Common Chapter 7 Questions

The Nellor Law Office provides legal services to debtors and creditors in chapter 7 bankeruptcy cases and proceedings.

A general summary of chapter 7 can be found elswhere on this website. The following is a list of common questions about chapter 7 bankruptcy cases together with answers to those questions. This list is not exhaustive. It is intended to provide a basic overview of chapter 7 bankruptcy relief.

1. What is chapter 7?

Chapter 7 is a part of the Bankruptcy Code that you to be relieved from debt through by liquidating your property. Chapter 7 bankruptcy cases involve the sale of assets to provide a payment to creditors.

2. How does chapter 7 work?

A chapter 7 debtor must turns non–exempt property over to a trustee. The trustee sells or otherwise converts the property to cash and then pays creditors a dividend from the proceeds of the property sold. The debtor receives a discharge for debts that remain unpaid after the trustee has liquidated the property.

3. Who can file for chapter 7?

Almost any person that resides, does business, or has property located, in the United States can file for chapter 7 relief. The only exception—persons who were involved in another bankruptcy case that was dismissed because the debtor did not follow court orders during the preceding 180 days.

4. May a husband and wife file chapter 7 together?

Yes. A husband and wife may file a joint petition and pay only one filing fee.

5. Can I file chapter 7 if I am using a debt consolidation or consumer credit counseling service?

Yes. A financial counselor, credit agency, or debt–consolidation service, has no legal right to prohibit anyone from filing for chapter 7 relief.

6. How does a chapter 7 differ from a chapter 13?

The entire focus of the two kinds of relief is different. Chapter 7 uses liquidation of property to repay debts. Chapter 13 is uses future income to repay debts. This means that:

• In a chapter 7, a debtor’s non–exempt property is sold to pay debts, while under chapter 13 a portion of the future income is used to repay creditors.
• A person who files chapter 7 usually loses all of his or her non–exempt property. A chapter 13 debtor usually retains all of his or her property.
• A chapter 13 discharge is broader than a chapter 7 discharge, but a chapter 13 case usually lasts much longer than does a chapter 7.

7. How does chapter 7 differ from chapter 11?

The entire focus of the two kinds of relief is different and the kinds of situations they are designed to cover are different. A chapter 7 always contemplates liquidation of a debtor’s property. A chapter 11 is designed to rehabilitate a debtor financially, which can involve property liquidation and many other, complex, programs designed to provide repayment to creditors.

8. How does chapter 7 differ from chapter 12?

Chapter 12 is a part of the Bankruptcy Code designed to provide financial relief to family farms. It is a rehabilitation proceeding that is very similar to chapter 13 relief (and to chapter 11) and contemplates the repayment of debt from future farm income. Chapter 12 does not normally involve a total liquidation of a debtor’s non–exempt property, which is the chapter 7 norm.

9. When should a person file a chapter 7 case?

There is no hard and fast rule. The answer depends on the status of the debtor’s dischargeable debts, the nature and status of the debtor’s non–exempt property, and the actions taken or threatened by creditors. In general, the following are important considerations, although the presence or absence of one or more of these factors is not controlling:

• You should not normally file a chapter 7 if there is significant non–dischargeable debt;
• You should not file a chapter 7 until all anticipated debts have been incurred;
• You should not file a chapter 7 until all non–exempt assets have been received. For example, if you are going to receive a substantial income tax refund in the future it is often better to wait until after the refund is received and has been used. Otherwise the refund would belong to the trustee to be paid to creditors;
• You not file a chapter 7 if you expect to receive money or property from an inheritance, life insurance, or a divorce during the next 180 days.

10. How long does a chapter 7 case last?

A chapter 7 case begins when the petition for relief is filed and ends when the case is closed. The case is closed after the trustee has determined all claims that must be paid and has gathered and sold all property. It could take several months, or even years, for a trustee to complete liquidation of a debtor’s property. If you have no non–exempt assets the case will be closed near the time a discharge is entered.

From a practical standpoint, the time it takes to close a case is rarely significant to a debtor. The legal rights relating to the chapter 7 case become fixed the moment the petition for relief is filed. A person who has filed a chapter 7 case is considered to be a new legal person the moment the petition for relief is filed, and can start acquiring property and rebuilding their financial status immediately after the case is filed.

