Chapter 7 Bankruptcy: It All Begins

A chapter 7 bankruptcy 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 chapter 7 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). Chapter 7 bankruptcy 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 chapter 7 petition or individual petitions. 11 U.S.C. § 302(a). Even if filing chapter 7 bankruptcy 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 atwww.uscourts.gov/bkforms/index.html. They are not available from the court.)

Chapter 7 Administrative Fees

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. 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. Chapter 7 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).

Chapter 7 Document Production Requirements

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 is required so that the court, the trustee and creditors can evaluate the household’s financial position.

Protecting Property in Chapter 7 Bankruptcy

Among the schedules that an individual chapter 7 debtor will file is a schedule of “exempt” property. The Bankruptcy Code allows an individual debtor 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.

Stopping Creditor Collection Calls

Filing a bankruptcy 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.

Chapter 7 341 Meeting

Between 20 and 40 days after the chapter 7 petition is filed, the case trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator 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 chapter 7 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).

Converting a Chapter 7 Case to Another Chapter

In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to case under chapter 11, 12 or 13 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 chapter 7 debtor will not be permitted to convert the case repeatedly from one chapter to another.

Drew Broaddus

Obviously, creditors prefer that contracts are assumed and that the pre-existing agreement remains in place after bankruptcy. However, if a debtor is not able to meet the obligations under the contract it should be rejected. This is also an opportunity for a debtor to negotiate a better contract with the creditor or seek out competitors who can offer better terms. Debtors must keep in mind however, if a financial background check is required, the existence of a bankruptcy on your credit history may hinder efforts to obtain a new contract. Although this can apply to any contract, it will likely only affect contracts involving significant assets such as an apartment or vehicle. Given the competition for sales for smaller contracts such as cellular phone and internet connections, a prior bankruptcy is not likely to affect a debtor’s ability to obtain new service.

There are two types of fraudulent transfers in bankruptcy law, which include actual transfers and constructive transfers. What this means is that the court may find that you engaged in a “fraudulent” exchange even if you did not intentionally deprive your creditors from securing their debt. As a consequence the trustee may reposess the property or the value of the property as part of the bankruptcy estate. Protecting yourself from fraudulent transfers will allow a faster discharge.

This law does not necessarily bar all types of transfers, but before you sell or give any of your assets away, including real property, make sure to consult a knowledgeable bankruptcy attorney to help you assess your available options. The laws on transfers can be quite complicated, so make sure to get some expert advice.

Stephen Trezza, Tucson Bankruptcy Attorney

In Chapter 7, the Bankruptcy Court usually grants the discharge 3-4 months after the petition has been filed. However, the court may deny an individual debtor’s discharge in a Chapter 7 case if the debtor fails to complete “an instructional course concerning financial management,” discussed here.  In certain cases, however, discharge may be delayed if creditors file objections to the discharge. Under 11 U.S.C. Sec. 727(c), a Bankruptcy Trustee, a creditor, or the U.S. trustee may object to the granting of a discharge. A party with interest in the debt may request that the trustee investigate the conduct of a debtor to determine whether sufficient evidence exists to deny the discharge.

In a chapter 13 case, the discharge is granted when the debtor completes his or her repayment plan.

When the eagerly awaited discharge finally comes, the Court will issue an Order Granting Discharge.  This Order will typically contain language to the effect that “the debtor is granted a discharge under section 727 of title 11, United States Bankruptcy Code.”  This section of the code states that “[t]he court shall grant the debtor a discharge” unless specific exceptions apply.  In most districts, the Order is accompanied by an explanation of discharge.  This document explains that the collection of discharged debts is prohibited; that discharged debts includes most debts existing on the date the case was filed; and that certain debts are not discharged, including taxes, debts incurred to pay taxes (for example, if someone put their tax bill on their credit card), student loans, domestic support obligations, criminal fines and penalties, debts that the debtor did not properly list on their petition, and a few other examples.  Be aware that granting of the discharge does not close your bankruptcy case.

Drew Broaddus

In some limited circumstances it may make sense to file Chapter 7 bankruptcy on behalf of a corporation, even though a discharge is not available. Such a situation may be presented where a creditor is poised to lien or levy on assets that could be used to pay debts for which the shareholders or officers are personally liable, such as trust fund taxes or leases or other obligations that are personally guaranteed. Another example is when the services of a trustee are desirable to preside over the liquidation of assets and the winding up of the business, freeing the corporation’s officers to pursue employment or other endeavors. Keep in mind that this can cut both ways. If there truly are significant assets for a trustee to administer chapter 7 bankruptcy may make sense for a corporation. Trustees will get a little upset however, if they are forced to waste time dealing with a shell of a corporation with nothing to administer. A third example in which it might make sense for a corporation to file for chapter 7 bankruptcy is when the filing is done to discourage creditor lawsuits which have a tendency to name the officers and shareholders of the corporation personally, even though they may not be legally liable for the debt.

As noted, this discussion assumes that the corporation is not going to continue as a viable business enterprise.  For corporations with hope of continuing, relief may be available under Chapter 11.

Drew Broaddus

I have written several articles on the National Bankruptcy Forum regarding reaffirmation agreements in bankruptcy.  However, the legal consequences of such agreements are often not fully understood. Before agreeing to reaffirm a debt after bankruptcy, it is always wise to consult your bankruptcy attorney.

In short, a reaffirmation agreement is a new contract signed between the debtor and a lender that reaffirms the debtor’s personal liability for a debt (typically an automobile or home).  This agreement essentially states that the debtor will continue to pay all or part of the debt obligation (depending upon what is negotiated) to the creditor – bankruptcy notwithstanding – in order to retain the vehicle or real estate.If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered by signing a written reaffirmation agreement and file it with the court. 11 U.S.C. § 524(c). The Bankruptcy Code requires that reaffirmation agreements contain detailed disclosures set forth at 11 U.S.C. § 524(k). Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated.  The disclosures must also explain 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 not to approve the reaffirmation agreement. Unless the debtor is represented by an attorney, the bankruptcy judge must approve the reaffirmation agreement.

