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Eligibility for Chapter 7

To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. Subject to the “means test” (described below) for individual debtors, relief is available under chapter 7 irrespective of the amount of the debtor’s debts or whether the debtor is solvent or insolvent.

If the debtor’s “current monthly income” [i] is more than the state median, the Bankruptcy Code requires application of a “means test” to determine whether the chapter 7 filing is presumptively abusive. The “current monthly income” received by the debtor means the average monthly income received over the six (6) calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from non-debtors and including income from the debtor’s spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes.

Abuse is presumed if the debtor’s aggregate current monthly income over five (5) years, net of certain statutorily allowed expenses, is more than (a) $12,850, or (b) 25% of the debtor’s nonpriority unsecured debt, as long as that amount is at least $7,700. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case will be converted to chapter 13 (with the debtor’s consent) or will be dismissed.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. A bankruptcy discharge does not extinguish a lien on property.

How Chapter 7 Works

A chapter 7 case begins with the debtor filing a petition with the bankruptcy court. In addition to the petition, the 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. 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). 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 sixty (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. A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.

The courts must charge a $245 case filing fee, a $75 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. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. For a detailed list of court fees and attorney’s fees in a bankruptcy case, a chapter 7 bankruptcy attorney in Birmingham, AL should be consulted.

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:

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

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. Each debtor in a joint case (both husband and wife) can claim exemptions under the federal bankruptcy laws. Many states, including Alabama, adopted their own exemption law in place of the federal exemptions. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult a chapter 7 bankruptcy attorney to determine the exemptions available in the state where the debtor lives.

Filing a petition under chapter 7 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. But filing the petition does not stay certain types of actions 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.

Between 21 and 40 days after the petition is filed, the case trustee (described below) 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 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.

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 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.

Role of the Case Trustee

When a chapter 7 petition is filed, the U.S. trustee (or the bankruptcy court in Alabama) appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets. If all the debtor’s assets are exempt or subject to valid liens, the trustee will normally file a “no asset” report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases. But if the case appears to be an “asset” case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. Unsecured debts generally may be defined as those for which the extension of credit was based purely upon an evaluation by the creditor of the debtor’s ability to pay, as opposed to secured debts, for which the extension of credit was based upon the creditor’s right to seize collateral on default, in addition to the debtor’s ability to pay. In the typical no asset chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim.

Commencement of a bankruptcy case creates an “estate.” The estate technically becomes the temporary legal owner of all the debtor’s property. It consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. Generally speaking, the debtor’s creditors are paid from nonexempt property of the estate.

The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor’s nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. The trustee accomplishes this by selling the debtor’s property if it is free and clear of liens (as long as the property is not exempt) or if it is worth more than any security interest or lien attached to the property and any exemption that the debtor holds in the property.

The trustee may also attempt to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to: set aside preferential transfers made to creditors within 90 days before the petition; undo security interests and other prepetition transfers of property that were not properly perfected under non-bankruptcy law at the time of the petition; and pursue non-bankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors and enhance the liquidation of the estate.

There are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is only paid if all other classes of claims have been paid in full. Accordingly, the debtor is not particularly interested in the trustee’s disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The individual debtor’s primary concerns in a chapter 7 case are to retain exempt property and to receive a discharge that covers as many debts as possible.

The Chapter 7 Discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.

The grounds for denying an individual debtor a discharge in a chapter 7 case are narrow and are construed against the moving party. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management.

Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt.

If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in 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 and 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 a chapter 7 bankruptcy attorney who represents clients in Birmingham, AL, the bankruptcy judge must approve the reaffirmation agreement.

If the debtor was represented by a chapter 7 bankruptcy 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 chapter 7 bankruptcy 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 dependents. The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by a chapter 7 bankruptcy attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.

An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. But not all of an individual’s debts are discharged in chapter 7. Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders. The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable.

The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud by the debtor, if 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, or if the debtor (without a satisfactory explanation) makes a material misstatement or fails to provide documents or other information in connection with an audit of the debtor’s case.

Dischargeable Debts In A Chapter 7 Bankruptcy

A chapter 7 bankruptcy offers relief to those who are overwhelmed by debt. It is an opportunity to start fresh financially by getting certain debts discharged. As previously mentioned, once a debt has been discharged, creditors can no longer pursue collection attempts or other actions against the debtor. The types of debts that are dischargeable in a chapter 7 bankruptcy include unsecured debts, such as credit cards, medical bills, personal loans, and payments on motor vehicles. To gain a better understanding of the types of debts that are dischargeable, it is highly advised to consult with a chapter 7 bankruptcy attorney who serves clients in Birmingham, AL.

Debts that are not customarily discharged could be discharged under certain circumstances. For instance, it is difficult to get student loans discharged. However, in some cases, if a debtor can prove undue hardship, the court may discharge part of the student loan. To have a chance at getting a student loan partially discharged, a debtor must be able to show that they are not able to maintain an adequate standard of living. A debtor, for example, could indicate that they cannot support themselves or their family economically. For further information on the possibility of getting a student loan debt discharged, contact a chapter 7 bankruptcy attorney who is experienced in bankruptcy cases in Birmingham, AL.

In some instances, income tax debts may be discharged under a special exemption. The special exemption, however, must be granted by the bankruptcy court. If a debtor is interested in having income tax debts discharged, enlisting the assistance of a knowledgeable chapter 7 bankruptcy attorney is recommended. A chapter 7 bankruptcy attorney can assess a debtor’s particular case to determine which debts are dischargeable. In cases where taxes are not dischargeable, the Internal Revenue Service may offer alternate options or payment arrangements.

John W. Clark

Call Us Now For A Personalized Case Evaluation
(205) 506-3354