The purpose of chapter 7 is to discharge debts and give the debtor a "fresh start." The discharge extinguishes the debtor's personal liability on debts. A discharge is available to individuals, not partnerships or corporations.
Although most individual chapter 7 cases result in a discharge of all debts, some types of debts are not discharged, and a discharge does not extinguish liens on property.
In rare cases a chapter 7 may be dismissed as an abusive filing if the court finds an individual has the ability to pay a meaningful dividend to unsecured creditors in a chapter 13 case.
How Chapter 7 Works
A chapter 7 case begins by filing a petition with the bankruptcy court in the district where the individual lives or where the business debtor has its principal place of business or its principal assets.
The debtor is required to file schedules of assets and liabilities, including current income and expenses, and a statement of financial affairs.
A husband and wife may file a joint petition, or a spouse may file individually. Joint petitioners pay only one filing fee.
Filing a petition "automatically stays" most creditor actions against the debtor and the debtor's property.
This stay arises by operation of law and requires no judicial action. While the stay is in effect, creditors cannot initiate or continue lawsuits, repossessions, or wage garnishments.
One schedule filed by individual debtors lists "exempt" property. Federal bankruptcy law provides that an individual [vs. business] debtor can protect certain assets from creditor claims because this property is exempt under federal bankruptcy law or the laws of the debtor's state. Married couples may only claim one set of exemptions.
A bankruptcy trustee is appointed when the case is filed. The trustee's duties are to examine and verify the accuracy of the debtor's bankruptcy papers and to identify assets which are not exempt. The trustee sells the non-exempt assets which have value and distributes the net proceeds to the creditors.
If an asset has a loan against it, the debtor can keep the asset if the equity is exempt.
A "meeting of creditors" is held about 30 days after the petition is filed. The debtor must attend the meeting, and if a husband and wife filed jointly, both must attend. You must bring a government issued picture I.D. and your social security card to the meeting.
Creditors may appear and ask questions regarding the debtor's financial affairs and property, but creditors rarely attend.
The trustee conducts the meeting, and the debtor must cooperate and provide the records the trustee requests. Otherwise, the debtor could be denied a discharge.
The bankruptcy court clerk issues the discharge, usually a few days after 60 days has elapsed from the first date set for the creditors meeting. A copy of the discharge is mailed to the debtor and all the creditors listed in the debtor's schedules.
Role of the Trustee
The case trustee is appointed to administer the case and liquidate the debtor's non-exempt assets.
In the most cases, all of the debtor's assets are exempt or subject to valid liens, so a trustee usually has no assets to sell. These are called "no asset" cases.
If the debtor has non-exempt assets or if the trustee later recovers assets to liquidate for distribution to unsecured creditors, the creditors are given an opportunity to file a form stating the basis of their claim against the debtor or the debtor's assets.
The filing of a bankruptcy petition creates an "estate," and the trustee becomes the temporary legal owner of the debtor's property. The estate consists of all the debtor's legal or equitable interest in property, including property owned or held by another person. The estate includes tangible and intangible assets, such as insurance claims or lawsuits for damages.
The trustee can sell non-exempt property as well as property with a market value in excess of the sum of any security interest or lien and the allowed exemption the debtor holds in the property.
Objections to debtor's exemption claims must be filed within 30 days of the date a creditors meeting is completed.
A bankruptcy discharge releases the debtor from personal liability and prevents the creditors from taking any further action against the debtor or his property to collect the debts.
As a general rule, individual debtors receive a discharge in over 99 percent of chapter 7 cases.
A creditor has two options to oppose the discharge: file a complaint objecting to the debtor's bankruptcy discharge; or file a complaint to determine if the creditor's debt is excluded from the discharge. A creditor may pursue one or both of these remedies by filing a complaint with the bankruptcy court.
The time limit for an adversary action is very short --- just 60 days from the first date of the creditors meeting, unless extended by court order.
The grounds for objecting to a bankruptcy discharge in a chapter 7 are narrow, and the creditor or trustee objecting to the discharge has the burden of proving the case.
In general, the grounds for denying a discharge are: the debtor failed to keep and produce adequate financial records; the debtor failed to explain satisfactorily a loss of assets; the debtor committed a bankruptcy crime; the debtor failed to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property that would have been property of the estate.
