Frequently Asked Questions
Table of Contents
- Who is permitted to file and maintain a chapter 7 case?
- Who should not file a Chapter 7 case?
- Is there anything that a person must do before a chapter 7 case can be filed?
- How much is the filing fee in chapter 7 case and when must it be paid?
- Where should a chapter 7 case be filed?
- May a husband and wife file jointly under chapter 7?
- Under what circumstances should a joint chapter 7 case be filed?
- When is the best time to file a chapter 7 case?
- How does the filing of a chapter 7 case by a person affect collection and other legal proceedings that have been filed against that person in other courts?
- How does filing a chapter 7 case affect a person’s credit rating?
- Are the names of persons who file chapter 7 cases published?
- Are employers notified of chapter 7 cases?
- Does a person loose any legal or civil rights by filing a chapter 7 case?
- May employers or governmental agencies discriminate against persons who files chapter 7 cases?
- Will a person lost all of his or her property is he or she files a chapter 7 case?
- What is exempt property?
- When must a person appear in court in a chapter 7 case and what happens there?
- What happens after the meeting of creditors?
- What is a trustee is a chapter 7 case, what does he or she do?
- What are the responsibilities to the trustee of the person filing the case?
- What happens to property that is turned over to the trustee?
- What if a person has no nonexempt property for the trustee to collect?
- How are secured creditors dealt with in a chapter 7 case?
- How are unsecured creditors dealt with in a chapter 7 case?
- What encumbered property may a person retain in a chapter 7 case?
- How may a person minimize the amount of money or property that must be turned over to the trustee in a chapter 7 case?
- May a utility company refuse to provide service to a person if the company’s utility bill is discharged under chapter 7?
- What should a person do if he or she moves before the chapter 7 case if completed?
- How is a person notified when his or her discharge has been granted?
- What if a person wishes to repay a dischargeable debt?
- How long does a chapter 7 case last?
- What should a person do if a creditor later attempt to collect a debt that was discharged in his or her chapter 7 case?
- 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?
- What is the role of the attorney for the person filing a chapter 7 case?
Who is permitted to file and maintain a chapter 7 case?
Any person who resides in, does business in, or had property in the United States is permitted to file a chapter 7 bankruptcy case except a person who intentionally dismissed a prior bankruptcy case within the last 180 days. To be permitted to maintain a chapter 7 bankruptcy case a person must qualify for chapter 7 relief under a process called means testing.
Who should not file a Chapter 7 case?
A person who is not eligible for a chapter 7 discharge should not file a chapter 7 case. Also, in most instances a person who has substantial debts that are not dischargeable under chapter 7 should not file a chapter 7 case. In addition, it is not usually advisable for a person with disposable income sufficient to make the required minimum payments to unsecured creditors to file a chapter 7 case, because a presumption of abuse will arise and the case will probably be dismissed or converted to chapter 13.
Is there anything that a person must do before a chapter 7 case can be filed?
Yes. A person is not permitted to file a chapter 7 case unless he or she has, during the 180 day period prior to filing, received from an approved nonprofit budget and credit counseling agency an individual or group briefing that outlined the opportunities for available credit counseling and assisted the person in performing a budget analysis. This briefing may be conducted by telephone or on the internet, if desired and must be paid for the person. When the chapter 7 case is filed, a certificate from the agency describing the services provided to the person must be filed with the court. In emergency situations, the required credit counseling may be conducted after the case is filed.
How much is the filing fee in chapter 7 case and when must it be paid?
The filing fee is $299.00 for either a single or a joint case. The filing fee is payable when the case if filed. However, if the person filing can show that his or her income is less than 150% of the official poverty line and that he or she is unable to pay the filing fee, the court can waive payment of the filing fee. If the person filing is unable to pay the entire filing fee when the case if filed, it may be paid in up to four installments, with the final installment due within 120 days. The period for payment may later be extended to 180 days by the court, if there is a valid reason for doing so. Unless payment is waived by the court, the entire filing fee must ultimately be paid or the case will be dismissed and no debts will be discharged.
Where should a chapter 7 case be filed?
A chapter 7 case is filed in the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the greater portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court.
May a husband and wife file jointly under chapter 7?
