What Is Chapter 7 Bankruptcy?

Following is some general information regarding bankruptcy under Chapter 7. It is intended to provide you with enough detail to give you a good basic understanding of the process, without snowing you under with too much information. Obviously, there are exceptions and nuances to just about everything described in this outline. The Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and reported case law are the primary sources of information. All section references here are to the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. All Rule references are to the Federal Rules of Bankruptcy Procedure. 

Fundamental Concepts of The Chapter 7 Bankruptcy Process

Chapter 7 is a liquidating bankruptcy: A debtor cannot pay debts and seeks a fresh start. The goal is to wipe out, or “discharge,” most if not all debt, and keep most if not all property. Actual results depend on the type of debts and the type and value of property held by the debtor. Read more

1. The Parties: The Chapter 7 Bankruptcy Process

A. The Debtor.

The debtor is the person or entity that commences a case in Bankruptcy Court by filing a petition. A married couple may—but does not have to—file a joint petition as co-debtors. Unmarried persons may not file a joint petition. “Who may be a debtor” is outlined in Code § 109. In rare cases, an involuntary bankruptcy may be commenced by creditors, an event that is outside the scope of this outline.

The individual debtor’s goal in Chapter 7 is a discharge, which is the debtor’s fresh start. The discharge is the court order stating that the debtor is legally excused from all prepetition debt (that is, debt which the debtor incurred prior to the moment of filing the petition) that is otherwise dischargeable in bankruptcy. The concept of dischargeability is discussed below.

Entities such as corporations and LLCs are not entitled to a discharge in Chapter 7. Entities that are no longer doing business generally do not file a Chapter 7 petition and will die a different kind of death, through expiration of state registration, going out of business sale, return of assets to secured lenders, etc. There nevertheless may be good reasons for an entity to file a Chapter 7, such as to permit an orderly liquidation of assets supervised by a bankruptcy trustee, or where a bankruptcy filing may result in payment of priority debts such as tax debt that the company principal may be liable for and particularly wants to see paid.

B. The Creditors.

“Creditor” is very broadly defined in the Bankruptcy Code. A creditor is anyone with a claim against the debtor. A “claim” is a right to receive a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. § 101(5). In other words, anyone claiming any right to payment of any kind, even if that right is disputed or speculative, is a creditor. For that reason, a debtor should list in the schedules all persons who may have a claim, even if the debtor believes no such right exists.

How a creditor fares in a Chapter 7 bankruptcy proceeding depends on what kind of claim that creditor possesses. There are four main types of claims: Read more

2. Pre-Filing + Information Gathering: The Chapter 7 Bankruptcy Process

At the initial interview, the lawyer should discuss with the client the various options available: 7, 11, 13, or not filing. The option of not filing should be explored fully. Bankruptcy should always be a last resort.

Certain disclosures must be given to the prospective debtor at the initial meeting. See § 527. Debtor’s counsel is also required to obtain a written fee agreement within five days of that meeting. § 528(a).

The lawyer needs to review the client’s financial picture in considerable detail: That is, what are the client’s assets, how much is owed (and to what types of creditors), what is the client’s historical and current income, and what are the client’s regular expenses.

The client needs to provide to counsel the information needed to prepare the bankruptcy schedules and statements. Bankruptcy forms software includes on-line tools for the client to input data and the attorney to then prepare bankruptcy schedules. The attorney may alternatively provide the client with a questionnaire that essentially matches up with the questions in the required bankruptcy schedules and statements. Read more

3. The Schedules: The Chapter 7 Bankruptcy Process

Debtor’s counsel, working with the debtor, will prepare the bankruptcy petition and all supporting schedules and statements. The information on the required court filings includes: the debtor’s property, both real and personal, and values; exemption claims; the secured, priority unsecured, and general unsecured creditors, including addresses, account numbers, and amounts; any obligation for which there is a co-debtor; executory contracts and unexpired leases where the debtor is a party; monthly income and expenses; a statement of financial affairs, that includes disclosure of a variety of financial information (including past income, lawsuits, payments to creditors, repossessions, and business information); a disclosure of compensation paid to the debtor’s attorney; a statement regarding the debtor’s intention with respect to secured consumer debt; a mailing matrix listing the addresses of all creditors; and the means test analysis. Read more

