Introduction
The purpose of chapter 7 is to discharge debts and give the
debtor a "fresh start." The discharge extinguishes
the debtor's personal liability on debts. A discharge is available
to individuals, not partnerships or corporations. Although
most individual chapter 7 cases result in a discharge of all
debts, some types of debts are not discharged, and a discharge
does not extinguish liens on property. In rare cases a chapter
7 may be dismissed as an abusive filing if the court finds
an individual has the ability to pay a meaningful dividend
to unsecured creditors in a chapter 13 case.
How Chapter 7 Works
A chapter 7 case begins by filing a petition 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. The debtor is required to file schedules
of assets and liabilities, including current income and expenses,
and a statement of financial affairs. A husband and wife may
file a joint petition, or a spouse may file individually.
Joint petitioners pay only one filing fee.
Filing a petition "automatically stays" most creditor
actions against the debtor and the debtor's property. 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.
One schedule filed by an individual debtor lists "exempt"
property. Federal bankruptcy law provides that an individual
[vs. business] debtor can protect certain assets from creditor
claims because this property is exempt under federal bankruptcy
law or the laws of the debtor's state. Married couples may
only claim one set of exemptions.
In Florida, your homestead is exempt from any creditor whose
debt does not arise out of the property itself. Examples of
debts which arise out of the property are mortgages, mechanics'
liens and materialmens' liens. Be aware that the homestead exemption
applies only to your principal place of residence and that you
must be able to present evidence supporting your claim. In addition,
there are limitations on the principal place of residence you
seek to exempt. Be certain to consult with me about these limitations
to see if they apply in your case.
A bankruptcy trustee is appointed when the case is filed. 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. The trustee sells the non-exempt assets which have
value and distributes the net proceeds to the creditors. If
an asset has a loan against it, the debtor can keep the asset
if the equity is exempt.
A "meeting of creditors" is held about 30 days after
the petition is filed. 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 trustee
conducts the meeting, and the debtor must cooperate and provide
the records the trustee requests. Otherwise, the debtor could
be denied a discharge.
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. A copy of the discharge is mailed to the
debtor and all the creditors listed in the debtor's schedules.
Role of the Trustee
The case trustee is appointed to administer the case and liquidate
the debtor's non-exempt assets. In the most cases, all of the
debtor's assets are exempt or subject to valid liens, so a trustee
usually has no assets to sell. These are called "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.
The filing of a bankruptcy petition creates an "estate,"
and the trustee becomes the temporary legal owner of the debtor's
property. The estate consists of all of the debtor's legal or
equitable interest in property, including property owned or
held by another person. The estate includes tangible and intangible
assets, such as insurance claims or lawsuits for damages.
The trustee can sell non-exempt property as well as property
with a market value in excess of the sum of any security interest
or lien and the allowed exemption the debtor holds in the property.
Objections to debtor's exemption claims must be filed within
30 days of the date a creditors meeting is completed.
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. As a general
rule, individual debtors receive a discharge in over 99 percent
of chapter 7 cases.
A creditor has two options to oppose the discharge: file a complaint
objecting to the debtor's bankruptcy discharge; or file a complaint
to determine if the creditor's debt is excepted from the discharge.
A creditor may pursue one or both of these remedies by filing
a complaint with the bankruptcy court. The time limit for an
adversary action is very short --- just 60 days from the first
date of the creditors meeting, unless extended by court order.
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. In general, the grounds
for denying a discharge are: the debtor failed to keep and produce
adequate financial records; the debtor failed to explain satisfactorily
a loss of assets; the debtor committed a bankruptcy crime; the
debtor failed to obey a lawful order of the bankruptcy court;
or the debtor fraudulently transferred, concealed, or destroyed
property that would have been property of the estate.
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: a) the discharge was obtained
through the fraud of the debtor; or b) 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. Generally, this complaint must
be filed within a year after the discharge was granted.
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. 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.
Debts 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. The creditor
must file the complaint within 60 days from the first date of
the creditors meeting. 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 debts
Secured creditors normally retain the right to seize their loan
collateral, even after a discharge is granted. The debtor must
decide whether to keep the asset. If a debtor returns the collateral,
and if a discharge is granted, the debtor will have no further
liability to the creditor.
A debtor wishing to keep the asset, such as an automobile, may
"reaffirm" the debt or redeem the property. A reaffirmation
is an agreement between the debtor and the creditor where the
debtor promises to pay all or a portion of the money owed. The
reaffirmed debt will still be owed after 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. Unfortunately, if the sale price is
not enough to pay off the debt, the debtor will still owe a
deficiency to the creditor.
A debtor may opt to redeem an asset by paying the fair market
value in a lump sum. For example, if the balance on a car loan
is $15,000 but the car is only worth $10,000, it may be sensible
to redeem the car. The problem is most debtors who file bankruptcy
do not have ready cash [or a rich relative] to pay the fair
market value in one lump sum. There are companies who provide
redemption financing. Their interest rates are high, but if
the gap between the loan balance and the value of the car is
large enough, a redemption loan may be less expensive than the
existing loan on the car. |