Yes. A husband and wife may file a joint case under chapter 7. If a joint chapter 7 case is filed, only one set of bankruptcy forms is needed and only one filing fee is discharged. However, both husband and wife must receive the required credit counseling before the case is filed and both must complete the required financial management course after the case is filed.
Under what circumstances should a joint chapter 7 case be filed?
A husband and wife should file a joint chapter 7 case if both of them are liable for one or more significant dischargeable debts. 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 non filing spouse, even if he or she has no income or assets. In community property states it may not be necessary for both spouses to file is all substantial dischargeable debts are community debts. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.
When is the best time to file a chapter 7 case?
The answer depends on the status of the person’s dischargeable debts, the nature and status of the person’s nonexempt assets, and the actions taken or threatened to be taken by creditors. The following rules should be followed:
- Don’t file the case until all anticipated debts have been incurred, because only debts that have been incurred when the case is filed are dischargeable and it will be another eight years before the person is again eligible for a chapter 7 discharge. For example, a person who has incurred substantial medical expenses should not file a chapter 7 case until the illness or injury has been either cured or covered by insurance, as it will do little good to discharge, say, $100,000 of medical debts now and then incur another $100,000 in medical debts after the case has been filed. (see medical bills bankruptcy)
- Don’t file the case until the person filing has received all nonexempt assets to which he or she may be entitled. If the person is entitled to receive an income tax refund or a similar nonexempt asset in the near future, the case should not be filed until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will have to be turned over to the trustee.
- Don’t file the case if the person filing expects to acquire nonexempt property through inheritance, life insurance or divorce in the next 180 days, because the property may have to be turned over to the trustee.
- If an aggressive creditor has threatened to attach or garnished a person’s assets or income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a chapter 7 case (see Question 18). If a creditor has threatened to attach or garnished the person’s wages or if s foreclosure action has been filed against his or her income, it may be necessary to file the case immediately in order to protect the person’s interest in the property. (see foreclosure bankruptcy)
How does the filing of a chapter 7 case by a person affect collection and other legal proceedings that have been filed against that person in other courts?
The filing of a chapter 7 case by a person automatically suspends virtually all collection and other legal proceedings pending against that person. A few days after a chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the person. This court-ordered suspension of creditor activity against the person filing is called automatic stay.
If necessary, notice of the automatic stay may be served on a creditor earlier by the person or the person’s attorney. Any creditor who intentionally violates that automatic stay may be held in contempt of court and may be liable in damages to the person filing. Criminal proceedings and actions to collect domestic support obligations from exempt property or property acquired by the person 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 person filing and a creditor may continue to collect debts from those person after the case if filed. Persons who have had a prior bankruptcy case dismissed within the past year may be denied that protection of the automatic stay.
How does filing a chapter 7 case affect a person’s credit rating?
It will usually worsen it, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least 8 years before they can file another chapter 7 case. If there are compelling reasons for filing chapter 7 case that are not within the person’s control (such as an illness or an injury), some credit rating agencies may take that into account in rating the person’s credit after filing. (see rebuilding your credit)
Are the names of persons who file chapter 7 cases published?
When a chapter 7 case is filed, it becomes a public record and the names of the persons filing may be published by some credit reporting agencies. However, newspapers do not usually report or publish the names of consumers who file chapter 7 cases.
Are employers notified of chapter 7 cases?
Employers are not usually notified when a chapter 7 case is filed. However, the trustee in a chapter 7 case often contacts an employer seeking information as to the status of the person’s wages or salary at the time the case was filed or to verify a person’s current monthly income. 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 that necessary information.
Does a person loose any legal or civil rights by filing a chapter 7 case?
No. Filing a chapter 7 case is not a criminal proceeding and a person does not lose any civil or constitutional right by filing.
May employers or governmental agencies discriminate against persons who files chapter 7 cases?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 7 case. It is also illegal for local, state, or federal governmental agencies 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 a chapter 7 case.
Will a person lost all of his or her property is he or she files a chapter 7 case?
Usually not. Certain property is exempt and may not be taken by creditors unless it is encumbered by a valid mortgage or lien. A person is usually allowed to retain his or her unencumbered exempt property in a chapter 7 case. A person may also be allowed to retain certain encumbered exempt property (see Question 34). Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.
What is exempt property?
