Information about Chapter 7
Bankruptcy can be a difficult decision. At Shankman & Associates, we are Maine Bankruptcy attorneys. We will guide you through your options, and help you to make a decision that helps you. Bankruptcy is an option. Stop repossessions, wage garnishment, lawsuits and foreclosure. In our economy today, you are not alone. Keep your home, your car and your wages. A fresh start is possible. Take control of your financial future.
1. What is Chapter 7 and how does it work?
Chapter 7 is that part (or Chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is that part of the federal laws that deals with bankruptcy. A person who files under Chapter 7 is called a Debtor. While almost all assets in a typical household are exempt, the Debtor must turn his or her nonexempt property, if any exists, over to a Trustee, who then converts the property to cash and pays the Debtor's unsecured creditors. In return, the Debtor receives a Chapter 7 discharge, if he or she pays the filing fee, is eligible for such a discharge, and obeys the orders and rules of the Court. top
2. What is a Chapter 7 discharge?
It is a Court Order releasing a Debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the Debtor. A debt that is discharged is one that the Debtor is released from and does not have to pay. Some debts, however, are not dischargeable under Chapter 7, and some persons are not eligible for a Chapter 7 discharge. top
3. What debts are not dischargeable under Chapter 7?
All debts of any kind or amount, including out-of-state debts, are dischargeable under Chapter 7 except the debts listed below. The following is a list of the most common debts that are not dischargeable under Chapter 7:
- Most tax debts and debts that were incurred to pay federal tax debts (although there is an important exception for older state and federal income taxes);
- Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor files a complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 60 days before the case is filed);
- Debts not listed on the Debtor's Chapter 7 forms, unless the creditor knew of the case in time to file a claim;
- Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the case;
- Debts for alimony, maintenance, or support and, certain other divorce-related debts including property settlement debts;
- Debts for intentional or malicious injury to the person or property of another if the creditor files a complaint in the case;
- Debts for certain fines or penalties;
- Debts for educational benefits and student loans, unless a Court finds that not discharging the debt would impose an undue hardship on the Debtor and his or her dependants;
- Debts for personal injury or death caused by the Debtor's operation of a motor vehicle while intoxicated;
- Debts that were or could have been listed in a previous bankruptcy case of the Debtor in which the Debtor did not receive a discharge.
4. What persons are not eligible for a Chapter 7 discharge?
The following persons are not eligible for a Chapter 7 discharge:
- A person who has been granted a discharge in a Chapter 7 case filed within the last eight years;
- A person who has been granted a discharge in a Chapter 13 case filed within the last six years, unless 70 percent or more of the unsecured claims were paid off in the Chapter 13 case;
- A person who files a waiver of discharge that is approved by the Court in a Chapter 7 case;
- A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the Trustee in the Chapter 7 case;
- A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions;
- A person who makes false statements or claims in the Chapter 7 case, or who withholds recorded information from a Trustee;
- A person who fails to satisfactorily explain any loss or deficiency of his or her income;
- A person who refuses to answer questions or obey orders of the Bankruptcy Court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.
5. What persons are eligible to file under Chapter 7?
Any person who resides in, does business in, or has property in the United States may file under Chapter 7, except a person who has been involved in another Bankruptcy case that was dismissed within the last 180 days on certain grounds. top
6. What persons should not file under Chapter 7?
A person who is not eligible for a Chapter 7 discharge should not file under Chapter 7. Also, a person who has substantial debts that are not dischargeable under Chapter 7 should not file under Chapter 7. In addition, it may not be wise for a person with current income sufficient to repay a substantial portion of his or her debts within a reasonable period to file under Chapter 7, because the Court may dismiss the case as constituting an abuse of Chapter 7. top
7. How much is the Chapter 7 filing fee and when must it be paid?
The filing fee is $306.00 for either a single or a joint case. If a Debtor is unable to pay the filing fee when the case is filed, it may be paid in installments,with the final installment due within 120 days. The fee charged by the Debtor's Attorney for handling the Chapter 7 case is in addition to the filing fee. top
