Chapter 7 Bankruptcy Basics
Get a "Fresh Start"
Chapter 7 is by far the most common type of bankruptcy.
For individuals and Businesses that have closed
A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in Chapter 13. Instead, the bankruptcy trustee gathers and sells all your nonexempt assets and uses the proceeds of such assets to pay your creditors. Most Chapter 7 cases however are “no asset” cases as the debtor’s assets typically have no value over and above any liens (including mortgages) and the debtor’ allowed exemptions (discussed in detail below). In return for this, individuals obtain a Discharge and are relieved from having to repay their debts. Its known as a “Fresh Start”.
The principles of bankruptcy are rooted in the United States Constitution and was seen by the Founding Fathers as a more suitable alternative to “debtors prisons”.
Under current federal law, a person may receive a Discharge under Chapter 7 once every 8 years.
The Automatic Stay
Filing a bankruptcy petition under Chapter 7 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property, such as foreclosures, lawsuits, and sheriff seizures. The stay arises automatically by operation of law and requires no judicial action. 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. The Automatic Stay is a powerful legal tool which enables you to regain control over your personal financial affairs and property while your bankruptcy case is pending and a fresh start is sought.
Exempt Assets are assets that you are allowed by law to keep, once you have gone through the Chapter 7 process. The Bankruptcy Code provides the debtor with a choice between electing the federal bankruptcy law exemptions set forth in the Bankruptcy Code, or electing the state law exemptions provided for in the state in which the debtor resides.
Under the new Massachusetts Homestead Statute, homeowners are now entitled to an automatic $125,000 exemption on the equity in their homes, including property held in trust. The homestead exemption increases to $500,000 with the filing of a one page Declaration of Homestead with your local county registry of deeds.
Both the federal and state exemptions allow a debtor to claim as exempt all pension and retirement income such as 401K’s, and IRA’s.
Examples of Exempt Assets Under the Federal Bankruptcy Law:
- $21,625 equity in a residence
- $3,450 equity in any automobile
- $11,535 in Household Furnishings
- $11,975 for any items (including cash) if homestead exemption not elected
- All Pensions, 401K’s, IRA’s
- All Clothing
- $1,450 in Jewelry
Examples of Exempt Assets Under Massachusetts State Law
- Up to $500,000 equity in a residence (under Massachusetts Homestead Exemption)
- All Pensions, 401K’s, IRA’s
- $7,500 for Motor Vehicle
- $2,500 in Cash or Savings
- $5,000 in Business Assets
- $15,000 in Household Furnishings
- $6,000 Miscellaneous “Catch-All”
Avoid Judicial Liens/Attachments
Chapter 7 Bankruptcy allows homeowners to avoid or “strip-off” judicial liens such as Attachments and Executions, on their primary residences, to the extent they impair a Federal or Massachusetts Homestead Exemption.
Do I Qualify for Chapter 7?
Under the amendments to the Bankruptcy Code passed by Congress in 2005, a means test was established for qualifying to file under Chapter
7. If your household income is below the median income you qualify for Chapter 7 filing. Debtors who do not qualify under Chapter 7 may still qualify under Chapter 13 which requires the completion a repayment plan. For cases filed after December 1, 2011, the median income for a one person household in Massachusetts is $53,496. For a family of four, it is $99,067. If your household income is less than the median income for Massachusetts for a family of your size, you can file Chapter 7 bankruptcy. The median income for a family of your size as well as all of the means testing information can be found at the following web site: http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm.
Credit Counseling and Financial Management Course
Under the 2005 amendments to the Bankruptcy Code individual debtors are required to take a credit counseling course with an approved agency prior to filing bankruptcy, as well as a financial management course after your case has been filed.
The Chapter 7 Discharge
An individual receives a Discharge for most of his or her debts in a Chapter 7 bankruptcy case. A Discharge releases individual debtors from personal liability for most debts . A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. Because a Chapter 7 discharge is subject to many exceptions, though, debtors should consult competent legal counsel before filing to discuss the scope of the Discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a Discharge in more than 99% of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the Discharge or a motion to extend the time to object, the bankruptcy court will issue a Discharge Order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.
But not all of an individual’s debts are discharged in chapter 7.
Examples of Debts Not Dischargeable
- Alimony and Child Support
- Criminal fines or restitution
- Recent Taxes
- Most Student Loans
- Debts for willful and malicious injury caused 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
The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case.
Grounds to Deny a Discharge
Based upon the debtors conduct once the bankruptcy case is commenced, there may exist grounds for denying an individual debtor a Discharge in a Chapter 7. These grounds are narrow and are construed against the moving party, and may include:
- Failing to keep or produce adequate books or financial records;
- Failing to explain satisfactorily any loss of assets;
- Committing a bankruptcy crime such as perjury;
- Failing to obey a lawful order of the bankruptcy court;
- Fraudulently transferring, concealing, or destroying property that would have become property of the estate; or
Failing to complete an approved instructional course concerning financial management.
The Chapter 7 Process
A Chapter 7 case begins with the debtor filing a Petition with the Bankruptcy Court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the Petition, the debtor must also file with the Court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases. Debtors must also provide the assigned case Trustee (described below) with a copy of the tax return or transcripts for the most recent tax year. Individual debtors with primarily consumer debts must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling, and evidence of payment from employers, if any, received 60 days before filing.
Between 20 and 40 days after the petition is filed, the Trustee will hold a meeting of creditors. During this meeting, the Trustee puts the debtor under oath, and both the Trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions.
It is important for the debtor to cooperate with the Trustee and to provide any financial records or documents that the Trustee requests. The Bankruptcy Code requires the Trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the 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. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.
Role of the Case Trustee
When a chapter 7 petition is filed, the United States Trustee for the District in which the case is filed appoints an impartial case Trustee to administer the case and liquidate the debtor’s nonexempt assets. These case Trustees are typically bankruptcy attorneys. If all the debtor’s 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 and the debtor will retain all of his assets. Most Chapter 7 cases involving individual debtors are no asset cases. But if the case appears to be an “asset” case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. In the typical no asset Chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution.