Chapter 7 – A Fresh Start
A new beginning. A reset. A fresh start. A line separating a bleak past from a future with hope. All of these things may be possible with a Chapter 7 discharge.
When a person files a Chapter 7 bankruptcy, he will (with exceptions noted below) receive a discharge of debts. A trustee is appointed to administer the case. The trustee’s job is to sell the debtor’s non-exempt assets and pay the proceeds to his creditors. This is the exchange given for the discharge. However, a trustee rarely sells a debtor’s assets because all of the debtor’s property is “exempt” and/or subject to mortgages or other liens. Usually, a debtor will receive his discharge without the trustee selling any of his assets.
In most Chapter 7 cases, personal debtors are discharged from their debts. However not all types of debts are subject to the discharge and a debtor can be denied a discharge for certain reasons. Most ordinary debts such as credit card debts and medical bills will be subject to the discharge.
Debts not subject to the discharge include child support, alimony and other domestic support obligations, certain taxes, most student loans, debts for malicious injuries and other bad acts. The above list is not all inclusive so the debtor should discuss his particular situation with his attorney.
If a debtor “reaffirms” a debt, he will not receive a discharge of that debt. Reaffirmation of debts is voluntarily and relates to secured debts (such as automobile loans). It is discussed more fully below.
Under some circumstances, a debtor can be denied a discharge. These bad acts include situations where a debtor hides assets, lies on his bankruptcy schedules or the bankruptcy proceedings, or fails to maintain adequate records regarding his financial affairs. This list is not all inclusive so the debtor should discuss his particular situation with his attorney. Denial of discharge in bankruptcy proceedings is rare.
The Chapter 7 discharge is available only to people, not to corporations or other entities.
SECURED DEBT CHOICES
Creditors who have a valid lien on property of the debtor will continue to maintain that lien during and after the bankruptcy. This normally applies to automobile loans and to mortgage loans. Regarding these secured debts, debtors have several choices or options available to them. 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. To reaffirm a debt, the debtor may have to show the court he can make the debt payments. Third, the debtor can “redeem” the property by paying the secured creditor the value of the property; however there are sometimes limits to what a creditor must accept for collateral such as an automobile purchased within 910 days before 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 $3,000 but has a secured automobile loan with a balance of $10,000. His monthly payments are $375. Debtor’s choices regarding the automobile are
- He can surrender the automobile to the lender and receive a discharge of that debt.
- If his budget will support the $375 monthly payment, he can reaffirm the debt with the lender and continue to make the monthly payments; or
- He can redeem the automobile by paying the lender its value, i.e. $3,000.
When a Chapter 7 bankruptcy is filed, a bankruptcy estate is created. The debtor’s property becomes property of that bankruptcy estate. However the Bankruptcy Code provides that the debtor can continue to own certain property, which it calls exempt property. Therefore, property that is “exempt” 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 law regarding the exemptions a debtor can claim depend on where the debtor has lived in the 2 to 2 ½ year period preceding the bankruptcy. If the debtor has lived in the same state for the entire two year period preceding his bankruptcy, the following rules apply to debtors residing in Kentucky and Indiana:
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 $21,625, an automobile exemption of $3,450 and, household furnishings having a value up to $11,525. If the debtor does not have a homestead exemption of $21,625, he can claim up to $11,525 of that unused exemption in any property including bank accounts. 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: Up to $17,600 in a residence, other real estate held as tenants by the entireties, up to $9,350 of non-residential real or tangible personal property and up to $350 of intangible personal property. WHAT ABOUT PROPERTY HELD BY ENTIRETIES
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; however the US Trustee may challenge the Chapter 7 filing for other reasons. Individuals whose debts are primarily consumer debts and who do not qualify for Chapter 7 relief still qualify for Chapter 13 and/or Chapter 11 relief.
According to the Bankruptcy Code, filing the bankruptcy creates an automatic stay which prohibits creditors from taking any action to enforce their debt. This automatic stay includes prohibitions against creditor phone calls, dunning letters, repossession of collateral (such as an automobile), continuing with a mortgage foreclosure. The bankruptcy court can, for certain reasons, terminate the automatic stay to allow a secured creditor to enforce its claim against the collateral.
CREDIT COUNSELING AND FINANCIAL EDUCATION
Also, to file a bankruptcy, the debtor must take a qualified credit counseling course within 180 days prior to his filing bankruptcy. After the bankruptcy is filed, the debtor must take a second course, a qualified debtor financial education course. These courses are normally taken on the Internet.
TIME LINE FOR CHAPTER 7
For most individuals, the Chapter 7 process last three to four months beginning to end. Prior to the bankruptcy, the debtor must complete his credit counseling. When the bankruptcy is filed, the debtor must file his petition, schedules and Statement of Financial Affairs and supply the Trustee with appropriate documents. After the bankruptcy is filed the debtor must complete his financial education course. The section 341 meeting (sometimes called the creditors meeting) is held approximately a month after the bankruptcy is filed. The case is then held open for a period of 60 days from the section 341 meeting during which period creditors or the US Trustee may challenge the debtor’s discharge or attempt to dismiss the case. If there are no challenges to discharge, and no attempts by the US Trustee to dismiss the case, and no property to be administered, the discharge will 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 tries to dismiss the case for abuse or other reason, then the administration can take longer, possibly over a year. 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).