8. Where is a Chapter 7 case filed?
A bankruptcy petition 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 greatest portion of the last 180 days. The Bankruptcy Court is a Federal Court and is a unit of the United States District Court. top
9. May a husband and wife file jointly under Chapter 7?
Yes. A husband and wife may file a joint petition under Chapter 7. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. On the other hand, either husband or wife has the right to file alone. top
10. Under what conditions should both spouses file under Chapter 7?
Both husband and wife should file if one or more substantial dischargeable debts are owed by both spouses. 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 nonfiling spouse, even if he or she has no income or assets. top
11. When should a Chapter 7 case be filed?
The answer depends on the status of the Debtor's dischargeable debts, the nature and status of the Debtor's nonexempt assets, and the actions taken or threatened to be taken by the Debtor's creditors. The following rules should be followed:
- Don't file under Chapter 7 until all anticipated debts have been incurred, because it will be another eight years before the Debtor is again eligible for a Chapter 7 discharge. For example, a Debtor who has incurred substantial medical expenses should not file under Chapter 7 until the illness or injury has either been cured or covered by insurance, as it will do little good to discharge, say $50,000.00 of medical debts now and then incur another $50,000.00 in medical debts in the next few months;
- Don't file under Chapter 7 until the Debtor has received all non exempt assets to which he or she may be entitled. If the Debtor is entitled to receive an income tax refund or a similar nonexempt asset in the near future, he or she should not file under Chapter 7 until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will become the property of the Trustee;
- Don't file under Chapter 7 if the Debtor expects to acquire property through inheritance, life insurance or divorce in the next 180 days, because the property will have to be turned over to the Trustee unless it is exempt;
- If hostile creditor action threatens a Debtor's exempt assets or future 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 12 below). If a creditor has threatened to attach or garnish the Debtor's wages or if a foreclosure action has been instituted against the Debtor's residence, it may be necessary to file a Chapter 7 case immediately in order to protect the Debtor's interest in the property.
12. How does the filing of a Chapter 7 case affect collection and other legal proceedings that have been filed against the Debtor in other Courts?
The filing of a Chapter 7 case automatically stays (or stops) virtually all collection and other legal proceedings pending against the Debtor. A few days after the Chapter 7 case is filed, the Court mails a notice to all creditors ordering them to refrain from any further action against the Debtor. If necessary, this notice may be served earlier by the Debtor's Attorney. Any creditor who intentionally violates the automatic stay may be held in contempt of Court and may be liable to the Debtor in damages. Criminal proceedings and actions to collect alimony, maintenance or support from exempt property or property acquired by the Debtor 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 Debtor, and a creditor may continue to collect the debts of the Debtor from those persons after the Debtor files a Chapter 7 case. top
13. May a person file under Chapter 7 if his or her debts are being administered by a financial counselor?
Yes. A financial counselor has no legal right to prevent anyone from filing a Chapter 7. top
14. How does filing under Chapter 7 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 eight years before they can file under Chapter 7 again. If there are compelling reasons for filing under Chapter 7 that are not within the Debtor's control (such as an illness or an injury), some credit reporting agencies may take that into account in rating the Debtor's credit after filing. top
15. Are the names of persons who file under Chapter 7 published?
When a Chapter 7 case is filed, it becomes a public record and the name of the Debtor may be published by some credit reporting agencies. However, newspapers do not usually report or publish the names of consumers who file under Chapter 7. top
16. Are employers notified of a Chapter 7 case?
Employers are not usually notified when a Chapter 7 case is filed. However, the Trustee in a Chapter 7 case may contact an employer seeking information as to the status of the Debtor's wages or salary at the time the case was filed. This rarely happens. 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 the necessary information. top
17. Does a person lose any legal or civil rights by filing under Chapter 7?
No. Filing under Chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing. top
18. May employers or governmental agencies discriminate against persons who file under Chapter 7?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under Chapter 7. It is also illegal for local, state or federal governmental units 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 under Chapter 7. top
