When most people think of bankruptcy, what they really have in mind is a Chapter 7 or otherwise known as a "straight bankruptcy." The name "Chapter 7" is derived from the federal Bankruptcy Code. When Congress wrote the current bankruptcy law in 1979, it divided the Bankruptcy Code into eight chapters, each beginning with an odd number (except for Chapter 12 which has been in and out since 1986). Chapters 1, 3, and 5 explain how all bankruptcies work, while Chapter 7 applies in liquidation cases. Unlike some bankruptcy chapters, a Chapter 7 can be filed by an individual, a corporation, or a partnership. Estates or trusts are not eligible. While a Chapter 7 is ordinarily commenced by the debtor (the person filing the bankruptcy) voluntarily submitting to the court, there is also a procedure for creditors put a person, corporation, or partnership involuntarily into a Chapter 7 case.
With that brief explanation, what follows are the key concepts and principles for anyone considering Chapter 7.
- How and where your case is filed. Bankruptcy cases are filed in the federal judicial district in which the debtor resides, or with a corporation, its place of incorporation or where it does business. The case is not filed where the lawyer works but where you live. It is important to remember this distinction because if you hire a lawyer out of your area, you will also pay travel time going to and from your assigned courthouse. In Southwest Missouri all cases are filed with the U.S. District Clerk in Kansas City, and then assigned either to the Springfield district or the Carthage district. Again, the assignment is based upon the county in which you live.
- The who, what, and where of the bankruptcy trustee. Chapter 7 requires the appointment of a trustee. That person is an officer of the court, appointed by the U.S. Department of Justice to sell the debtor's non-exempt assets, turn them into cash, and pay out money to the proper creditors. The law requires the debtor to cooperate with the trustee in the administration of the case, including collection of assets. Only about 7% of the cases filed nationwide have assets sold to distribute to creditors. The other 93% of the bankruptcy cases filed have no assets subject to sale, usually because there are valid liens or the debtor has exemptions sufficient to shield the assets from the trustee.
- Exempt property. Every person filing bankruptcy is entitled to keep some exempt assets. Exemptions are determined by the state law where you live and in effect on the date you file bankruptcy. Each state has determined the minimum amount of property a person should have in spite of filing a bankruptcy, just enough to get by. See the other articles at http://www.cp-law.com/ explaining exemptions in greater detail.
- Property of the estate. When someone files bankruptcy, all of their assets create a bankruptcy estate. This estate consists of anything you call your own, whether it is jointly owned, subject to liens, and even leases. It is up to the trustee to review all of the assets and to determine whether there is anything available for distribution to creditors. As a general proposition, assets and wages received after the bankruptcy are not part of the bankruptcy estate. There is an exception, however, for assets received within 180 days of the bankruptcy petition by way of inheritance or a beneficiary under a life insurance policy.
- Automatic stay. One of the principal reasons to file bankruptcy is because of lawsuits, garnishments, foreclosures, and harassing phone calls. When a bankruptcy petition is filed the court enters an automatic stay, essentially a restraining order to stop virtually all creditor activity. In other words, when upon filing bankruptcy any foreclosure, garnishment, or lawsuit must stop, and phone calls from creditors are put to a halt. If a creditor willfully violates the automatic stay it is subject to a lawsuit for actual and punitive damages as well as attorney fees.
- Discharge. This is the bankruptcy part of the case. When someone wants to file bankruptcy, they do so with the idea of terminating or wiping out all of their debts. This is the fresh start which is commonly referred to by bankruptcy lawyers and bankruptcy courts. Unless a creditor objects to the discharge by filing a trial proceeding before the bankruptcy court within 60 days after the meeting of creditors, the discharge is automatically entered. By the same token, a discharge can be denied if the debtor has done certain things, including failing to produce adequate records, failure to explain loss of assets, committing a bankruptcy crime including perjury, failing to obey a lawful order of the court, or any kind of fraudulent activity. Other debts are not discharged, and they may include alimony, child support, as well as some taxes, and often student loans. Discharge issues become very complicated and anyone contemplating bankruptcy should speak with competent legal counsel regarding all the facts of their particular case so they know what to expect before filing. It is also important to remember that only people receive a discharge, corporations and partnerships do not.
- Surviving bankruptcy. No one looks forward to filing bankruptcy. Sometimes bad decisions or bad luck leave no choice. Like all bitter lessons, it is important not to repeat history. If you must file bankruptcy be sure that you are never again found in such a vulnerable position. Keep good records of all of your financial affairs, cut up your credit cards, maintain medical insurance, never using a payday or title loan company, and be sure that your expenses are not more than your net income. If you need to, get outside financial counseling so that the Chapter 7 fresh start is worthwhile.
- In conclusion. When a potential client visits us at Checkett & Pauly, we fully discuss Chapter 7 and Chapter 13, and help you compare the pros and cons of each. Take this chance to read the http://www.cp-law.com/ article on Chapter 13 and think about a personal reorganization as an alternative. We hope this Chapter 7 article provides you the basic information to make a fully informed decision to help you and your family through any financial crisis.
