Filing chapter 7 bankruptcy doesn’t involve the filing of a repayment plan like chapter 13 bankruptcy. Instead, the chapter 7 trustee sells your nonexempt assets and uses the proceeds of the sales to pay your creditors in accordance with the rules outlined in the Bankruptcy Code. Bankruptcy laws allow debtors in Colorado and Oregon to keep certain “exempt” property, but the bankruptcy trustee will liquidate any remaining assets. As a result, you should realize that the filing chapter 7 bankruptcy can result in losing some of your personal property.
CHAPTER 7 ELIGIBILITY FOR CONSUMERS & BUSINESSES
Every individual, married couple, partnership and business entity – like corporations, sole proprietors and LLCs – are potentially eligible for bankruptcy protection under chapter 7. In order to qualify for chapter 7 bankruptcy relief, you don’t need to be insolvent, and your debts can be either large or small. To qualify as an individual or married couple, the law requires you to “pass” a complex mathematical “means test” before filing chapter 7 bankruptcy. Other obstacles may prevent you from qualifying for chapter 7 bankruptcy, too. The three most common occur if:
- You have already filed for chapter 7 bankruptcy during the preceding 180 days and your case was dismissed because of your “willful failure” to appear before the court or to comply with orders of the court;
- You voluntarily dismissed your own case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens; or
- You haven’t received credit counseling from an approved credit counseling agency within 180 days before filing your chapter 7 bankruptcy petition, schedules and other documents.
There are exceptions to these rules in emergency situations or when the trustee determines that there is a gross lack of approved credit counseling agencies to provide your counseling. If a “debt management plan” is developed during required credit counseling, it must be filed with the court.
The primary purpose of bankruptcy is to discharge your debts and give you a debt-free fresh start. Although there are several specific types of debt that can’t be eliminated in bankruptcy, you are absolved of liability for your debts, which qualify for chapter 7 “discharge.” Unlike individuals and married couples, however, partnerships and corporations cannot discharge their debts under chapter 7 bankruptcy. See 11 U.S.C. § 727(a)(1). Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and you may lose your fresh start if you don’t cooperate with court orders.
HOW CHAPTER 7 BANKRUPTCY WORKS
In Colorado and Oregon, Chapter 7 bankruptcy begins the moment you file your chapter 7 petition and supporting paperwork with US Bankruptcy Court. In addition to your chapter 7 bankruptcy voluntary petition, here is a list of some of the other documents you will be required to file with the court under the rule 1007(b) of the Federal Rules of Bankruptcy Procedure:
- Schedules of assets and liabilities;
- Schedule of current income and expenditures;
- Statement of financial affairs; and
- Schedule of executory contracts and unexpired leases.
Debtors must also provide the trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).
Individuals and married couples with primarily consumer debts have additional document filing requirements. They must file:
- A certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling;
- Evidence of payment from employers received 60 days before filing (if applicable);
- A statement of monthly net income and any anticipated increase in income or expenses after filing; and
- A record of any interest the debtor has in federal or state qualified education or tuition accounts.
Married couples can file a “joint” petition or two individual petitions. Even if you choose to file jointly, married couples are subject to the exact same filing requirements of individual debtors. (Although they are not available from the court, you may purchase the official forms at legal stationery stores or downloaded from the internet at USCourts.gov.)
To file chapter 7 bankruptcy in Colorado or Oregon, you must pay the court $306, which equals the $252 case filing fee, a $39 miscellaneous administrative fee and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court when you actually file your paperwork. If you can’t pay $306, you can ask the court for permission to pay your $306 fee in installments. If you are married and plan to file a joint petition, the fee stays the same but be aware that failing to pay these fees can result in a dismissal of your chapter 7 case.
If your income is less than 150% of the poverty level (as defined in the Bankruptcy Code) and you’re unable to pay the chapter 7 fees – even in installments – the court can waive the fees requirement. 28 U.S.C. § 1930(f).