11. Will I lose all of my property if I file a chapter 7?

Usually not. Bankruptcy laws are designed to provide a person with enough property to have a fresh start after bankruptcy. Certain property is exempt from the trustee and your creditors. If property is exempt and if it is not collateral for a debt, a debtor may keep it after the chapter 7 case.

Sometimes a creditor has a lien on a property. This means the creditor is entitled to be paid, or is entitled to receive the property that is subject to the lien. You can keep property that is subject to a lien by paying the value of the property, or by curing defaults to the creditor and continuing to perform the contract.

12. What is a discharge?

A discharge under chapter 7 is a court order that releases a debtor from all dischargeable debts. The discharge order also prevents creditors from collecting or attempting to collect debts. A debt that is discharged is one that you are released from and do not have to pay.

13. Do all debtors receive a discharge?

Some persons are not eligible for a chapter 7 discharge. A debtor is not eligible if the court finds:

• The debtor received a discharge in a chapter 7 case during the last 7 years;
• The debtor received a discharge within the last 7 years in a chapter 13 case where less than seventy percent of the unsecured claims were paid;
• The debtor has signed a written waiver of discharge that the court approves;
• The debtor conceals, transfers, or destroys property with the intent to defraud creditors or the trustee;
• The debtor conceals, destroys, or falsifies financial records;
• The debtor makes false statements or claims during the case;
• The debtor withholds recorded information from the trustee;
• The debtor fails to make a satisfactory explanation about the loss or destruction of assets, and;
• The debtor refuses to answer questions or obey orders of the court.

14. Are all debts dischargeable in chapter 7?

All debts of any kind or amount, whether they are actual or estimated, from within this state or from out of state, are discharged, except:

• Some (but not all) tax debts;
• Debts incurred by false pretenses, fraud, or false financial statements;
• Debts that are not listed in the chapter 7 paperwork (unless the case is results in no assets being available to creditors);
• Debts for alimony, maintenance, or support;
• Debts incurred as a result of an intentional injury to another person or another person’s property;
• Debts for certain fines or penalties;
• Debts for student loans or other educational benefits that became due within the last 7 years, unless the court determines that repayment in the future would create an undue hardship on the debtor or the debtor’s dependents;
• Debts that arose due to death or personal injury caused by the debtor while operating a motor vehicle while lawfully intoxicated, and;
• Debts that the debtor did not or could not have received a discharge for in a previous bankruptcy.

15. How will I know when I get a discharge?

The court will mail a written discharge order to you and to all creditors.

Creditors, and a trustee, have a time limit to object to a discharge. If that time limit passes without an objection, the discharge will be automatically entered by the court, usually 120 days after the case was filed. The discharge order can be entered long before the case is closed—the discharge is independent of the trustee’s activities in collecting assets and making distributions.

16. How is a chapter 7 case started?

A chapter 7 case can be either voluntary (started by a debtor), or involuntary (started by creditors).

A voluntary chapter 7 case is started by filing a petition with the court clerk requesting relief under chapter 7. A number of other documents must be filed with the petition. If there is an emergency, most of the other documents required can be filed within 15 days after the petition was filed.

An involuntary case can be started by creditors in very limited situations. In each of those situations, a petition is filed, and the court holds a hearing to determine whether the debtor should be in a chapter 7 bankruptcy case. The debtor has the opportunity to show that he or she should not be in chapter 7. If the court decides that the debtor is insolvent, it enters an order for relief, and the case continues just like a voluntary chapter 7 case. If the court decides that the debtor is not insolvent, the petition is dismissed, and the debtor is entitled to a judgment against the creditors who filed the petition for any costs or damages that the debtor incurred because the petition was filed.

17. How much is the filing fee and when is it paid?

The filing fee for chapter 7 is $338⁰⁰ for either a single or a joint (husband and wife) case. The fee is normally paid when the case is filed. If you are unable to pay when the case is filed, the court can allow payment in installments, with the final installment due 120 days after the case is filed. The court can also extend payment of the filing fees for a period not to exceed 180 days after filing. If the filing fee is not ultimately paid in full the case will be dismissed.

