Ch. 7 Bankruptcy Process
The end result of a successful Chapter 7 Bankruptcy Petition is that all general unsecured debts are legally discharged (wiped out) forever.
This generally includes medical bills, credit card bills, personal loans, guaranteed business loans, etc. Certain types of debts that cannot be discharged include child support payments, student loans, and recent income tax debt which substantively became due less than 3 years before the petition is filed.
Secured loans generally cannot be discharged. However, there are exceptions to this principle, and if the debtor(s) cannot afford to continue making payments to a secured lender, the debtor generally has the right to indicate or not indicate their intent to surrender the property and what is known as the "deficiency debt", which is any debt that remains after the secured creditor sells or is given a credit for the fair market value ("FMV") of the collateral.
How Does Chapter 7 Work?
A Chapter 7 is typically filed with the US court in the district in which the client resides. Your petition should include a list of all your assets and debts. Many debts under the U.S. bankruptcy code can be wiped out by filing for Chapter 7. In a successful Chapter 7 bankruptcy petition, ideally all of unsecured debts will be legally discharged and completely eliminated. The most common type of debts would include:
Credit card debt
Certain types of debts however, are not eligible to be discharged through Chapter 7. Any outstanding child support payments, student loans, tax debts, restitution or debts related to criminal charges cannot generally be discharged.
In order to be found eligible for Chapter 7, you will need to pass what is known as the means test. You must take what is known as a credit counseling seminar within 180 days before filing your petition.
The benefit of filing for Chapter 7 is that once your petition is entered you are protected under the "automatic stay." This makes it so that creditors are no longer permitted to pursue collection actions against you. As long as the automatic stay is in effect, creditors cannot contact you, demand payments, cannot continue with lawsuits and must cease all wage garnishments.
An Overview of the Process
The Chapter 7 petition must include all material assets owned by and all secured and unsecured liabilities/debts owed by debtors, as well as a schedule of all of the debtors' gross household income received in the previous 6 months and the debtors' projected monthly gross and net household income and expenses.
Debtors will also have to satisfy the Bankruptcy Code’s means test based on their entire gross household income earned over the 6 months preceding the month in which the petition is filed, the means test determines if potential debtors must file a Chapter 13, as opposed to a chapter 7, petition and pay back a minimum of 25% of their total, general, unsecured debt to their unsecured creditors (see article in this website entitled "The Bankruptcy Means Test" - all prospective bankruptcy filers should speak to an experienced bankruptcy attorney concerning the Bankruptcy Code’s means test requirements as part of their consultation).
Debtors will be also able to reject or affirm any of their ongoing executory contracts/contractual obligations, if they have any, at the time the petition is filed. If the debtor's assets are all exempt (i.e. able to be protected), as is the case with the vast majority of Chapter 7 debtors, all unsecured debts will be discharged pursuant to the Bankruptcy Court's discharge order issued at the end of the case.
Although the Chapter 7 Trustee and creditors have the right to file an Adversarial Complaint against debtors with the U.S. Bankruptcy Court claiming that their subject debt was procured through the fraudulent or willful misconduct of the debtor, these complaints are rare. As long as debtors accurately provide all of their financial information at their consultation with an experienced bankruptcy practitioner, the debtor's attorney should know if there is any real possibility of this happening.
Approximately four weeks after the petition is filed, the Bankruptcy Court schedules the 341(a) Hearing.
The 341(a) Hearing is also commonly referred to as the Meeting of Creditors. All debtors, including both a husband and wife in the case of a joint petition, must appear and answer questions under oath at their 341(a) hearing. If the debtor does not speak fluent English, the U.S. Trustee's Office will provide the debtor with a competent interpreter.
Although each one of the debtor's creditors has a right to show up and ask the debtor questions concerning their assets and liabilities at the 341(a) hearing, this is rare. In the majority of cases, the Chapter 7 Trustee, appointed by the Bankruptcy Court at the time the Chapter 7 Petition is filed, will ask the debtor a series of questions pertaining to the debtor's assets and liabilities.
Since the debtor's assets usually fall well within the exemptions allowed by the U.S. Bankruptcy Code, the questions asked by the Trustee are usually perfunctory; e.g. the Trustee will likely ask if the debtor expects to receive a significant amount of money in the near future; if they had a right to file a lawsuit against any person or entity at the time the petition was filed and general questions related to the information in the petition.
What to Expect
The debtor should also be prepared to answer common sense questions concerning the debtor's good faith, such as what caused the debtor(s) to have to file for Chapter 7 relief, how the debtor is making ends meet if the petition shows a significant negative disposable income and other common sense questions relating to confirmation of the debtor's good faith.
Another common question asked by the Trustee is whether the debtor(s) used any of the credit cards listed in their petition during the several months preceding the filing of their petition. The reason for this question is obvious. If a debtor(s) runs up credit card or any other debt when the debtors knew or reasonably should have known that he/she was insolvent, the Trustee or a creditor can argue that the debt which was run up during this time period constituted fraudulent conduct on the part of the debtors.
If too much of this occurred the case could be referred to the US Trustee's Office which might potentially object to the debtor's right to receive a discharge order by the Bankruptcy Court and (thereby defeat the purpose of filing for bankruptcy protection). It should be noted that, depending on the type of debt incurred, the Code provides for a presumption that the debtor knew that he/she was insolvent (i.e. that they would not be able to pay back the debt) if the debt was incurred during a 70-90 day period preceding the filing of Chapter 7 or 13 petitions.
If a creditor files a timely Adversarial Complaint against the debtor and the Bankruptcy Court finds that the debt which is the subject of the adversarial complaint was procured through the debtor's willful or fraudulent misconduct, the debt will not be discharged by the Bankruptcy Court's Final Decree or Discharge Order. As indicated above, this is extremely rare.
The Bankruptcy Court's Notice scheduling the 341(a) hearing sets the deadline by when creditors would have to file any/all objections to their debt being discharged, and the debtor's right to receive the sought Discharge Order.
If there are no objections filed by the debtor's creditors or the Chapter 7 Trustee, the Bankruptcy Court will usually issue its Discharge Order and/or Final Decree within one to two weeks after the above-referred deadline to object expires. This is approximately three to four months after the case was filed and approximately two to two-and-a-half months after the date of the 341(a) Hearing.
Get Trustworthy Guidance
To learn more about how Chapter 7 works, contact The Law Office of Marc G. Alster today. We offer free initial consultations, quality services at competitive rates, and effective representation.
From his office in Hackensack, New Jersey, Attorney Alster's services extend throughout the state of New Jersey, as well as New York. Some areas he serves in New Jersey are Passaic County, Bergen County, Hudson County, Essex County, and more; in New York, he serves Rockland County, Queens, and the Bronx.