In order to complete the forms that comprise your chapter 7 bankruptcy petition, statement of financial affairs and schedules, you’ll need the following information:
- A complete, detailed list of your creditors and the amount and nature of their claims;
- Your employer’s name and address as well as your annual income;
- A complete list of your real and personal property; and
- A detailed list of your monthly living expenses (e.g., food, clothing, shelter, utilities, taxes, transportation, medicine).
Married couples must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions or if only one spouse plans to file chapter 7 bankruptcy. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee and creditors can evaluate your household’s overall financial condition.
Among the documents the bankruptcy court will require you to file is a list of “exempt” property. The Bankruptcy Code allows individuals to keep the shirts on their backs by allowing you to exempt specific pieces of property from the reach of your creditors. Like many other states, both Colorado and Oregon have taken advantage of a clause in the Bankruptcy Code that permits individual states to adopt their own laws in place of the federal bankruptcy exemptions. For detailed information on Colorado’s and Oregon’s bankruptcy exemptions, contact us by clicking here.
Filing a petition under chapter 7 automatically “stays” (or stops) almost all collection actions against you and your property. Simply filing the petition, however, won’t stop certain types of actions, and the stay may be effective only for a short time in certain situations. The stay arises automatically under the Bankruptcy Code and requires absolutely no judicial action whatsoever. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Between 20 and 40 days after your chapter 7 bankruptcy petition is filed, the bankruptcy trustee will oversee a meeting of your creditors. This is commonly called a “341 Hearing.” During this meeting, the trustee places you under oath and asks you questions along with your creditors. It’s extremely uncommon in a chapter 7 bankruptcy for your creditors to show up. But you are required to be there. In the case of married couples, both debtors must attend the creditors’ meeting.
It’s important for you to cooperate with the trustee and provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask you questions at your 341 Hearing to ensure you are aware of the potential consequences of seeking a discharge of your debts in bankruptcy, including the potential effect on your credit history, your ability to file a petition under a different chapter, the effect of receiving a discharge and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information.
THE CHAPTER 7 BANKRUPTCY TRUSTEE’S ROLE
Once your chapter 7 bankruptcy petition has been filed, the US Trustee appoints an impartial case trustee to administer your case. If all of your assets are exempt or subject to valid liens, the trustee will normally file a “no asset” report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 bankruptcies are no asset cases. In the typical no asset chapter 7 bankruptcy, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time for them to file proofs of claim.
Filing your chapter 7 bankruptcy case automatically creates your bankruptcy “estate.” The estate basically becomes the temporary legal owner of all your property. Your chapter 7 bankruptcy estate consists of all of the legal or equitable interests you have in property as of the commencement of your case, including property owned or held by another person.
In an asset case, the primary role of the chapter 7 bankruptcy trustee is to liquidate your nonexempt assets and distribute the proceeds amongst your unsecured creditors. The trustee accomplishes this by selling your property if it is free and clear of liens (as long as the property is not exempt). The trustee may also attempt to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to:
- Set aside preferential transfers made to creditors within 90 days before the petition;
- Undo security interests and other prepetition transfers of property that were not properly perfected under nonbankruptcy law at the time of the petition; and
- Pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law.
In addition, if the chapter 7 bankruptcy was filed for a business, the bankruptcy court may authorize the trustee to operate the business while it winds down, if such operation will benefit creditors and enhance the liquidation of the estate.
THE CHAPTER 7 BANKRUPTCY DISCHARGE
Chapter 7 bankruptcy wipes out (or “discharges“) your personal liability for most types of debt. By doing so, your creditors aren’t allowed to take any collection actions against you. Because your discharge under chapter 7 bankruptcy is subject to many exceptions, it’s often a good idea to consult a lawyer if you have a particularly complex case. Even if it’s not particularly complex, hiring a lawyer to handle your bankruptcy can also help you achieve the maximum possible benefit from the bankruptcy laws beyond a mere discharge. In general, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a creditor files a complaint objecting to your discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early, i.e., 60 to 90 days after the date of your 341 Hearing. See Fed. R. Bankr. P. 4004(c).