18. Where is a chapter 7 case filed?

A chapter 7 case must be filed with the clerk of the court in the district where the debtor has resided or maintained a principal place of business for the greatest portion of the preceding 180 days.

19. Do I have to go to court?

You are required to appear at a meeting of creditors (also known as a §341 hearing). Technically this is not a court appearance. The interim trustee conducts the meeting. At this meeting, you are required to answer questions about your property and financial affairs, under oath. For many debtors this is the only hearing that is required. If debts are to be reaffirmed, property is to be redeemed, or other matters related to the chapter 7 case arise, other court appearances, before the bankruptcy judge, may be necessary.

20. What happens after the meeting of creditors?

The trustee may contact you about property that needs to be liquidated. The court may issue orders to turn over property or to provide the trustee with certain information. Those orders must be followed or the case could be dismissed or the discharge could be denied. If there are no assets that need to be administered then there may be nothing that happens after the meeting of creditors other than the entry of a discharge.

21. How does a chapter 7 case affect lawsuits or legal proceedings against me?

The filing of a chapter 7 bankruptcy automatically stops virtually all collection or other legal actions that are pending against a debtor and a debtor’s property. This is known as the automatic stay.

The court clerk normally mails a notice to all creditors a few days after the case is filed that includes an order telling creditors to leave you alone. This notice can also be served earlier on creditors if it is necessary.

In addition, actions taken innocently by a creditor after the case is started, but before the creditor knows about it are, in this district, void. If a creditor intentionally violates the automatic stay the court may hold them in contempt and may require that they pay damages.

There are some actions that are not subject to the automatic stay. These include criminal proceedings, and actions to collect support, alimony, or maintenance from exempt property or property acquired by the debtor after the bankruptcy case is started.

22. How does chapter 7 affect my credit rating?

There is really no such thing as a “credit rating.” There are credit reporting agencies that gather information from creditors about how their customers are paying obligations. These agencies make reports about credit histories available to persons or businesses that request them. A person’s “credit rating” is determined by the person who is reading the report.

The fact that a chapter 7 was filed can be (and usually is) listed on a credit report. Some creditors consider bankruptcy to be a negative factor in determining whether to extend credit. Others will allow an explanation of why the chapter 13 was necessary and will evaluate a person’s credit risk based on the facts that led to the bankruptcy. Still others do not care at all.

The real purpose of chapter 7, however, is to put you in a financial position where you can afford to by things over time, or otherwise borrow money. If you are in a situation where chapter 7 is an alternative, your credit report will show that you do not have the present ability to borrow money because you have too many debts to pay from the income you have. After chapter 13 those debts will be gone, and your credit report will show the ability to repay a loan from existing income. In the end, that is what a “credit rating” is all about.

23. Will my name be published if I file chapter 7?

A chapter 7 case is a public record. The name of the debtor may be published by some credit reporting agencies. Consumer bankruptcies are not normally published in the local newspapers.

24. Will my employer be notified if I file chapter 7?

Employers are not normally contacted by the court when a chapter 7 case is filed. It is possible that a chapter 7 trustee will contact an employer to verify the debtor’s wage status. If there are reasons for an employer not to be contacted the trustee should be informed so that other arrangements can be made for the trustee to receive any employment or wage information he or she may desire.

25. Can my employer fire or demote me if I file chapter 7?

No. It is illegal for either private or governmental employers to discriminate against an employee as to employment because that person has filed for chapter 7 relief.

26. Can someone deny me a license or permit if I file chapter 7?

No. It is illegal for federal, state or local governmental agencies to discriminate against a person as to the granting of licenses (including drivers licenses), permits, or similar grants, because that person has filed for chapter 7 relief.

27. Can a utility company stop service if I file a chapter 7 case?

You may be required to furnish the utility company with a deposit or other reasonable security for future performance, within twenty [20] days after the chapter 7 case is filed. If you provide security for future performance it is illegal for the utility to cut off service. Normally a security deposit of up to two [2] months average bills is a reasonable deposit. If you propose security and the utility refuses, you can ask the court to set a reasonable deposit that the utility must accept.