Once a discharge is granted, the trustee, a creditor, or the U.S. Trustee may later file a complaint to revoke a chapter 7 discharge if they can prove: a) the discharge was obtained through the fraud of the debtor; or b) the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee.
Generally, this complaint must be filed within a year after the discharge was granted.
Certain types of debts may not be discharged in a chapter 7 such as alimony and child support, most taxes, student loans made or guaranteed by a governmental unit, debts for death or personal injury caused by the debtor's operation of a motor vehicle while intoxicated from alcohol or other substances, and debts for criminal restitution orders.
To the extent that these types of debts are not fully paid in the chapter 7 case, the debtor is still responsible for them after the bankruptcy. Debts for money or property obtained by false pretenses, debts for fraud while acting in a fiduciary capacity, debts for willful and malicious injury to another or to the property of another, and debts arising from a property settlement agreement incurred during or in connection with a divorce will be discharged unless the creditor timely files an adversary complaint. The creditor must file the complaint within 60 days from the first date of the creditors meeting. The presumption is in favor of the discharge, and the creditor normally has the burden of proof to show that such debts should be excepted from the bankruptcy discharge.
Secured debts Secured creditors normally retain the right to seize their loan collateral, even after a discharge is granted. The debtor must decide whether to keep the asset. If a debtor returns the collateral, and if a discharge is granted, the debtor will have no further liability to the creditor.
A debtor wishing to keep the asset, such as an automobile, may "reaffirm" the debt or redeem the property. A reaffirmation is an agreement between the debtor and the creditor where the debtor promises to pay all or a portion of the money owed.
The reaffirmed debt will still be owed after the discharge. In return, the creditor promises as long as payments are made, the creditor will not repossess the automobile or other property. If the debtor defaults on the payments, the creditor may repossess and sell the collateral. Unfortunately, if the sale price is not enough to pay off the debt, the debtor will still owe a deficiency to the creditor.
Chapter 13 Background
Chapter 13 is available to individuals with regular income from any source, not just wages. A sole proprietor is also eligible for chapter 13 relief. The goal is for individuals to reorganize pay creditors though a plan requiring monthly payments for a minimum of three years and no more than five years.
Currently unsecured debts must be $394,725, or less, and secured debts $1,184,200, or less, for an individual to qualify for chapter 13. Corporations and partnerships may not file chapter 13.
An individual, even if self-employed in an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $383,175 and secured debts are less than $1,149,525.
Corporations and partnerships may not file chapter 13.
How Chapter 13 Works
A chapter 13 begins with a petition filed at the bankruptcy court where the debtor has a domicile or residence. The debtor also files schedules of assets and liabilities, a schedule of current income and expenditures, and a statement of financial affairs.
A husband and wife may file a joint petition or file individually. Joint petitioners pay only one filing fee.
If only one spouse files, the income and expenses of the non-filing spouse must be included in the debtor's schedules.
The filing of the petition under chapter 13 "automatically stays" most actions against the debtor or the debtor's property. As long as the "stay" is in effect, creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession, or wage garnishment.
Chapter 13 also provides a "co-debtor" stay which stops a creditor from trying to collect a "consumer debt" from another individual who is liable with the debtor on the debt.
A consumer debt is an obligation incurred for consumer, as opposed to business, needs.
A debtor facing foreclosure can stop the foreclosure sale by filing chapter 13. The chapter 13 plan permits the debtor to cure defaults on mortgage debts by repaying the arrears within a reasonable period of time [usually within 36-60 months].
If the mortgage becomes all due during the chapter 13, the plan must pay off that entire debt by the due date.
Upon the filing the petition, a trustee is appointed to administer the case. The chapter 13 trustee's role is to collect plan payments from debtors and make distributions to creditors according to the debtor's plan.