Exempt property is property that is protected by law from the claims of creditors. However, if exempt property has been pledged to secure a debt or is otherwise by a valid lien or mortgage, the lien or mortgage holder may claim the exempt property may be exempt under either state or federal law. Exempt property typically includes all or a portion of a person’s unpaid wages, home equity, household furniture, and personal effects. Your attorney can inform you as to the property that is exempt in your case.
When must a person appear in court in a chapter 7 case and what happens there?
The first court appearance is for a hearing called the “meeting of creditors,” which is usually held about a month after the case is filed. The person filing the case must bring photo identification, his or her social security card, his or her most recent pay stubs and all of his or her bank and investment account statements to this hearing.
At this hearing, the person is put under oath and questioned about his or her debts, assets, income and expenses by the hearing office or trustee. In most chapter 7 consumer cases no creditors appear in court, but any creditor that does appear is usually allowed to question the person. For most persons this will be the only court appearance, but if the bankruptcy court decides not to grant a person a discharge or if the person wishes to reaffirm a debt, there may be another hearing about three months later which the person will have to attend.
What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the person filing regarding his or her property and the court may issue certain orders to the person. These orders are sent by mail and may require the person to turn certain property over to the trustee or provide the trustee with certain information. If the person fails to come with these orders, the case may be dismissed, in which case his or her debts will not be discharged. The person must also attend and complete an instructional course on personal financial management and file a statement with the court showing completion of the course.
What is a trustee is a chapter 7 case, what does he or she do?
The trustee is a person appointed by the United States trustee to examine the person who filed the case, collect the person’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 responsible for seeing to it that the person filing performs the required duties in the case. A trustee is appointed in a chapter 7 case, even if the person filing has no nonexempt property.
What are the responsibilities to the trustee of the person filing the case?
The law requires the person filing to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the person’s nonexempt property. If the person does not cooperate with the trustee, the chapter 7 case may be dismissed and the person’s debts will not be discharged. At least 7 days before the meeting of creditors the person filing must give the trustee and any requesting creditors copies of his or her recent Federal income tax returns.
What happens to property that is turned over to the trustee?
It is usually converted to cash, which us used to pay the fees and expenses of the trustee, to pay the claims of priority creditors, and, if there is any left, to pay the claims of unsecured creditors.
What if a person has no nonexempt property for the trustee to collect?
If, from the bankruptcy forms filed, it appears that the person filing has no nonexempt property, a notice will be sent 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. Most chapter 7 cases that are filed by consumers are no-asset cases.
How are secured creditors dealt with in a chapter 7 case?
Secured creditors are creditors with valid mortgage or liens against property of the person filing. Property that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose on its secured property, unless the value of the secured property greatly exceeds the amount owned to the creditor. The claim of a secured creditor is called a secured claim and secured claims are collected from or enforced against encumbered property. Secured claims are not paid by the trustee. A secured creditor must prove the validity of its mortgage or lien and must usually obtain a court order before repossessing or foreclosing on encumbered property. Encumbered property should not be turned over to a secured creditor until a court order to do so have been obtained, unless the property is encumbered only to finance its purchase. The debtor may be permitted to retain certain types of encumbered personal property (see Question 25).
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 person filing. If the person filing has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the first date of set for the meeting of creditors. The trustee will examine these claims and file objectives to those deemed improper. When the trustee has collected all of the person’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. Domestic support obligations, administrative expenses, claims for wages, salaries and contributions to employee benefit plans, claims for the refund of certain deposits and tax claims, are given priority, in that order, 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. In chapter 7 cases filed by consumers, unsecured creditors usually get nothing.
What encumbered property may a person retain in a chapter 7 case?
A person may retain (or redeem) certain encumbered personal and household property, such as household furniture, appliances and goods, wearing apparel, and tools of trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred to finance the purchase of the property. A person may also retain without payment to the secured creditor any encumbered property that is both exempt and subject only to a judgment lien that is not divorce-related. Finally, a person may retain certain encumbered exempt personal, family, or household property by paying to the secured creditor an amount equal to the replacement value of the property, regardless of how much is owed to the creditor.
How may a person minimize the amount of money or property that must be turned over to the trustee in a chapter 7 case?
