Congress passed our current bankruptcy law in 1978, naming it the United States Bankruptcy Code. The “Code” is divided into “Chapters,” some containing general principles of bankruptcy law applicable to any form of bankruptcy relief being sought by an individual or a business. Most individuals find one of two forms of bankruptcy to be beneficial, Chapter 7 relief or Chapter 13 relief. In the Code, Chapter 7 is subtitled “Liquidation,” while Chapter 13 is subtitled “Individual Debt Adjustment.”
Chapter 7 “liquidation” implies that there will be a sale of the individual or business’ assets, with the sale proceeds to be paid to the creditors. Fortunately for individuals, the law allows individual debtors to keep enough of their assets to enable the individual to have a “fresh start” while eliminating unsecured debts through a bankruptcy discharge.
In most cases, individuals are able to keep ALL of their unencumbered assets in Chapter 7 cases. Sometimes, individual debtors use Chapter 7 bankruptcy to “walk away” from assets whose value is far below what they owe, such as an older car with a high loan balance; individuals have a choice in those circumstances, it is not a result forced on them. Your attorneys at Seelinger Law will evaluate your circumstances, including the value of your assets and any risk associated with losing assets to a trustee sale, before advising you to file for Chapter 7 bankruptcy. If there is a serious risk that an asset would be sold in Chapter 7, you may be advised to file for Chapter 13 relief, instead. The goal of a Chapter 7 case is to have the debtor’s personal liability to the creditors (with some exceptions, such as student loans) eliminated, or “discharged.” The process usually takes only a matter of months from beginning to end.
The means test is meant to keep high income earners from being able to have access to the benefits of Chapter 7 bankruptcy. It is a numeric test that your attorney will do for you based on your income and ability to pay off some of your unsecured debt. If your income is lower than your state's median income, then you have already passed the test and you are eligible to file for Chapter 7. Your attorney will be adept at factoring in the types of expenses which are used in the means test to determine whether you have any disposable income to pay your creditors. If you are considered a high income filer with few dependents, you can still pursue your bankruptcy rights through a Chapter 13 repayment plan. Remember that you might not be required to pay back the majority of your unsecured debt under Chapter 13, depending on the amount of your income compared to the size of your debts.
Typically, a Chapter 7 case ends less than 6 months after it is filed, often sooner. The vast majority of individual Chapter 7 cases do not result in any assets being taken and sold by the Chapter 7 trustee. Debtors attend a “Meeting of Creditors” within 4 to 6 weeks after the case is filed. Despite the name of this meeting, few, if any, creditors attend, and the meeting is conducted by the Chapter 7 Trustee (see the topic “What does the Chapter 7 trustee look for at the meeting of creditors?”). Any creditors in attendance may ask questions about the debtor’s assets or finances, but they are not permitted to use the meeting as an opportunity to demand payments or to intimidate the debtor. Following the meeting, creditors have 60 days in which to challenge the debtor’s eligibility for a discharge of one or all of the debts. Such challenges are rare, because creditors cannot successfully prevent most debts from being discharged unless the debtor has engaged in fraud or some other bad conduct in connection with the debtor’s finances. Soon after the meeting, the trustee informs the bankruptcy court as to whether or not the trustee has determined that any assets are available to pay creditors; typically, a “no asset” report is filed. When the trustee has filed a “no asset” report and the deadline for creditors to raise objections to discharge has passed, the bankruptcy court issues a discharge and the case is then closed.
During the filing process, a trustee will be assigned to your Chapter 7 case. The trustee does not represent the creditors, but is responsible for overseeing the bankruptcy estate. The trustee does not work for the Bankruptcy Court, but instead is an independent attorney who has been appointed by the Department of Justice to serve as trustee in cases filed under Chapter 7. If a debtor owns property which is not exempt, the trustee is required to take possession of the property and to sell it, to generate money to pay to unsecured creditors. However, when all of your assets are exempt, as is usually the case, there is nothing for the trustee to sell, and instead, the trustee’s only role is to review your case for accuracy.
Remember that a trustee is simply a lawyer whose job it is to review your case for any errors or omissions and to evaluate whether you have listed all of your property on your paperwork. During the trustee meeting you will be asked a series of yes or no questions while you are sworn to tell the truth. Your attorney will prepare you for the questions that will be asked so there is no reason to feel nervous about the trustee meeting. For most clients this is the one and only time that they will be setting foot in the bankruptcy courthouse. It is rare for a Chapter 7 debtor to be required to go to an actual courtroom, as the trustee meetings are generally held in a conference room.
Part of the trustee's job is to make sure that the creditors are being treated fairly, since they will be the ones that are losing money in the bankruptcy process. Keeping this in mind, the trustee will be making sure that you were entirely forthcoming in your paperwork, and will be looking for questions or issues that may benefit your creditors.
Some common issues that the trustee looks for are things like undervalued assets, omitted assets, understated income, overstated expenses, recent payments that you might have made to preferred creditors, and any fraudulent transfers of property.
The trustee does not pass judgment upon you if you consider yourself to be a ‘shopper’ or a ‘spender.’ In fact, the trustee asks each of my clients their reason for filing bankruptcy at this time and then proceeds to list possible reasons such as illness, loss of income, or “simply overspending”…this means that overspending is a good enough reason to file for bankruptcy! In other words, you are allowed to make a mistake, you will be given a fresh start.
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