Chapter 7 Bankruptcy gets its name from the United States Bankruptcy Code in which the 7th chapter of the bankruptcy laws describes the most recognizable and common type of bankruptcy. When most people think about bankruptcy, they are usually thinking about chapter 7. Some people describe chapter 7 as a “liquidation,” or a “complete” or “full” bankruptcy, or the bankruptcy that “wipes everything out.” Although these words and phrases describe some aspects of chapter 7 bankruptcy, they are not entirely accurate and should not be taken literally. A chapter 7 bankruptcy is a type of bankruptcy in which a debtor (person who files for bankruptcy) must meet certain qualifications and have assets that can be fully exempted (protected) by state or federal law in order to safely eliminate all unsecured debts (i.e. credit cards, medical bills, payday/signature loans, etc.) or secured debts that you do not wish to keep (i.e. home mortgage and car loans). A chapter 7 bankruptcy does not provide a method to repay secured debts that you wish to keep (i.e. home mortgage and car loans) or that you must repay (i.e. most taxes, child support and student loans) after bankruptcy. In every bankruptcy a Trustee is assigned to monitor your case, and a chapter 7 Trustee seeks to determine if you have any assets of value that are not fully exempted or protected by law that can be sold at auction to use the proceeds to pay back your creditors as much as possible. Therefore, it is important to speak with one of our attorneys to ensure that you qualify for chapter 7, to ensure that your assets are not taken and sold, and to ensure that you do not have other reasons that may require you to file a chapter 13 bankruptcy.
When considering filing for chapter 7 bankruptcy in Illinois or Missouri it is important to understand that there are several types of bankruptcies, and there are specific reasons why a person should file one bankruptcy over another. It is a myth to believe one bankruptcy is better than the other—one person could greatly benefit from filing a chapter 7 bankruptcy while a different person with different assets, debts and income would not benefit from filing a chapter 7 bankruptcy. The same is true for the other types of bankruptcy. The two most common types of bankruptcies filed by individuals are called chapter 7 and chapter 13. Contact our office to schedule an appointment with an attorney to help you determine which bankruptcy is best for your particular situation and future goals.
1. What Is A Chapter 7 Discharge?
It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. However, some debts are not dischargeable under chapter 7.
2. What Debts Are Not Dischargeable Under Chapter 7?
All debts of any kind or amount, including out-of-state debts, are dischargeable under chapter 7 except the debts listed below. The following is a list of the most common debts that are not dischargeable under chapter 7:
• Certain tax debts and debts that were incurred to pay federal tax debts.
• Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor filed a timely complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 90 days before the case is filed).
• Debts not listed on the debtor’s chapter 7 forms, unless the creditor knew of the case in time to file a claim.
• Debts for fraud, embezzlement, or larceny, if the creditor files a timely complaint in the case.
• Debts for alimony, maintenance, or support.
• Debts for intentional or malicious injury to the person or property of another, if the creditor files a timely complaint in the case.
• Debts for certain fines or penalties.
• Debts for educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents.
• Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated.
3. May A Husband And Wife File Jointly Under Chapter 7?
Yes. A husband and wife may file a joint petition under chapter 7. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged.
4. Under What Conditions Should Both Spouses File Under Chapter 7?
Both husband and wife should file if one or more substantial dischargeable debts are owed by both spouses. If both spouses are liable for a substantial debt and only one spouse files under chapter 7, the creditor may later attempt to collect the debt from the nonfiling spouse, even if he or she has no income or assets.
5. How Does The Filing Of A Chapter 7 Case Affect Collection And Other Legal Proceedings That Have Been Filed Against The Debtor In Other Courts?
The filing of a chapter 7 case automatically stays (or stops) virtually all collection and other legal proceedings pending against the debtor. A few days after a chapter 7 case is filed, the court mails a notice to all creditors ordering them to refrain from any further action against the debtor. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable to the debtor in damages. Criminal proceedings and actions to collect alimony, maintenance, or support from exempt property or property acquired by the debtor after the chapter 7 case was filed are not affected by the automatic stay. The automatic stay also does not protect cosigners and guarantors of the debtor, and a creditor may continue to collect debts of the debtor from those persons after the debtor files a chapter 7 case.
6. May A Person File Under Chapter 7 If His Or Her Debts Are Being Administered By A Financial Counselor Or Debt Settlement Company?
Yes. A financial counselor and a debt settlement company have no legal right to prevent anyone from filing under chapter 7.
7. Are The Names Of Persons Who File Under Chapter 7 Published?
When a chapter 7 case is filed, it becomes public record and the name of the debtor may be published by some credit-reporting agencies. However, newspapers do not usually report or publish the names of consumers who file under chapter 7.
8. Are Employers Notified Of Chapter 7 Bankruptcy Cases?
Employers are not usually notified when a chapter 7 case is filed unless an employer is a creditor. However, the trustee in a chapter 7 case may contact an employer seeking information as to the status of the debtor’s wages or salary at the time the case was filed. If there are compelling reasons for not informing an employer in a particular case, the trustee should be so informed and he or she may be willing to make other arrangements to obtain the necessary information.
9. Does A Person Lose Any Legal Or Civil Rights By Filing Under Chapter 7?
No. Filing under chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.
10. May Employers or Governmental Agencies Discriminate Against Persons Who File Under Chapter 7?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under chapter 7. It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses (including a driver’s license), permits, student loans, and similar grants because that person has filed under chapter 7.
11. Does A Person Lose All Of His Or Her Property By Filing Under Chapter 7?
Usually not. Certain property is exempt and cannot be taken by creditors, unless it is encumbered by a valid mortgage or lien. A debtor is usually allowed to retain his or her unencumbered (or unsecured) exempt property.