If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor’s dependants. The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. However, even in the absence of a reaffirmation agreement, the debtor may repay any debt voluntarily. 

Drew Broaddus

The current economic downturn may be altering this trend.  Recent conversations we have had with potential clients suggest that many households are going through rapid and extreme financial changes.  This has left many families and individuals in a gray area where their six-month average income is above the median, but they clearly need some kind of help due to a recent job loss, business failure, health problem (perhaps coupled with a loss of insurance secondary to a job loss), or other issue.  In some cases a thorough understanding of the “long form” means test (a term that I have borrowed from Ms. Patton’s aforementioned article) can be the key to getting these individuals the protection they need under Chapter 7.

Assuming your six-month average income is above the median, “long form” means testing directs you to a section entitled “Calculation of Deductions Allowed Under § 707(b)(2).”  This section consists of several subparts, described in more detiail here. Subpart A (deductions under standards of the Internal Revenue Service) calculates what the local expenses would be for a household of a particular size, as determined by the IRS.  These deductions are not based on the debtor’s actual expenses but rather, are based upon tables which are periodically updated by the government (as I discussed here).  Next, Subpart B (entitled “Additional Expense Deductions under § 707(b)”) deals with various actual expenses for   After that, Subpart C (”Deductions for Debt Payment”) deals with required payments for secured debts and priority debts (debts that are not secured, but important debts that are not dischargeable, such as child support and alimony payments).  Finally, debtors who fail the “long form” means test might still qualify for Chapter 7 in light of “special circumstances” or “totality of the circumstances.”

Whether the aforementioned deductions apply to a particular case, and whether they will be sufficient to qualify a “high wage earner” (i.e., someone who is above the six-month median) for Chapter 7 can be complicated issues which should be discussed with a bankruptcy attorney inyour jurisdiction.

Keep in mind that the system is not perfect, and in some cases individuals or families will not qualify for Chapter 7 even when their financial situation is dire.  As Kentucky bankruptcy lawyer John Rogers recently wrote, bankruptcy is not always the answer; sometimes people will not be eligible for Chapter 7 bankruptcy because their income was too high, yet be able to file Chapter 13 bankruptcy because they could not afford the payment required.

Drew Broaddus

For instance, a 62 year old man with no dependents who could not find public or private employment in his educational field could not get a full discharge on his loans.  The man had a minimal income which consisted of a part time salary and some security benefits.

The court ruled that he was capable of maintaining a minimal standard of living if required to repay his student loan obligation of about $20,000.  That is because the lender had reduced his debt of  about $108,000, bearing interest at 7.75%, to $20,160 at 0% interest.  Had the lender not reduced his debt, it is likely that there would have been a full or partial discharge of the man’s loans.

In any case, if you are hoping to get your all of your student loans discharged you might be disappointed.  In some cases, “undue hardship” may be granted to debtors who suffer from a severe medical condition that prevents them from finding employment. Regardless, if you think you have a good case for full or partial discharge of your student loans, make sure to seek a reputable bankruptcy attorney to guide you in the right direction.

Stephen Trezza — Southern Arizona Bankruptcy Lawyer

For instance, you have defaulted on your car and jet ski payments and your creditors are ready to repossess both vehicles.  You proceed to file for bankruptcy, but you wish to keep the car because it is your only reliable source of transportation.  At this point you decide to sign a reaffirmation agreement with your car creditor which will allow you to keep the car as long as you promise to pay for the remaining debt by the new terms of the agreement.

On the other hand, since you have surrendered your jet ski, it will be repossessed and sold at market value.  The money made on the jet ski goes to the creditor, and whatever you still owe on the jet ski will be discharged through bankruptcy relief.

However, you can also sign a reaffirmation agreement if you wish to keep the jet ski as well.  But before signing any new agreement you may want to seek a bankruptcy attorney to go over the terms of the new contract or to inquire whether a reaffirmation agreement would be a practical option.

Trezza & Associates — Tucson Bankruptcy

Current Monthly Income or CMI

The first step is to compare the income earned by your household in the last six months to the state average. If your household income (from all sources) is below your state’s average, the means test doesn’t come into play. You are presumptively entitled to file for chapter 7 bankruptcy. If your household income exceeds the state average, it will be necessary to perform the remaining portion of the test.

Monthly Expenses

In determining whether a debtor qualifies for chapter 7 bankruptcy under the means test, it is necessary to deduct monthly expenses from current monthly income. This will provide a figure for the debtor’s net monthly income which will be used to see if chapter 7 bankruptcy is an option. Keep in mind that your actual monthly expenses will not necessarily be the figures used for deductions. In many cases, standardized IRS deductions are used. Remember, the ostensible purpose of the means test is to try to divert those who can afford to pay back debt into a chapter 13 plan. As a result, the amount a debtor has left over after expenses is a crucial factor in qualifying for chapter 7. Too much “disposable income” means that there is money left over at the end of the month to fund a chapter 13 plan.

It all boils down to this:

- If, after expenses, there is $100 or less of disposable income the means test has been passed, the debtor may file for chapter 7 bankruptcy.

- If, after expenses, there is $166.67 or more left over as disposable income, the debtor fails the means test and there is a presumption that chapter 13 is the appropriate path.

- If there is between $100 and $166.67 left over as disposable income, the debtor passes the means test IF the monthly disposable income multiplied by 60 is less than 25 percent of her nonpriority unsecured debts (such as credit card debt).

If you are considering filing for bankruptcy, consult an attorney.