28. What is a chapter 7 trustee?

A chapter 7 trustee is an officer of the court appointed to gather the debtor’s non–exempt property, reduce it to cash and pay a dividend to creditors. In addition, the trustee has administrative duties and is in charge of seeing that the debtor performs his or her duties in the chapter 7 case. A trustee is appointed in every case, even if the debtor has no assets to be liquidated. When a chapter 7 case is first filed an interim trustee is selected from a panel of qualified persons. Creditors can elect a trustee, but if they do not do so the interim trustee becomes the trustee of the case.

29. What are my responsibilities to a trustee?

You must cooperate with the trustee in the administration of the chapter 7 case. If you do not cooperate, your discharge could be denied or the case could be dismissed.

30. What happens to the property I turn over to the trustee?

Almost all property is converted to cash. That cash is used to pay the trustee’s fees and costs, and other costs incurred during the administration of the case. Remaining moneys are paid to creditors in the form of a dividend.

31. What happens if I have no non–exempt property?

Creditors are mailed a notice that says you do not have any assets from which they will receive a dividend. The trustee will close the case after the time for objections has run and your discharge is granted.

32. What is a secured creditor?

A secured creditor is a person who holds collateral for the payment of a debt. A secured creditor holds a lien on property you own or control. Real estate mortgages or contracts and installment contracts for cars or furniture where the creditor has retained a security interest are typical examples of situations where the creditor is secured.

33. What happens to secured creditors in chapter 7?

Property that is subject to a lien is called secured property. A secured creditor is entitled to repossess or foreclose secured property, or to be paid. The secured creditor can take no action to foreclose or repossess during the chapter 7 case, however, unless it gets permission from the court to do so. That permission would come in the form of an order granting relief from the automatic stay. You may also be permitted to retain or redeem secured property.

34. What is an unsecured creditor?

A creditor that has no lien on property is known as an unsecured creditor.

35. What happens to unsecured creditors in chapter 7?

Unsecured creditors must file a proof of claim with the court within ninety days after the first date for the meeting of creditors. The trustee examines the claims and may object to any claim that is improper. The court will hold a hearing to determine whether the trustee’s objection is valid. If the trustee does not object, the claim is allowed.

Allowed unsecured claims receive a dividend from the trustee according to a priority system that is set forth in the Bankruptcy Code. This means that some unsecured claims are paid before others. All claims of a higher priority must be paid in full before any claims of a lower priority may be paid to any lower priority claims. If there is not enough money available from the liquidation to pay all claims in a particular rank in full, those claims share the remaining funds pro rata.

36. Can I keep any secured property?

You can redeem and retain certain secured personal and household property, such as furniture, appliances, wearing apparel, and tools of the trade, without payment to the secured creditor if the property is exempt and if the lien against the property was not incurred for the purpose of financing the purchase of the property. You may also retain and redeem any property that is subject to a judicial lien without payment to the secured creditor, and you may redeem other personal property by paying the secured creditor an amount equal to the value of the property, regardless of what is owed.

You can also usually cure a default to the secured creditor and just continue making payments. In some circumstances the secured creditor may require you to reaffirm the debt as a condition of curing the default.

37. Can I do anything to minimize the amount of property or money that must be turned over to the trustee?

Only non–exempt property must be turned over to the trustee. It is acceptable to engage in negative estate planning to convert non–exempt assets into exempt assets. It is not cheating or illegal to limit the non–exempt assets that must be turned over to the trustee—you are entitled to use the bankruptcy law to your advantage to maximize the chance of getting an effective fresh start.