The grounds for denying an individual debtor’s discharge under chapter 7 are narrow. By way of example, the bankruptcy court may deny your discharge if it believes that you:
- Failed to keep or produce adequate books or financial records;
- Failed to explain satisfactorily any loss of assets;
- Committed a bankruptcy crime such as perjury;
- Failed to obey a lawful order of the bankruptcy court;
- Fraudulently transferred, concealed or destroyed property that would have become property of your chapter 7 bankruptcy estate; or
- Failed to complete an approved financial management course.
Depending upon your situation, secured creditors may retain some rights to repossess your collateral even after a discharge is granted. Depending on your circumstances, if you want to keep certain collateral, you may decide to “reaffirm” the debt. A Reaffirmation Agreement is a contract between you and your creditor that stipulates you will remain personally liable and continue to pay all or a portion of the money owed, even though the debt would otherwise be eligible for discharge in your chapter 7 bankruptcy case. In return, the creditor promises that it will not repossess the collateral – like a car – so long as you continue to make regular payments.
If you choose to reaffirm a debt, you must do so before the bankruptcy court will grant your chapter 7 discharge. To do so, you must sign a written reaffirmation agreement and file it with the court. Your bankruptcy attorney can do it for you as well. The Bankruptcy Code also requires reaffirmation agreements to contain an extensive set of disclosures described in 11 U.S.C. § 524(k). For example, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated and that reaffirmation means that the debtor’s personal liability for that debt will not be discharged in the bankruptcy. The disclosures also require the debtor to sign and file a statement of his or her current income and expenses, which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of “undue hardship,” and the court may decide to cancel your reaffirmation agreement.
If you are represented by an attorney in connection with your reaffirmation agreement(s), your attorney must certify in writing that he or she advised you of the legal effect and consequences of the agreement, including a default under the agreement. In both Colorado and Oregon, your bankruptcy attorney must also certify that you were fully informed and voluntarily made the agreement. The Bankruptcy Code requires a reaffirmation hearing if you have not been represented by an attorney during the negotiations, or if the court disapproves the reaffirmation agreement. See 11 U.S.C. § 524(d) and (m). You’re also free to repay any debt voluntarily, after you discharge, whether or not you sign a reaffirmation agreement.
Although it’s extremely common to discharge all of your debts in chapter 7 bankruptcy, some types of debts cannot be discharged in chapter 7. These include:
- Debts not discharged include debts for alimony and child support;
- Certain taxes;
- Debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit;
- Debts for willful and malicious injury by the debtor to another entity or to the property of another entity;
- Debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances; and
- Debts for certain criminal restitution orders.
You will still be personally liable on these debts if you cannot pay them off in full during your chapter 7 bankruptcy case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged in chapter 7 bankruptcy unless your creditors file a motion with the court.
The court has the authority to revoke your chapter 7 bankruptcy discharge upon the request of bankruptcy trustee, one of your creditors or the US Trustee if they can prove (1) your discharge was obtained through fraud; (2) you acquired property that should be a part of your bankruptcy estate but knowingly and fraudulently failed to report the acquisition of such property; or (3) if you are unable to explain a “material misstatement” or in connection with an audit of the debtor’s case.
ALTERNATIVES TO FILING CHAPTER 7 BANKRUPTCY
Debtors should be aware that there are several alternatives to filing chapter 7 bankruptcy. For example, debtors who are engaged in business – including corporations, partnerships and sole proprietorships – may prefer to remain in business and avoid liquidation. If this describes your situation, you should consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, you can seek to adjust your debts, either by reducing the debt or by extending the time for repayment, or you can seek a more comprehensive reorganization of your finances. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code.
In addition, individual debtors who have “regular income” may seek an adjustment of their debts under chapter 13 of the Bankruptcy Code. A particularly useful advantage of filing chapter 13 bankruptcy is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to “catch up” on overdue payments through a payment plan.
If you have questions about bankruptcy or debt relief, contact us today. Our knowledgeable team will help you explore your options and determine whether bankruptcy can help you get a debt-free fresh start.