Chapter 7 Bankruptcy: How does it work?

A chapter 7 bankruptcy case begins with the debtor filing a petition with the bankruptcy court in the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets.

Besides a petition, a debtor must also file with the court:

• Detailed lists of his assets, liabilities, and other financial information;
• A schedule of current income and expenditures;
• A statement of financial affairs that includes a series of questions the debtor must answer in writing concerning such things as his sources of income, transfers of property, and lawsuits by creditors; and
• A schedule of contracts or leases under which both parties to the agreement have duties remaining to be performed.

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 yet been filed when the case began.  (The case trustee is the representative of the bankruptcy estate whose responsibilities include reviewing the debtor’s petition and schedules as well as bringing actions against creditors or the debtor to recover property of the bankruptcy estate.)

Individual debtors with primarily consumer debts (that is, debts incurred for personal rather than business needs) have additional document filing requirements including:

• 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.

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 bankruptcy court’s permission, however, individual debtors may pay in installments.  Failure to pay these fees may result in dismissal of the case.

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.

In order to complete the official bankruptcy forms that make up the petition, statement of financial affairs, and schedules, the debtor must also provide the following information:

• A list of all creditors and the amount and nature of their claims;
• The source, amount, and frequency of the debtor’s income;
• A list of all of the debtor’s property; and
• A detailed list of the debtor’s monthly living expenses such as food, clothing, shelter, utilities, taxes, transportation, and medicine.

Among the schedules that an individual 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.  Many states, such as Florida, 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. Thus, whether certain property is exempt and therefore may be kept by the debtor is often a question of state law rather than federal law.
Filing a petition under chapter 7 automatically stays or stops most collection actions against the debtor or the debtor’s property.  But filing the petition does not stay certain types of actions such as the commencement or continuation of a criminal action against a debtor or a proceeding concerning child custody.  Also, the stay may be effective only for a short time in some situations.

The stay arises by operation of law and requires no action by the court. 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 twenty and forty days after the petition is filed, the case trustee will hold a meeting of creditors.  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.  If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions. Within ten 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.”  (The Bankruptcy Code applies a means test to determine whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Code requiring dismissal or else conversion of the case to a case under chapter 11, 12, or 13 of the Code.)

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 his 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 provide the debtor with complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to a case under chapter 11, 12 or 13 of the Code 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. In that way, a debtor is not permitted to convert his case repeatedly from one chapter to another.