principal place of business or its principal assets (In
your case this will be the Northern District of Ohio). The debtor, in addition
to the bankruptcy petition, must also file schedules listing all assets and all
liabilities, an income and expense report, and a statement of financial affairs.
Federal Rules of Bankruptcy Procedure 1007(b). Married persons may file a joint
bankruptcy petition or one or both spouses may file individual bankruptcy
petitions. 11 U.S.C. § 302(a). Joint petitioners pay only one filing
fee.
Once a bankruptcy case is commenced, most creditor actions against
the debtor and the debtor’s property are enjoined pursuant to the “automatic
stay” provisions of the Bankruptcy Code. 11 U.S.C. § 362(a). This stay arises by
operation of law and requires no judicial action. While the stay is in effect,
creditors cannot initiate or continue lawsuits, repossessions, or wage
garnishments.
While Chapter 7 of the Bankruptcy Code is often referred to as a
liquidation or a “straight bankruptcy,” Chapter 7 debtors will rarely lose any
assets. Most, if not all of a Chapter 7 debtor’s assets are exempt under
Ohio Exemption Law. Married persons may only claim one set of
exemptions
Upon the commencement of every chapter 7 case a bankruptcy trustee is
appointed. 11 U.S.C. §§ 701, 702. The trustee’s duties are to examine and verify
the accuracy of the debtor’s bankruptcy papers and to identify assets which are
not exempt. 11 U.S.C. § 704. The trustee sells the non-exempt assets which have
value and distributes the net proceeds to the debtor’s creditors. To the extent
an asset has a lien against it (i.e. a car or a house) such asset has value only
to the extent the debt against the asset when combined with the amount of any
exemption is less than the fair market value of the asset. 11 U.S.C. §§ 506,
522.
A “meeting of creditors” (341(a) hearing) is held about 40 days after
the petition is filed. 11 U.S.C. § 341(a). The debtor must attend the meeting,
and if a husband and wife filed jointly, both must attend. Creditors may appear
and ask questions regarding the debtor’s financial affairs and property, but
creditors rarely attend. The meeting is conducted by the chapter 7 trustee and
not the bankruptcy judge. The debtor testifies under penalty of perjury and must
cooperate with the chapter 7 trustee. The debtor that fails to cooperate with
the chapter 7 trustee or to testify truthfully could be denied a discharge. 11
U.S.C. §§ 502, 727; Federal Rules of Bankruptcy Procedure 4004.
The Bankruptcy Court Clerk issues the discharge, usually a few days
after 60 days has elapsed from the first date set for the creditors meeting.
See generally, Federal Rules of Bankruptcy Procedure 4004. A copy of the
discharge is mailed to the debtor and all the creditors listed in the debtor’s
schedules.
The Trustee
A chapter 7 trustee is appointed to administer the bankruptcy estate
and liquidate the debtor’s non-exempt assets. In most cases, all of the debtor's
assets are exempt or subject to valid liens, so a trustee usually has no assets
to sell. Chapter 7 bankruptcy cases with no non-exempt assets are commonly
referred to as “no asset” cases. If the debtor has non-exempt assets or if the
trustee later recovers assets to liquidate for distribution to unsecured
creditors, the creditors are given an opportunity to file a form stating the
basis of their claim against the debtor or the debtor’s assets.
As intimated above, the filing of a bankruptcy petition creates an
“estate,” and the trustee becomes the temporary legal owner of the debtor’s
property. 11 U.S.C. § 541. The bankruptcy estate consists of all the debtor’s
legal or equitable interest in property, including property owned or held by
another person. 11 U.S.C. § 541. By way of example, the bankruptcy estate
includes, tax refunds, law suits, insurance claims, and any intellectual
property rights.
The chapter 7 trustee is required to analyze the value of each and
everyone of the debtor’s assets. The trustee will consider the fair market value
of the asset, any claim of exemption, as well as any liens recorded against the
asset. The trustee reserves the right to object to the extent and validity of
any lien as well as any claim of exemption. Objections to the debtor’s
exemptions must be filed within 30 days of the conclusion of the meeting of
creditors. Federal Rules of Bankruptcy Procedure 4003.
The Discharge
A bankruptcy discharge releases the debtor from personal liability
and prevents the creditors from taking any further action against the debtor or
his property to collect the debts. 11 U.S.C. §§ 523, 727. Creditors are afforded
the right to either object to the discharge of their particular debt or object
to the debtor’s discharge. 11 U.S.C. §§ 523, 727. A creditor may pursue one or
both of these remedies by filing a complaint with the bankruptcy
court.
