Chapter 7 FAQs
1. What is a Chapter 7 bankruptcy case and how does it work?
A Chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under Chapter 7 of the Bankruptcy Code. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is a federal law that deals with bankruptcy. A person who files a Chapter 7 case is called a debtor. In a Chapter 7 case, the debtor must turn his or her nonexempt 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 the discharge, and obeys the orders and rules of the bankruptcy 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 a debt that the debtor is released from and does not have to pay.
3. How does a person obtain a Chapter 7 discharge?
A Chapter 7 discharge is obtained by filing and maintaining a Chapter 7 bankruptcy case and being eligible for a Chapter 7 discharge. However, not all debts are discharged by a Chapter 7 discharge. Certain types of debts are by law not dischargeable under Chapter 7 and debts of this type will not be discharged even if the debtor receives a Chapter 7 discharge.
4. Who is permitted to file and maintain a Chapter 7 case?
Any person who resides in, does business in or has property in the United States is permitted to file a Chapter 7 bankruptcy case except a person who has intentionally dismissed a prior bankruptcy case within the last 180 days. To be permitted to maintain a Chapter 7 bankruptcy case a person must qualify for Chapter 7 relief under a process called means testing.
5. What types of debts are not dischargeable in a Chapter 7 case?
All debts of any type or amount, including out-of-state debts, are dischargeable in a Chapter 7 case except for the types of debts that are by law nondischargeable in a Chapter 7 case. The following is a list of the most common types of debts that are not dischargeable in a Chapter 7 case:
(1) Most tax debts and debts that were incurred to pay nondischargeable federal tax debts.
(2) 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 bankruptcy case.
(3) Debts not listed on the debtor’s Chapter 7 forms, unless the creditor knew of the bankruptcy case in time to file a claim.
(4) Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the bankruptcy case.
(5) Debts for domestic support obligations, which include debts for alimony, maintenance, or support, and certain other divorce-related debts, including property settlement debts.
(6) Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the bankruptcy case.
(7) Debts for certain fines or penalties.
(8) Debts for most educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents.
(9) Debts for personal injury or death caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated.
(10) 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.
6. Who should not file a Chapter 7 case?
A person who is not eligible for a Chapter 7 discharge should not file a Chapter 7 case. Also, in most instances, a person who has substantial debts that are not dischargeable under Chapter 7 should not file a Chapter 7 case. In addition, it is not usually advisable for a person with disposable income sufficient to make the required minimum payments to unsecured creditors to file a Chapter 7 case, because a presumption of abuse will arise and the case will probably be dismissed or converted to Chapter 13.
7. How does the filing of a Chapter 7 case by a person affect collection and other legal proceedings that have been filed against that person in other courts?
The filing of a Chapter 7 case by a person automatically suspends virtually all collection and other legal proceedings pending against that person. A few days after a Chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the person. This court-ordered suspension of creditor activity against the person filing is called the automatic stay. If necessary, a notice of the automatic stay may be served on a creditor earlier by the person or the person’s attorney. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable in damages to the person filing. Criminal proceedings and actions to collect domestic support obligations from exempt property or property acquired by the person 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 person filing, and a creditor may continue to collect debts from those persons after the case is filed. Persons who have had a prior bankruptcy case dismissed within the past year may be denied the protection of the automatic stay.
8. How does filing a Chapter 7 case 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 8 years before they can file another Chapter 7 case. If there are compelling reasons for filing a Chapter 7 case that are not within the person’s control (such as an illness or an injury), some credit rating agencies may take that into account in rating the person’s credit after filing.
9. Are the names of persons who file Chapter 7 cases published?
When a Chapter 7 case is filed, it becomes a public record and the names of the persons filing may be published by some credit-reporting agencies. However, newspapers do not usually report or publish the names of consumers who file Chapter 7 cases.
10. Will a person lose all of his or her property if he or she files a Chapter 7 case?
Usually not. Certain property is exempt and may not be taken by creditors unless it is encumbered by a valid mortgage or lien. A person is usually allowed to retain his or her unencumbered exempt property in a Chapter 7 case. A person may also be allowed to retain certain encumbered exempt property (see Question 34, below). Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.
11. When must a person 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,” which is usually held about a month after the case is filed. The person filing the case must bring photo identification, his or her social security card, his or her most recent pay stub and all of his or her bank and investment account statements to this hearing. At this hearing, the person is put under oath and questioned about his or her debts, assets, income and expenses 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 person. For most persons, this will be the only court appearance, but if the bankruptcy court decides not to grant the person a discharge or if the person wishes to reaffirm a debt, there may be another hearing about three months later which the person will have to attend.
12. What is a trustee in a Chapter 7 case, and what does he or she do?
The trustee is a person appointed by the United States trustee to examine the person who filed the case, collect the person’s nonexempt 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 responsible for seeing to it that the person filing performs the required duties in the case. A trustee is appointed in a Chapter 7 case, even if the person filing has no nonexempt property.
13. How is a person notified when his or her discharge has been granted?
The person is usually notified by mail. Most courts send a form called “Discharge of Debtor” to the person filing and to all creditors. This form is a copy of the court order discharging the person from his or her dischargeable debts, and it serves as notice that the discharge has been granted and that creditors are forbidden from attempting to collect discharged debts. It is usually mailed about four months after a Chapter 7 case is filed.
14. What if a person wishes to repay a dischargeable debt?
A person may repay as many dischargeable debts as desired after filing a Chapter 7 case. By repaying one debt, a person does not become legally obligated to repay any other debts. The only dischargeable debt that a person is legally obligated to repay is one for which the person and the creditor have signed what is called a “reaffirmation agreement.” If the person was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid. If the person was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and other required documents with the court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, the person filing is not legally obligated to repay the debt, even if the person has made a payment on the debt since filing the Chapter 7 case, has agreed in writing to repay the debt, or has waived the discharge of the debt in a waiver that was not approved by the bankruptcy court.
15. How long does a Chapter 7 case last?
A successful Chapter 7 case begins with the filing of the bankruptcy forms and ends with the closing of the case by the court. If there are no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the person filing receives his or her discharge, which is usually about four months after the case is filed. If there are 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 perform his or her other duties in the case. Most Chapter 7 consumer cases with assets last about six months, but some last considerably longer.
16. What should a person do if a creditor later attempts to collect a debt that was discharged in his or her Chapter 7 case?
When a Chapter 7 discharge is granted, the court enters an order prohibiting creditors from later attempting to collect any discharged debt from the person filing. Any creditor who violates this court order may be held in contempt of court and may be liable to the person for damages. If a creditor later attempts to collect a discharged debt from the person, the person should give the creditor a copy of his or her Chapter 7 discharge and inform the creditor in writing that the debt was discharged in the Chapter 7 case. If the creditor persists, the person should contact an attorney. If a creditor files a lawsuit on a discharged debt, it is important to inform the court in which the lawsuit is filed that the debt was discharged in bankruptcy. The lawsuit should not be ignored because even though a judgment entered on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly.
17. 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 person or persons who filed the Chapter 7 case. 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 person filing is still liable for the debt even if the person filing receives a Chapter 7 discharge with respect to the debt. The only exception to this rule is in community property states where the spouse of the person filing is released from certain community debts by the Chapter 7 discharge.