12. When Must A Debtor In A Chapter 7 Case Attend The 341 Meeting Of Creditors And What Happens At The Meeting?
The 341 meeting of creditors usually takes place about a month after the case is filed. At this hearing or meeting the debtor is put under oath and questioned by the trustee about his or her debts, assets, income and expenses. In most chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the debtor.
13. What Happens After the Meeting of Creditors?
After the meeting of creditors, the trustee may contact the debtor regarding the debtor’s property, and the court may issue certain orders to the debtor. These orders are sent by mail and may require the debtor to turn certain property over to the trustee, or provide the trustee with certain information. If the debtor fails to comply with these orders, the case may be dismissed and the debtor may be denied a discharge.
14. What Is A Trustee In a Chapter 7 Case, And What Does He Or She Do?
The trustee is an officer of the court, appointed to examine the debtor, collect the debtor’s nonexempt property, and pay the expenses of the estate and the claims of creditors. In addition, the trustee has certain administrative duties in a chapter 7 case and is the officer in charge of seeing to it that the debtor performs the required duties in the case. A trustee is appointed in a chapter 7 case, even if the debtor has no nonexempt property.
15. What Are The Debtor’s Responsibilities To The Trustee?
The law requires the debtor to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the debtor’s nonexempt property. If the debtor does not cooperate with the trustee, the chapter 7 case may be dismissed and the debtor may be denied a discharge.
16. What Happens To The Property That The Debtor Turns Over To The Trustee?
It is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay the claims of unsecured creditors.
17. What If The debtor Has No Nonexempt Property For The Trustee To Collect?
If, from the debtor’s chapter 7 forms, it appears that the debtor has no nonexempt property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay creditors, that it is unnecessary for them to file claims, and that if assets are later discovered they will then be given an opportunity to file claims. This type of case is referred to as a no-asset case.
18. How Are Secured Creditors Dealt With In A Chapter 7 Case?
Secured creditors are creditors with valid mortgages or liens against property of the debtor, for example, a car or home. Property of the debtor that is encumbered by a valid mortgage or liens is called secured property. The claim of a secured creditor is called a secured claim and secured claims must be collected from or enforced against secured property. Secured claims are not paid by the trustee. The debtor may reaffirm or redeem certain types of secured personal property (see Knowledge Center icons above, Your Car and Your Home).
19. How Are Unsecured Creditors Dealt With In A Chapter 7 Case?
An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has nonexempt assets, unsecured creditors may file claims with the court in which the trustee will examine these claims and file objections to those deemed improper. When the trustee has collected all of the debtor’s nonexempt property and converted it to cash, and when the court has ruled on the trustee’s objections to improper claims, the trustee will distribute the funds in the form of dividends to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Administrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits, claims for alimony, maintenance support, and tax claims, are given priority in the payment of dividends by the trustee. If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors.
20. May A Utility Company Refuse To Provide Service To A Debtor If The Company’s Utility Bill Is Discharged Under Chapter 7?
The debtor furnishes a utility company with a deposit or other security to insure the payment of future utility services, it is illegal for a utility company to refuse to provide future utility service to the debtor, or to otherwise discriminate against the debtor, if its bill for the past utility services is discharged in the chapter 7 case.
21. How Is A Debtor Notified When His Or Her Discharge Has Been Granted?
Usually by mail. Most courts send a form called “Discharge of Debtor” to the debtor and to all creditors. This form is a copy of the court order discharging the debtor from his or her dischargeable debts, and it serves as notice that the debtor’s discharge has been granted. It is usually mailed about four months after a chapter 7 case is filed.
22. What If A Debtor Wishes To Pay A Dischargeable Debt?
A debtor may repay as many dischargeable debts as desired after filing under chapter 7. By repaying one creditor, a debtor does not become legally obligated to repay any other creditor. The only dischargeable debt that a debtor is legally obligated to repay is one for which the debtor and the creditor have signed what is called a “reaffirmation agreement.” The reaffirmation agreement must be approved by the court to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, a debtor is not legally obligated to repay the debt, even if the debtor has made a payment on the debt since filing under chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt.
23. How Long Does A Chapter 7 Case Last?
A chapter 7 case begins with the filing of the case and ends with the closing of the case by the court. If the debtor has no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the debtor receives his or her discharge, which is usually about four months after the case is filed. If the debtor has nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most consumer cases with assets last about six months, but some last considerably longer.
24. What Should A Person Do If A Creditor Later Attempts To Collect A Debt That Was Discharged Under Chapter 7?
When a chapter 7 discharge is granted, the court enters an order prohibiting the debtor’s creditors from later attempting to collect any discharged debt from the debtor. Any creditor who violates this court order may be held in contempt of court and may be liable to the debtor in damages. If a creditor later attempts to collect a discharged debt from the debtor, the debtor should give the creditors a copy of the order of discharge and inform the creditor in writing that the debt has been discharged under chapter 7. If the creditor persists, the debtor should contact an attorney. If a creditor files a lawsuit against the debtor on a discharged debt, it is important not to ignore the matter, because even though a judgment entered against the debtor on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly to the debtor.
25. How Does A Chapter 7 Discharge Affect The Liability Of Cosigners And Other Parties Who May Be Liable To A Creditor On A Discharged Debt?
A chapter 7 discharge releases only the debtor. The liability of any other party on a debt is not affected by a chapter 7 discharge. Therefore, a person who has cosigned or guaranteed a debt for the debtor is still liable for the debt regardless of the debtor’s chapter 7 discharge.
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Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.