4. Credit Counseling Certificate: The Chapter 7 Bankruptcy Process

The individual debtor is required to obtain a certificate of completion of a course of credit counseling prior to filing. This requirement, by consensus a waste of time and money, is completed by contacting one of a number of companies authorized to provide such services. A list of approved providers may be found on the bankruptcy court’s website. If the debtor has not obtained a certificate prior to filing, the case will be dismissed. For this reason, it is critical to advise clients who may present with very limited time (such as an imminent foreclosure) to drop everything and get the certificate. Read more

5. Filing: The Chapter 7 Bankruptcy Process

The practical details of filing are set out below. Upon filing, the case will be assigned a case number, bankruptcy judge, and panel trustee.

The first form generated following a bankruptcy filing is the official “Notice of Bankruptcy” issued by the Clerk of Court. The debtor, trustee, and all creditors will receive this notice. It lists several important pieces of information:

• The name of the debtor(s), the date and location of filing, the case number, and the name of the assigned judge.

• The name and address of debtor’s attorney and trustee.

• The date and time for the meeting of creditors

• The deadline for filing complaints related to the discharge

• A notice of automatic stay prohibiting certain activities against the debtor and the debtor's property. Read more

6. The Meeting of Creditors: The Chapter 7 Bankruptcy Process

The meeting of creditors, required by § 341(a) of the Code, is also known as a “341 meeting.” All debtors are required to attend, and cannot get a discharge without attending. Counsel should note the date and time of the meeting of creditors, and send a letter to the client confirming the hearing date.

The hearing is presided over by the Chapter 7 trustee. It is an opportunity for the trustee and for any creditors who appear (an unusual occurrence) to question the debtor under oath regarding assets, liabilities, prospects for payment, etc. The hearing is digitally recorded. Read more

7. Financial Education: The Chapter 7 Bankruptcy Process

Individual debtors are required to take a course in financial education subsequent to filing and prior to discharge. The discharge order will not be issued without a completion certificate on file with the Court. A list of approved financial management courses may be found on the court’s website. Read more

8. The Trustee’s Activities: The Chapter 7 Bankruptcy Process

1. Liquidation

The trustee’s main role is to review the debtor’s schedules for nonexempt assets and, if appropriate, to liquidate those assets. If there are no nonexempt assets, the trustee will docket a Report of No Distribution, or “no asset report,” and take no further action on the case.

The trustee may employ an attorney, appraisers, auctioneers, and other professionals to assist in the liquidation. Liquidation may involve the sale of real or personal property, either at private sale or public auction, collection of accounts receivable and other money owed to the debtor, and litigating causes of action belonging to the debtor. This last item includes bringing lawsuits for tort or contract claims or stepping into already pending lawsuits in the name of the debtor's estate.

2. Avoidance actions.

The trustee may also bring certain avoidance actions on behalf of the estate. These are causes of action that specifically arise in bankruptcy, and are designed primarily to insure that no single creditor is favored over other similarly situated creditors. The concept of equivalent distribution to similarly situated creditors is one of the key concepts of the Bankruptcy Code. Read more.

9. The Creditors: The Chapter 7 Bankruptcy Process

A creditor may take an interest in the case, or may do nothing, depending on the situation. Here are a few examples where creditors may be active:

1. Claims.

All creditors may file proofs of claim with the court clerk evidencing the amount owed them. Creditors in Chapter 7 must file claims only in cases where there will be a distribution to creditors. Creditors will receive a notice advising them to file claims and setting a deadline for doing so.

There is an official form for proofs of claim. See Rules 3001-3005 for rules regarding filing of claims. The proof of claim should state the amount and the type of claim (priority, secured, unsecured), and should provide supporting documentation such as invoices or security agreements.

The debtor or trustee may object to claims as appropriate. Rule 3007. The court may then hold a hearing to determine the validity and amount of the claim. Read more

10. The Discharge: The Chapter 7 Bankruptcy Process

For the individual debtor, the desired result of Chapter 7 is the discharge order. Again, entities do not get a discharge. The Chapter 7 discharge, the extent of which is described in §§ 524 and 727, discharges the debtor from all prepetition debts, except for those types of debts listed in § 523. If a married person files individually, the discharge will include not only the filer but the marital community. The nonfiling spouse would not be discharged from his or her separate liabilities. Read more