In most consumer cases all the assets are exempt and therefore no assets are available for liquidation. Thus there is no dividend to the creditors. Chapter 7 is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships.
Not everyone will qualify to file Chapter 7 under the Bankruptcy Code’s "means test" and certain types of debt cannot be discharged or wiped out (such as most federally guaranteed student loans and any outstanding family support obligations).
Before filing the debtor must take a certified credit course and obtain a certificate of completion. There are a number of online and telephonic options.
Filing Chapter 7
Filing the official petition, schedule and statement of financial affairs begins the case. These forms prompt you to list all of your assets and debts, along with some recent financial history. This is the most important and time consuming part of a bankruptcy filing.
It is important to list every creditor in the schedules with an accurate mailing address. You must list all of your debts, even if the debt is not dischargeable or if you intend to reaffirm the debt.
The schedules also list your property, any debts secured by that property, and the sale value of the property. “Property” here means assets or possessions, not just real estate. Your choice of exemptions is made on one of the schedules. The schedules are signed by the debtor under penalty of perjury.
The schedules are filed with the bankruptcy clerk in the district where you live, or have lived for the greater part of the last 180 days. The automatic stay goes into effect on filing the petition and creates a legal barrier to collection actions by creditors.
For most purposes the rights of the debtor and the creditors are those that exist on the day the case is filed. All the proceedings in bankruptcy after the filing relate to the situation as it was on the day the case was filed.
The court appoints a trustee and gives notice to all creditors listed in your schedules that you have filed bankruptcy. You will get a copy of that notice at the same time it is sent to creditors.
First Meeting of Creditors
The debtor must appear at the first meeting of creditors, also called a 341 meeting from the code section that describes the meeting. The trustee can ask the debtor questions under oath about assets and liabilities. Creditors can also question the debtor but they seldom do.
After the First Meeting of Creditors
If there are assets that are not exempt, the trustee takes control of them. From the sale of those assets, or the recovery of avoidable transfers, the trustee pays the expenses of the case administration then distributes the remaining funds to creditors with allowed claims according to the claim priority.
The trustee may review your income and expense schedule to see if you have enough money left after your current living expenses to pay something to creditors. The United States Trustee or the Chapter 7 trustee can seek to have a debtor's case dismissed for "abuse" if the debtor's income, including that of a non-filing spouse, is sufficient to repay a significant portion of the scheduled debts. 11 U.S.C. 707(b). The real expectation is that debtors who are challenged in this way will convert their case to Chapter 13.
Any wages the debtor earns after the case is begun are the debtors and beyond the reach of creditors who had dischargeable claims on the filing date.
Generally, the only responsibilities the debtor has with respect to the bankruptcy after the 341 meeting is to cooperate with the trustee in providing any information requested by the trustee.
Debtors are expected to perform on their expressed intentions to return, redeem or reaffirm debts secured by personal property.
The debtor can chose to waive the discharge as to a debt that is reaffirmed. Generally, the parties to the reaffirmed debt have the same rights and liabilities that each had prior to the bankruptcy filing: the debtor is obligated to pay and the creditor can sue or repossess if the debtor doesn't pay.
Getting to Discharge
Creditors and the trustee have a 60-day periods from after the 341 meeting in which they may challenge the debtor’s right to a discharge (11 U.S.C. 727) or the dischargeability of a particular debt (11 U.S.C. 523) by filing an adversary proceeding.
Unless an action to deny the debtor a discharge is filed, the court issues the order providing for the discharge of debts shortly after the 60-day period expires. The filing of a contest to the discharge of one debt does not prevent or delay the entry of a discharge to the balance of the debts.
In cases filed after October 17, 2005, debtors must complete a course of financial education from an approved provider in order to get their discharge. The class is generally several hours and is available online from a number of providers. Failure to take the class and file the certificate of completion can result in the case being closed without entry of a discharge. The court may charge a new filing fee to reopen the case, file the certificate and enter the discharge.
Individual debtors get their discharge within 4-6 months of filing the case. The discharge affects dischargeable debts that existed at the commencement of the case. Corporations and partnerships don’t get a bankruptcy discharge.
After the Discharge
Certain debts survive a Chapter 7 bankruptcy because they are exempted from discharge by law: priority taxes, support, student loans and liens are among the debts not discharged in Chapter 7. Any debts that were reaffirmed also survive the bankruptcy.