Chapter 7 Eligibility.
To qualify for relief under chapter 7 of the
Bankruptcy Code, the debtor may be an individual, a
partnership, or a corporation or other business
entity. 11 U.S.C. §§ 101(41), 109(b). Subject to the
means test described above for individual debtors,
relief is available under chapter 7 irrespective of
the amount of the debtor's debts or whether the
debtor is solvent or insolvent. An individual cannot
file under chapter 7 or any other chapter, however,
if during the preceding 180 days a prior bankruptcy
petition was dismissed due to the debtor's willful
failure to appear before the court or comply with
orders of the court, or the debtor voluntarily
dismissed the previous case after creditors sought
relief from the bankruptcy court to recover property
upon which they hold liens. 11 U.S.C. §§ 109(g),
362(d) and (e). In addition, no individual may be a
debtor under chapter 7 or any chapter of the
Bankruptcy Code unless he or she has, within 180
days before filing, received credit counseling from
an approved credit counseling agency either in an
individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or
where the U.S. trustee (or bankruptcy administrator)
has determined that there are insufficient approved
agencies to provide the required counseling. If a
debt management plan is developed during required
credit counseling, it must be filed with the court.
One of the primary purposes of bankruptcy is to
discharge certain debts to give an honest individual
debtor a "fresh start." The debtor has no liability
for discharged debts. In a chapter 7 case, however,
a discharge is only available to individual debtors,
not to partnerships or corporations. 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 some types of
debts are not discharged. Moreover, a bankruptcy
discharge does not extinguish a lien on property.
How Chapter 7 Works.
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. (3) 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. Fed. R.
Bankr. P. 1007(b). Debtors must also provide the
assigned case 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). 11 U.S.C. § 521. Individual debtors
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, if
any, received 60 days before filing; 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. Id. A
husband and wife may file a joint petition or
individual petitions. 11 U.S.C. § 302(a). Even if
filing jointly, a husband and wife are subject to
all the document filing requirements of individual
debtors. (The Official Forms may be purchased at
legal stationery stores or downloaded from the
internet at www.uscourts.gov/bkforms/index.html.
They are not available from the court.)
The courts must charge a $245 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 upon filing. With the court's
permission, however, individual debtors may pay in
installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P.
1006(b); Bankruptcy Court Miscellaneous Fee
Schedule, Item 8. The number of installments is
limited to four, and the debtor must make the final
installment no later than 120 days after filing the
petition. Fed. R. Bankr. P. 1006. For cause shown,
the court may extend the time of any installment,
provided that the last installment is paid not later
than 180 days after filing the petition. Id. The
debtor may also pay the $39 administrative fee and
the $15 trustee surcharge in installments. If a
joint petition is filed, only one filing fee, one
administrative fee, and one trustee surcharge are
charged. Debtors should be aware that failure to pay
these fees may result in dismissal of the case. 11
U.S.C. § 707(a).
If the debtor's income is less than 150% of the
poverty level (as defined in the Bankruptcy Code),
and the debtor is unable to pay the chapter 7 fees
even in installments, the court may waive the
requirement that the fees be paid. 28 U.S.C. §
1930(f).
In order to complete the Official Bankruptcy Forms
that make up the petition, statement of financial
affairs, and schedules, the debtor must provide the
following information:
1.
A list of all creditors and the amount and nature of
their claims;
2.
The source, amount, and frequency of the debtor's
income;
3.
A list of all of the debtor's property; and
4.
A detailed list of the debtor's monthly living
expenses, i.e., food, clothing, shelter, utilities,
taxes, transportation, medicine, etc.
Married individuals must gather this information for
their spouse regardless of whether they are filing a
joint petition, separate individual petitions, or
even if only one spouse is filing. 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 the
household's financial position.
Among the schedules that an individual debtor will
file is a schedule of "exempt" property. The
Bankruptcy Code allows an individual debtor (4) to
protect some property from the claims of creditors
because it is exempt under federal bankruptcy law or
under the laws of the debtor's home state. 11 U.S.C.
§ 522(b). Many states have taken advantage of a
provision in the Bankruptcy Code that permits each
state to adopt its own exemption law in place of the
federal exemptions. In other jurisdictions, the
individual debtor has the option of choosing between
a federal package of exemptions or the exemptions
available under state law. Thus, whether certain
property is exempt and may be kept by the debtor is
often a question of state law. The debtor should
consult an attorney to determine the exemptions
available in the state where the debtor lives.
Filing a petition under chapter 7 "automatically
stays" (stops) most collection actions against the
debtor or the debtor's property. 11 U.S.C. § 362.
But filing the petition does not stay certain types
of actions listed under 11 U.S.C. § 362(b), and the
stay may be effective only for a short time in some
situations. The stay arises 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.
Between 20 and 40 days after the petition is filed,
the case trustee (described below) will hold a
meeting of creditors. If the U.S. trustee or
bankruptcy administrator (5) schedules the meeting
at a place that does not have regular U.S. trustee
or bankruptcy administrator staffing, the meeting
may be held no more than 60 days after the order for
relief. Fed. R. Bankr. P. 2003(a). 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. 11 U.S.C. § 343. If a husband and wife
have filed a joint petition, they both must attend
the creditors' meeting and answer questions. Within
10 days of the creditors' meeting, the U.S. trustee
will report to the court whether the case should be
presumed to be an abuse under the means test
described in 11 U.S.C. § 704(b).
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. 11 U.S.C. § 341(c).
In order to accord the debtor complete relief, the
Bankruptcy Code allows the debtor to convert a
chapter 7 case to a case under chapter 11, 12, or 13
(6) as long as the debtor is eligible to be a debtor
under the new chapter. However, a condition of the
debtor's voluntary conversion is that the case has
not previously been converted to chapter 7 from
another chapter. 11 U.S.C. § 706(a). Thus, the
debtor will not be permitted to convert the case
repeatedly from one chapter to another.
Information herein was obtained from the United States Courts.