In a chapter 7 case the person filing is required to turn over to the trustee only the nonexempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets are liquid in nature and tend to vary in size or amount from day to day. It is wise; therefore, to engage in some planning so as to minimize the value or amount of these liquid assets on the day and hour that the chapter 7 case is filed. The most common nonexempt liquid assets and the assets that the trustee will be most likely to look for, include the following:
- Bank accounts,
- Prepaid rent,
- Landlord and utility deposits
- Accrued earnings and benefits
- Tax refunds, and
- Sporting goods
It is usually advantageous to take steps to insure that the value of each of these assets is as low as possible on the day and hour that the chapter 7 case is filed. By doing this the person will not be cheating or acting illegally; he or she will simply be using the law to his or her advantage, much the same as a person who takes advantage of the tax laws by selling property at the appropriate time.
If possible, the person filing should have no cash on hand when the chapter 7 case is filed. Further, if he or she has received cash or the equivalent in the form of a paycheck or the closing of a bank account shortly before the filing of the case, the funds should be disposed of for valid purposes and receipts should be obtained when disposing of the funds in order to prove to the trustee and the court that the funds were validly disposed of prior to the filing of the case. Money possessed or obtained shortly before the filing of a chapter 7 case may be spent on such items as food and groceries, the chapter 7 filing fee, the attorney’s fee in the chapter 7 case and the payment to creditors whose claims the person intends to reaffirm and continue paying after the filing of the chapter 7 case. Payments should not be made as gifts or loans to friends or relatives, however, as the trustee may later recover these payments.
The best practice is to close out all bank accounts before filing a chapter 7 case. If a bank account is not closed, the balance of the account should be as close to zero as the bank will allow and all outstanding checks must clear the account before the case is filed. If the person filing has written a check to someone for, say, $50, and if the check has not cleared the account when the case filed, the $50 in the account to cover the outstanding check will be deemed an asset and will have to be paid to the trustee.
If a person’s rent is paid on the first day of the month and if the person’s chapter 7 case is filed on the tenth day of the month, the portion of the rent covering the last 20 days of the month, if not exempt, will be deemed an asset and will later have to be paid to the trustee. If possible, the person should make arrangements with the landlord to pay rent only through the date that the case if to be filed and to pay the balance of the rent from funds acquired after the case if filed. If this is not possible, the case should be filed near the end of the rent period.
Landlord and Utility Deposits
Unless they are exempt, the person filing should attempt to obtain the refund of all landlord and utility deposits before filing a chapter 7 case. Otherwise, the deposits or their cash equivalents will have to be paid to the trustee, unless the deposits are exempt.
Accrued Earnings and Benefits
In most states, and under the federal law, only a certain percentage (usually 75%) of a person’s earnings is exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25%) of any accrued and unpaid wages, salary, commissions, vacations pay, sick leave pay, and other accrued and nonexempt employee benefits. Normally, then the best time to file a chapter 7 case is the morning after payday. Even then, if the pay period does not end on the payday, the person may have accrued earnings unless special arrangements are made with the employer. If annual leave or vacation pay is convertible to cash, it should be collected before the chapter 7 case if filed, as should any other nonexempt employee benefits that are convertible to cash.
In most states, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the person prior to the filing of a chapter 7 case. Therefore, if a tax refund is expected, a chapter 7 case should not be filed until after the refund has been received and validly disposed of. Even if the case is filed before the end of the tax year, if the person filing later receives a refund, the trustee may be entitled to the portion of the refund earned prior to the filing of the case. The best practice, then, is to either file the chapter 7 case early in the tax year (but after the refund from the previous year has been received) or make arrangements to insure that there will be no tax refund for that year.
If the person owns guns, fishing gear, cameras, or similar items of value that are not exempt, he or she will later have to turn them, or their cash equivalent, over to the trustee. Such items should be disposed of prior to the filing of the case, especially if they are of considerable value.
May a utility company refuse to provide service to a person if the company’s utility bill is discharged under chapter 7?
If, within 20 days after a chapter 7 case is filed, the person filing furnishes a utility company with a deposit or other security to unsure the payment of future utility services, it is illegal for a utility company to refuse to provide utility service to the person after the case is filed, or to otherwise discriminate against the person, if its bill for past utility services is discharged in the person’s chapter 7 case.