The debtor must file a plan within fifteen days of the petition, unless extended by the court, and the debtor must begin making plan payments to the trustee within 30 days of the petition date. The plan provides for monthly payments of a fixed amount to the trustee and must ultimately be confirmed by the court. Upon confirmation, the trustee begins distributing funds to creditors according to the terms of the plan. A plan can offer unsecured creditors less than full payment of their claims. Automobile loans can be modified so a debtor pays the lender only the value of the car as of the date of the petition. The undersecured portion of the debt is treated like all other unsecured debts in the plan. A meeting of creditors is held in every case, and the debtor is examined under oath. The meeting is held about 30 days after the petition is filed. The trustee conducts the meeting and questions the debtor's financial affairs and the proposed terms of the plan. You must bring a government issued picture I.D. and your social security card to the meeting. Creditors may attend and ask questions. Debtors must attend, and if a husband and wife filed jointly, they must both be present. Problems with the plan are typically resolved during or shortly after the creditors' meeting. If there are no plan objections, a confirmation order is submitted at the creditors meeting. If the trustee or a creditor objects to confirmation of the plan, a hearing is scheduled before the court. The bankruptcy judge will determine whether the plan is feasible and meets the legal requirements for confirmation. A variety of objections may be made, but the most frequent objections are: the total plan payments are less than creditors would receive if the debtor's assets were liquidated; or the debtor's plan does not commit all of the debtor's projected net disposable income for the minimum three-year period. The debtor must commit all projected "disposable income" during the time the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income excludes those sums necessary to pay ordinary operating expenses. If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee begins distributing the funds received according to the plan. If the plan is not confirmed, the debtor may attempt to amend the plan. The debtor also has a right to convert the case to a chapter 7 at any time.
Making The Plan Work
On occasion, changed circumstances will affect a debtor's ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation.
Modification after confirmation is not limited to a motion by the debtor. Modifications may be at the request of the trustee or an unsecured creditor.
The provisions of a confirmed plan are binding on the debtor and each creditor. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. Chapter 13 is not designed to solve financial problems that arise after the case is filed.
The debtor must make regular payments to the trustee, which will require living on a fixed budget for a long period.
The debtor's employer may be required to withhold the amount of the plan payment from the debtor's paycheck and send it to the chapter 13 trustee.
Furthermore, while confirmation of the plan entitles the debtor to retain property, the debtor may not incur any significant new debt without consulting the trustee, if such obligations have an impact upon the execution of the plan. Failure to make plan payments may result in dismissal of the case.
The Chapter 13 Discharge
The chapter 13 debtor is entitled to a discharge upon successful completion of all payments. The discharge releases the debtor from all claims provided for in the plan or disallowed by the court.
It is the creditor's duty to file a claim in the case. Those creditors who were provided for in full or in part under the chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.
In return for adhering to the requirements of a repayment plan for three to five years, the debtor receives a broader discharge under chapter 13 than in a chapter 7 case.
Generally, the debtor is discharged from all debts provided for by the plan or disallowed, except certain long term obligations (such as a home mortgage), debts for alimony or child support, debts for most student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. To the extent that these types of debts are not fully paid pursuant to the chapter 13 plan, the debtor will still be responsible for these debts after the chapter 13 case has successfully concluded.
Keith Cothroll practices Chapter 7 Chapter 13 in Houston , Texas. Call today!
Documents Required for the Initial Office Appointment:
In order to have a meaningful first visit together please bring the following with you:
1. A list of all creditors and the amounts and what it is for;
2. For each secured debt, such as a car loan or home mortgage:a copy of the latest statement showing the balance due on the debt;
3. Income tax returns for the last two years, including W-2, 1099, and K-1 information;
4. Copies of the last six months paystubs or copies of bank statements for the last 6 months showing the amount and frequency of the client's income;
5. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, housing, utilities, taxes, transportation, medicine, etc;
6. If self-employed, copies of monthly profit-and-loss statements for the past six months;
7. Copies of any lawsuits or judgments, regardless of whether the client is a plaintiff or defendant;
8. Copies of any family trusts or prenuptial agreements; and
9. Any other document you feel may be relevant to your assets, debts or income.
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Here at the Cothroll Law Firm we handle every aspect of your consumer bankruptcy case. We can advise you from pre-filling planning through Discharge and everything in between including job changes, modifications, conversions and substitutions. We look forward to helping you.
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Bankruptcy Law Houston
Correspondence Address: PO Box 820805, Houston, TX 77282
Office location 2000 S. Dairy Ashford Rd. Ste. 298A, Houston, TX 77077