Absent an extension by court order, a creditor has 60 days to
commence an adversary proceeding objecting to the debtor’s discharge. Federal
Rules of Bankruptcy Procedure 4004. The grounds for objecting to a bankruptcy
discharge in a chapter 7 are narrow, and the creditor or trustee objecting to
the discharge has the burden of proving the case. 11 U.S.C. § 727. In general,
the grounds for denial of a discharge are: (1) the debtor has failed to keep and
produce adequate financial records; (2) the debtor has failed to explain
satisfactorily a loss of assets; (3) the debtor committed a bankruptcy crime;
(4) the debtor failed to obey a lawful order of the bankruptcy court; or (5) the
debtor fraudulently transferred, concealed, or destroyed property that, but for
the improper transfer, would have been property of the estate. 11 U.S.C. §
727.
Once a discharge is granted, the trustee, a creditor, or the U.S.
Trustee may later file a complaint to revoke a chapter 7 discharge if they can
prove: (1) the discharge was obtained through the fraud of the debtor; or (2)
the debtor acquired property that is property of the estate and knowingly and
fraudulently failed to report the acquisition of such property or to surrender
the property to the trustee. 11 U.S.C. § 727(d). Generally, this complaint must
be filed within a year after the discharge was granted. 11 U.S.C. §
727(e).
Certain types of debts may not be discharged in a chapter 7 such as
alimony and child support, most taxes, student loans made or guaranteed by a
governmental unit, debts for death or personal injury caused by the debtor's
operation of a motor vehicle while intoxicated from alcohol or other substances,
and debts for criminal restitution orders. 11 U.S.C. § 523. To the extent that
these types of debts are not fully paid in the chapter 7 case, the debtor is
still responsible for them after the bankruptcy.
A creditor’s claim for money or property obtained by false pretenses,
debts for fraud while acting in a fiduciary capacity, debts for willful and
malicious injury to another or to the property of another, and debts arising
from a property settlement agreement incurred during or in connection with a
divorce will be discharged unless the creditor timely files an adversary
complaint. 11 U.S.C. § 523. The deadline for a creditor to commence an adversary
proceeding objecting to the discharge of such debts is 60 days from the first
date set for the creditors meeting. Federal Rules of Bankruptcy Procedure 4007.
The presumption is in favor of the discharge, and the creditor normally has the
burden of proof to show that such debts should be excepted from the bankruptcy
discharge.
Secured Creditors
Secured creditors are creditors that have a valid and perfected lien
against one or more of the debtor’s assets. Secured creditors normally retain
their lien rights (including the right to repossess or foreclose) regardless of
any discharge issued by the bankruptcy court. The debtor must decide whether to
retain or surrender such assets. If a debtor returns the collateral, and a
discharge is granted, the debtor will no longer be liable to that secured
creditor.
However, a debtor wishing to retain property that is collateral for a
creditors, (i.e. cars and homes) may “reaffirm” the debt or redeem the property.
A reaffirmation agreement between the debtor and the creditor creates a new
contract between the respective parties where the debtor promises to pay all or
a portion of the money owed. The reaffirmation agreement causes the debtor to
once again become personally liable to the secured creditor. The reaffirmed debt
will survive the discharge. In return, the creditor promises as long as payments
are made, the creditor will not repossess the automobile or other property. If
the debtor defaults on the payments, the creditor may repossess and sell the
collateral. And if the sale price is not enough to satisfy the debt, the debtor
will the creditor any deficiency. Note that Ohio does not permit a debtor to allow the
secured creditor’s lien to simply “ride through” the bankruptcy process absent
reaffirmation or redemption. Johnson v. Sun Fin. Co. (In re Johnson), 89
F.3d 249 (5th Cir. 1996) (per curiam) (no retention of collateral without
reaffirmation or redemption).
A debtor may redeem an asset by paying the fair market value in a
lump sum. For example, if the balance on a car loan is $10,000 but the car is
only worth $7,000, it may be sensible to redeem the car. From a practical
perspective most debtors that file bankruptcy do not have access to ready cash
sufficient to pay the secured creditor. There are, however, companies that will
provide redemption financing. While their interest rates are high, it may still
be the preferred course of action depending on how negotiations relative to
reaffirmation proceed.
Copyright 2006, All Rights Reserved.
Thrush and Rohr
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