What can be done to convert non–exempt property to exempt property depends somewhat on what kind of property is involved and the time available before a chapter 7 petition must be filed. The most common consumer property and the most common steps to protect their values are:

• Cash:You usually should have no cash on the date and at the time the chapter 7 petition is filed. The same thing is true of cash equivalents, such as un–cashed paychecks. Money possessed before the chapter 7 petition is filed can be spent to acquire things such as food and groceries, the chapter 7 filing fee, attorney fees for the chapter 7 case and the payment of up to $600.00 to creditors you intend to keep paying after the chapter 7 case is filed. It is not a good idea to give money to relatives or friends, however, because the trustee can use some special rules and laws to recover those payments.
• Bank Accounts: You should close all bank accounts before the chapter 7 case is filed. New accounts can be opened immediately after the case is filed. If the account is not closed, funds should be drawn down to the lowest amount permitted by the bank. All outstanding checks should clear the account before the case is filed.
• Prepaid Rent: Persons normally pay rent on or about the first day of the month. If you do pay rent on the first of the month and the chapter 7 petition is filed on the tenth day (for example), the rent due for the last twenty days of the month is an asset of the estate that the trustee may recover. There are two ways to deal with this. Arrangements can be made with the landlord to pay rent late (after the case is filed early in the month) or the case can be filed near the end of the month.
• Rent Or Utility Deposits: These are difficult to deal with. Most of these are estate assets that a trustee can recover unless an exemption can be found to cover them. An exemption is not always available. If an arrangement can not be made with the landlord or utility company to refund these deposits the trustee can recover them after the case is filed.
• Earnings And Benefits: Generally speaking, only 75% of a debtor’s earnings are exempt. This means that about 25% of a debtor’s accrued (but unpaid) wages, salary, commissions, vacation pay, sick leave pay and other accrued employee benefits can be taken by the trustee. The easiest way to deal with this is to file a chapter 7 case the morning after payday. Even then, some income could be at risk because the pay period may not end on the payday. Sometimes it is necessary to make special arrangements with the employer to clear all accrued pay before the case is filed. In addition, it may be necessary to collect all accrued vacation or other benefits that are convertible to cash before the case is filed.
• Tax Refunds: Tax refunds that have not been received by the time the case is filed belong to the trustee. If the debtor expects a refund, a chapter 7 filing should be delayed until after the refund is received and disposed of.
• Sporting Goods: Guns, fishing gear, skis, camping equipment or similar items are all things that a trustee will liquidate if no exemption can be found. If these items are valuable they should normally be sold for cash that can be used for living expense or to purchase exempt property.

38. What if I move before the chapter 7 case is closed?

You must immediately notify the court clerk, in writing, of any address change. This is necessary because all persons involved in the chapter 7 case can rely on the address stated in the petition for all communications with a debtor by mail. If you move and do not notify the court, you can be served with binding notices by having the communication mailed to the old address.

39. Can I repay a dischargeable debt?

You can repay any dischargeable or discharged debt at any time. A partial repayment does not bind you to pay the whole debt.

You can become legally obligated to repay a discharged debt only by entering into a reaffirmation agreement with the creditor that is approved by the court. Many creditors ask for reaffirmation agreements. Even if a reaffirmation agreement is signed and approved by the court, you can change your mind by giving notice to the creditor within sixty days after the agreement is filed with the court, or before the discharge is granted, whichever occurs later.

40. What should I do if a creditor tries to collect a debt after the chapter 7 case?

The discharge is a permanent bar to collect discharged debts. The usual remedy is to simply mail the creditor a copy of the discharge order. If the creditor persists, contact an attorney. A creditor is subject to fines, penalties, attorney fees and damages they cause by trying to collect a discharged debt.

41. How does a chapter 7 affect cosigners and guarantors?

A chapter 7 discharge only releases the debtor. Guarantors and cosigners are liable to the same extent that they would be had the chapter 7 case not been filed.

42. How much are attorney fees in chapter 7 cases?

There is no single, fixed, market price for bankruptcy cases.

If you shop around your local community you will find that some attorneys quote fees at flat rates and others will charge based on the number of hours their services take. Some lawyers will give you an estimate of the expected fees after a basic analysis of the work that needs to be done.

The amount of attorney fees in a bankruptcy case also depends on the kind of bankruptcy relief that is involved. In business cases, the amount charged varies greatly depending on the size of the business, the type of business involved, the extent of the relief needed by the debtor, the attitude and aggressiveness of the creditors, and the debtor's cooperation with the trustee, court and debtor's attorneys.