19. Does a person lose all of his or her property by filing under Chapter 7?
Usually not. Certain property is exempt and cannot be taken by creditors, unless it is encumbered by a valid mortgage or lien. A Debtor is usually allowed to retain his or her unencumbered (or unsecured) exempt property (see Question 29 below). Depending on the law of the local state, property that is exempt in a Chapter 7 case may be either property that is exempt under state law or property that is exempt under the Bankruptcy Code. top
20. When must a Debtor appear in Court in a Chapter 7 case and what happens there?
Most Debtors do not have to appear in "Court". However, every Debtor must attend a hearing called the "meeting of creditors". This hearing takes place about a month after the case is filed and usually occurs in a relatively informal setting in front of the Chapter 7 Trustee. No Judge will be present. At this hearing, the Debtor is put under oath and questioned about his or her debts and assets by the Trustee. In most Chapter 7 consumer cases no creditors appear in Court; but any creditor that does appear is usually allowed to question the Debtor. If the Bankruptcy Court decides not to grant the Debtor a discharge or if the Debtor wishes to reaffirm a debt and is not represented by an attorney, there will be another hearing about three months later which the Debtor will have to attend. top
21. What happens after the meeting of creditors?
After the meeting of creditors, the Trustee may contact the Debtor regarding the Debtor's property, and the Court may issue certain orders to the Debtor. These orders are sent by mail and may require the Debtor to turn certain property over to the Trustee, or provide the Trustee with certain information. If the Debtor fails to comply, the case may be dismissed and the Debtor may be denied a discharge. top
22. What is a Trustee in a Chapter 7 case, and what does he or she do?
The Trustee is an Officer of the Court, appointed to review the Bankruptcy Petition, question the Debtor, collect the Debtor'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 the officer in charge of seeing to it that the Debtor performs the required duties in the case. A Trustee is appointed in a Chapter 7 case, even if the Debtor has no nonexempt property. top
23. What are the Debtor's responsibilities to the Trustee?
The law requires the Debtor to cooperate with the Trustee in the administration of a Chapter 7 case, including the collection by the Trustee of the Debtor's nonexempt property. If the Debtor does not cooperate with the Trustee, the Chapter 7 case may be dismissed and the Debtor may be denied a discharge. top
24. What happens to the property that the Debtor turns over to the Trustee?
It is usually converted to cash, which is used to pay the fees and expenses of the Trustee and to pay the claims of unsecured creditors. The Trustee's fee is usually $60.00 plus a percentage of the amount collected from the Debtor. top
25. What if the Debtor has no nonexempt property for the Trustee to collect?
If, from the Debtor's Chapter 7 forms, it appears that the Debtor has no nonexempt property, a notice will be sent to the creditors advising them that there appear 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. The vast majority of all Chapter 7 cases that are filled are no-asset cases. top
26. How are secured creditors dealt with in a Chapter 7 case?
Secured creditors are creditors with valid mortgages or liens against property of the Debtor. Property of the Debtor that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose its secured property, unless the value of the property greatly exceeds the amount owed to the creditor. The claim of a secured creditor is called a secured claim and secured claims must be collected from or enforced against secured property. Secured claims are not paid by the Trustee. A secured creditor must prove the validity of its mortgage or lien and obtain a Court order before repossessing or foreclosing on secured property. The Debtor should not turn any property over to a secured creditor until a Court order has been obtained. The Debtor may be permitted to retain or redeem certain types of secured property (see Question 28 below). top
27. 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 Debtor. If the Debtor has nonexempt assets, unsecured creditors may file claims with the Court within 90 days after the first date set for the meeting of creditors. The Trustee will examine these claims and file objections to those deemed improper. When the Trustee has collected all of the Debtor'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. Administrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits, claims for alimony, maintenance, support 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. top
28. What secured property may a Debtor retain or redeem in a Chapter 7 case?
A Debtor may retain and redeem certain secured personal and household property, such as household furniture, appliances and goods, wearing apparel and tools of the trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred for the purpose of financing the purchase of the property. A Debtor may also retain and redeem without payment to the secured creditor any secured property that is both exempt and subject only to a judgment lien. Finally, a Debtor may redeem certain exempt personal, family or household property by paying to the secured creditor an amount equal to the value of the property, regardless of how much is owed to the creditor. Deadlines are imposed on the enforcement of these rights by the Debtor during the bankruptcy case. top
29. What property can be claimed as exempt?
Because one of the goals of bankruptcy is to give the Debtor a fresh financial start, Debtors are allowed to retain certain exempt items of property. The values listed below are for a single Debtor. If a husband and wife file together, the amounts double. The exemptions apply only to equity (how much it is worth minus how much you owe) in real property or personal property.