What should a person do if he or she moves before the chapter 7 case if completed?
The person should immediately notify the bankruptcy court in writing of the new address. Because most communications between the person filing and the bankruptcy court are by mail, it is important that the bankruptcy court always have the person’s current address. Otherwise, the person may fail to receive important notices and the chapter 7 case may be dismissed. Many courts have change-of-address forms for persons to use when they move and one of these forms should be obtained is a move is planned.
How is a person notified when his or her discharge has been granted?
The person is usually notified by mail. Most courts send a form called “Discharge of Debtor” to the person filing and to all creditors. This form is a copy of the court order discharging the person from his or her dischargeable debts, and it serves as notice that the discharge has been granted and that creditors are forbidden from attempting to collect discharged debts. It is usually mailed about four months after a chapter 7 case is filed.
What if a person wishes to repay a dischargeable debt?
A person may repay as many dischargeable debts as desired after filing a chapter 7 case. By repaying one debt, a person does not become legally obligated to repay any other debts. The only dischargeable debt that a person is legally obligated to repay is one for which the person and the creditor have signed what is called a “reaffirmation agreement.” If the person was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid. If the person was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and other required documents with the court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, the person filing is not legally obligated to repay the debt, even if the person has made a payment on the debt since filing the chapter 7 case, has agreed in writing to repay the debt, or had waived the discharge of the debt in a waiver that was not approved by the bankruptcy court.
How long does a chapter 7 case last?
A successful chapter 7 case begins with the filing of the bankruptcy forms and ends with the closing of the case by the court. If there are no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the person filing receives his or her discharge, which is usually about four months after the case is filed. If there are 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 chapter 7 consumer cases with assets last about six months, but some last considerably longer.
What should a person do if a creditor later attempt to collect a debt that was discharged in his or her chapter 7 case?
When a chapter 7 discharge is granted, the court enters an order prohibiting creditors from later attempting to collect any discharged debt from the person filing. Any creditor who violates this court order may be held in contempt of court and may be liable to the person for damages. If a creditor later attempts to collect a discharged debt from the person, the person should give the creditor a copy of his or her chapter 7 discharge and inform the creditor in writing that the debt was discharged in the chapter 7 case. If the creditor persists, the person should contact an attorney. If a creditor files a lawsuit on a discharged debt, it is important to inform the court in which the lawsuit is filed that the debt was discharged in bankruptcy. The lawsuit should not be ignored because even though a judgment entered on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly.
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 person or persons who filed the chapter 7 case. 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 person filing is still liable for the debt even if the person filing receives a chapter 7 discharge with respect to the debt. The only exception to this rule is in community property states where the spouse of the person filing is released from certain community debts by the chapter 7 discharge.
What is the role of the attorney for the person filing a chapter 7 case?
The attorney for the person filing performs the following functions in a typical chapter 7 consumer case:
- Analyze the amount and nature of the debts owed by the person filing and determine the best remedy for the person’s financial problems.
- Advise the person filing of the relief available under chapter 7 and the other chapters of the Bankruptcy Code, and of the advisability of proceeding under each chapter.
- Assist the person in obtaining the required pre-bankruptcy budget and credit counseling briefing.
- Assemble the information and data unnecessary to prepare the chapter 7 forms for filing.
- Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court.
- Assist the person filing in arranging his or her assets so as to enable the person to retain as many of the assets as possible after the chapter 7 case.
- Filing the chapter 7 petitions, schedules, statements and other forms with the bankruptcy court and if necessary, notifying certain creditors of the commencement of the case.
- If necessary, assisting the person filing in reaffirming certain debts, redeeming personal property, setting aside mortgages, or liens against exempt property, and otherwise carrying out the matters set forth in the statement of intention.
- Attending the meeting of creditors with the person and appearing with the person any at any other hearings that may be held in the case.
- Assist the debtor in attending and completing the required instructional course on personal financial management.
- If necessary, preparing and filing amended schedules, statements and other documents with the bankruptcy court in order to protect the rights of the person.
- If necessary, assisting the person in overcoming obstacles that may arise to the granting of a chapter 7 discharge.
The fee paid, or agreed to be paid; to an attorney representing the person filing in a chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Most attorneys collect all or most of their fee before the case is filed.