Chapter 7 of the Bankruptcy code, deals with bankruptcy cases involving liquidation of the debtors assets. Chapter 7 is the most popular form of bankruptcy filing. The basic process of liquidation involves the appointment of a trustee, collection of debtor’s non-exempt property by the trustee, sale of debtor’s non-exempt property, and distribution of the amounts received from the sale to the creditors.
The Process: The liquidation process is initiated by a petition filed by the debtor in the bankruptcy court. A petition filed by an individual debtor must include the individual debtor’s current address and the address of his/her principal assets. A petition filed by a business debtor must include the address of the place of business or the address of the business’ principal assets. Additionally, each debtor must provide:
- assets and liability schedule,
- present income and expenditure schedule,
- financial affairs statement,
- executory contracts and unexpired leases schedule,[i]
- the assigned case trustee, [ii]
- the copy of tax return of the year previous to making the filing,[iii]
- any copy of the return filed during the case, [iv]
- exempt property schedule.
Apart from the above listed, there are some more documents required to be filed by individual debtors with primarily consumer debts. They are:
- certificate of credit counseling
- copy of any debt repayment plan developed through credit counseling
- evidence of payment from employers
- a statement of monthly net income,
- anticipated increase in income or expenses after filing
- a record of any interest the debtor has in federal or state qualified education or tuition accounts.[v]
Even if a petition is filed jointly by a couple (husband and wife), they need to provide all the documents individually.
Court Charges: The filing fees involved include the case filing fee, miscellaneous administrative fees, and trustee surcharge. Fees are paid to the court clerk. In certain cases involving individual debtors, the court clerk may allow the payment of fees in installments.[vi] Fee requirements are waived by the court if it is found that the debtor’s income is below 150% of the poverty line as defined in the Bankruptcy Code.[vii]
Bankruptcy Forms: Information required to complete the Official Bankruptcy Forms are:
- Creditor list and the amount due and the claim nature,
- Debtor’s income source, extend and frequency,
- Debtor’s property details,
- Debtor’s monthly living expenditure (this includes: food, clothing, shelter, and all other facilities required for a day to day living.)
Exempt property schedule: There are some properties of the debtor which can not be liquidated. These are called exempt properties. Each state has different rules regarding the assets allowed as exempt property.[viii]
Automatic Stay: Once the Chapter 7 Bankruptcy petition is filed, all the debt recovery proceedings already initiated on the debtor’s property will come to a stand still or automatically stop. [ix] The creditors should immediately stop litigation, garnishment process and telephone calls to demand payments. The court clerk shall provide bankruptcy notice to all the creditors in the list provided by the debtor.
Creditor’s Meeting: The case trustee shall conduct a meeting of all the creditors within 20 days but not later than 40 days after filing. The debtor is required to attend this meeting and is under oath at the meeting. During this meeting the debtor must answer all questions posed by the creditors and trustee about the debtor’s financial affairs and property.[x] In case of a couple filing the petition both of them must attend the meeting.
Means Test: This is a standard used to test if the debtor is abusing the bankruptcy system.
Conversion: The Bankruptcy Code allows debtors to convert their case under Chapter 7 to a case under Chapter 11, 12, or 13. However, the debtor must be a qualified debtor under the other chapter to covert the case to that chapter. Without a proper reason, debtors are not allowed to switch chapters unnecessarily.
No Asset Case: If all the debtor’s property falls into the category of exempt property, the debtor will not have any non-exempt property. In such case, the trustee shall file a report namely the ‘no asset report’. This type of case is called a ‘No Asset Chapter 7 Case’. In this case there will not be any distribution of property.
Creditors’ Duties: Creditors are sometimes required to file proofs of claim against the debtor’s property; this is to secure the creditor’s lien over the property.[xii] Although, the filing of a proof of claim is not required by secured creditors under chapter 7, on certain occasions they are required to file.
Estate: A temporary legal owner is created for all assets of the debtor. This owner is called the bankruptcy ‘estate’. This estate can include property owned by others where the debtor has an interest in that property.
Liquidation: In Chapter 7 cases the non-exempt property held by the estate is liquidated by the trustee. The trustee plans a sale in such a way so as to gain the maximum return on these assets. In case of a business debtor, the trustee may operate the business for a while before selling the business and its assets. This is done only if it is found that running the business for a while would be beneficial to the creditors and in getting a higher return on the sale.[xiii]
Distribution: The creditors or the claimants are divided into six classes for the purpose of distribution of funds received after the sale of an estate.[xiv] Distribution is made class by class based on the class hierarchy. If there is any amount remaining after the distribution to all the creditors, the debtor may receive the remaining amount. However, this is a rare scenario.
Discharge: Once all the creditors are paid off from the debtor’s non exempt assets, the debtor is discharged or released from any further liability. Through a discharge the individual debtors are freed from any personal liability. A discharge is give in all cases where the case concluded by selling and distributing the property. A discharge is not granted in cases which are dismissed or converted.
An unsatisfied creditor can file an objection or motion to extend the time of granting the discharge to the debtor.[xv] Generally, discharge is granted by the court unless and until it finds the debtor guilty of one of the following:
- Improper book keeping and production of financial records,
- Unsatisfactory explanation to loss of assets,
- Disobedience to bankruptcy court orders,
- Fraudulent transfer,
- Concealment, or
- Destruction of property to exclude it from the estate, or
- Not completing the approved course on financial management.
Revocation: The discharge will be revoked by the court if it is found that the discharge was granted based on the debtor’s fraud.
[i] USCS Bankruptcy R 1007
[ii] 11 U.S.C. § 521
[vi] 28 USCS § 1930(a)
[vii] 28 USCS § 1930(f).
[viii] 11 USCS § 522(b)
[ix] 11 USCS § 362
[x] 11 USCS § 343
[xii] USCS Bankruptcy R 3002(c)
[xiii] 11 USCS § 721
[xiv] 11 USCS § 726
[xv] USCS Bankruptcy R 4004(b).