In Maine, the following exemptions apply:
- Residence. $47,500.00 in real estate which serves as a residence, unless the Debtor is over 60 or disabled, in which case the exemption is $95,000.00;
- Motor vehicle. The Debtor's interest of $5,000.00 in one motor vehicle;
- Clothing, furniture, appliances and similar items. The Debtor's interest, not to exceed $200.00 in any particular item in household furnishings, household goods, wearing apparel, appliances, books, animals, crops or musical instruments held for personal, family or household use;
- Jewelry. The Debtor's wedding ring and engagement ring (no matter how valuable), as well as the Debtor's aggregate interest in all other jewelry up to a total of $750.00 held for personal, family or household use;
- Tools of the Trade. The Debtor's aggregate interest of $5,000.00 in any implements, professional books or tools of the trade of the Debtor;
- Furnaces, stoves and fuel. The Debtor's interest in the following items held primarily for the personal, family or household use of the Debtor or a dependant of the Debtor; one cooking stove; all furnaces or stoves used for heating and all cooking and heating fuel not to exceed 10 cords of wood, 5 tons of coal or 1,000 gallons of petroleum products or its equivalent;
- Food, produce and animals. All food provisions reasonably necessary for six months; all seeds, fertilizers, feeds and other material reasonably necessary to raise or harvest food through one growing season; all tools and equipment reasonably necessary for raising and harvesting food;
- Farm equipment. The Debtor's interest in one of every type of farm implement reasonably necessary for the Debtor to raise and harvest agricultural products commercially;
- Fishing boat. The Debtor's interest in one boat, not exceeding five tons burden, used by the Debtor primarily for commercial fishing;
- Life insurance contract. Any unmatured life insurance contract owned by a Debtor other than a credit life insurance contract;
- Health aids. Professionally prescribed health aids for the Debtor or a dependent of the Debtor.
- Disability benefits; pensions. The Debtor's right to receive Social Security benefits, unemployment compensation, veteran's benefits, disability, illness or unemployment benefits, alimony, support or separate maintenance, or a payment under a stock bonus, pension, profit sharing, annuity, or a similar plan or contract on account of illness, disability, death, age or length of service to the extent reasonably necessary for the support of the Debtor and any dependent of the Debtor;
- IRA account. A payment or account under an individual retirement account or similar plan or contract on account of illness, disability, death, age or length of service to the sum of $15,000.00 or to the extent reasonably necessary for the support of the Debtor and any dependent of the Debtor, whichever is greater.
- Legal awards; life insurance benefits. Debtor's right to receive an award under a victim's reparation law, a payment on account of the wrongful death of an individual of whom the Debtor was a dependent, to the extent reasonably necessary for the support of the Debtor and any dependent of the Debtor; a payment under a life insurance contract that insured the life of an individual of whom the Debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the Debtor and any dependent of the Debtor; a payment up to $12,500.00 on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the Debtor or an individual of whom the Debtor is a dependent or a payment in compensation of loss of future earnings of the Debtor or an individual of whom the Debtor is or was a dependent, to the extent reasonably necessary for the support of the Debtor and any dependent of the Debtor.
- Other property. The Debtor's aggregate interest, not to exceed $400.00 in any property, whether or not otherwise exempt; and
- Unused residence exemption. The Debtor's unused residence exemption up to $6,000.00 in any item of clothing, furniture, or appliances, tools of the trade or legal awards for personal bodily injury. top
30. May a utility company refuse to provide service to a Debtor if the company's utility bill is discharged under Chapter 7?
If, within 20 days after a Chapter 7 case is filed, the Debtor furnishes a utility company with a deposit or other security to insure the payment of future utility service, it is illegal for a utility company to refuse to provide utility service to the Debtor, or to otherwise discriminate against the Debtor, if its bill for past utility services is discharged in the Chapter 7 case. top
31. What should the Debtor do if he or she moves before the Chapter 7 case is closed?
The Debtor should immediately notify their attorney who will inform the Bankruptcy Court of the new address. Because most communications between a Debtor and the Bankruptcy Court are by mail, it is important that the Bankruptcy Court always have the Debtor's current address. Otherwise, the Debtor may fail to receive important notices and the Chapter 7 case may be dismissed. top
32. How is a Debtor notified when his or her discharge has been granted?
The Bankruptcy Court will send a form called "Discharge of Debtor" to the Debtor and to all creditors. This form is a copy of the Court Order discharging the Debtor from his or her dischargeable debts, and it serves as notice that the Debtor's discharge has been granted. It is usually mailed about 4 months after a Chapter 7 case is filed. top
33. What if a Debtor wishes to repay a dischargeable debt?
A Debtor may repay as many dischargeable debts as desired after filing under Chapter 7. By repaying one creditor, a Debtor does not become legally obligated to repay any other creditor. The only dischargeable debt that a Debtor is legally obligated to repay is one for which the Debtor and the creditor have signed what is called a "Reaffirmation Agreement". If the Debtor 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 Debtor was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and the attorney's statement with the Court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, a Debtor is not legally obligated to repay the debt, even if the Debtor has made a payment on the debt since filing under Chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt. top
34. How long does a Chapter 7 case last?
A Chapter 7 case begins with the filing of the case and ends with the closing of the case by the Court. If the Debtor has no exempt assets for the Trustee to collect, the case will most likely be closed shortly after the Debtor receives his or her discharge, which is usually about four months after the case is filed. If the Debtor has 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 consumer cases with assets last about six months, but some last considerably longer. top
35. What should a person do if a creditor later attempts to collect a debt that was discharged under Chapter 7?
When a Chapter 7 discharge is granted, the Court enters an order prohibiting the Debtor's creditors from later attempting to collect any discharge debt from the Debtor. Any creditor who violates this Court Order may be held in Contempt of Court and may be liable to the Debtor in damages. If a creditor later attempts to collect a discharged debt from a Debtor, the Debtor should give the creditor a copy of the order of discharge and inform the creditor in writing that the debt has been discharged under Chapter 7. If the creditor persists, the Debtor should contact an attorney. If a creditor files a lawsuit against the Debtor on a discharged debt, it is important not to ignore the matter, because even though a judgment entered against the Debtor on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly to the Debtor. top
36. 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 Debtor. 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 Debtor is still liable for the debt regardless of the Debtor's Chapter 7 discharge. The only exception to this rule is in community property states where the spouse of a Debtor is released from certain community debts by the Debtor's Chapter 7 discharge. top
37. Information about Credit Counseling and Debtor Education.
With limited exceptions, people who file for bankruptcy protection must receive credit counseling from a government approved organization within six months before they file. They also must complete a debtor education course to have their debts discharged. Only credit counseling organizations and debtor education course providers that have been approved by the United States Trustee Program may provide the certificates of completion needed. A pre-bankruptcy counseling session will last approximately ninety minutes and will include an evaluation of your personal financial situation and a discussion of potential alternatives to bankruptcy. A debtor education course will last approximately two hours and will include information on developing a budget, managing money, using credit wisely and other useful topics. We routinely use the same provider for both the credit counseling and the financial management course due to the exceptional job that they do. We will arrange both courses for you. top
38. The "Means Test"
In order to qualify to file a Chapter 7 bankruptcy petition, your household income needs to be less than the median (middle) income for Maine. The magic number varies based on the number of people in your household. Therefore, part of the preliminary bankruptcy process is to analyze your financial situation by looking at your "current monthly income" and factoring in any special circumstances that warrant giving you a break from the strict application of the federal guidelines. If your income is determined to be too high, the only option available to you is to file a Chapter 13 petition. top