| Chapter 7 is
by far the most common form of bankruptcy. “Chapter 7” refers to the
chapter of the United States Bankruptcy Code that permits the filing of
these cases.
Chapter 7
cases can be filed by individuals, married couples and businesses,
whether they are proprietorships, partnerships, limited partnerships,
limited liability companies, or corporations.
In Chapter
7, the Federal Bankruptcy Court orders all creditors to cease all
collection activities the moment the Chapter 7 case is filed. This order
is known as the “automatic stay” and is effective even against the IRS.
Creditors are not permitted to file lawsuits, continue with lawsuits
that are already filed, obtain judgments, garnish wages, garnish bank
accounts, levy on property, send dunning letters, make telephone calls
or attempt to collect a debt in any other way.
After the
case is filed, a trustee is assigned to the case. The trustee’s
responsibility is to interview the debtor (the one who filed bankruptcy)
to determine if the debtor owns any property which he, she or it is not
permitted to keep. This property is called “non-exempt” property. If
the debtor does own non-exempt property, and if the property could be
sold or otherwise reduced to cash so that a meaningful distribution to
creditors could be made, then it is the trustee’s job to undertake this
work. The task of taking non-exempt property from the debtor, reducing
it to cash, and making a distribution to creditors is known as
“administration of the bankruptcy estate”.
About 90
days after a Chapter 7 case is filed, the court will issue a discharge
order if the debtor has successfully completed his/her/ or its
obligations, and no party has objected to the discharge. A “discharge”
is an order which permanently prevents creditors with dischargeable
claims from attempting to collect their debts from the debtor. Once a
discharge is issued, the creditor’s only means of collection are to wait
for the trustee to make a distribution, or to cause a sale of any
collateral they have.
Trustees
essentially step into the debtor’s shoes upon the filing of a Chapter 7
case. Therefore, if the debtor has no equity in property, then the
trustee will not sell it. For example, if the debtor owns a home worth
$100,000.00 and has a mortgage of $90,000.00 on it, the trustee would
not sell the home, because by the time the trustee sold the home, paid
closing costs, paid a real estate agent his or her commission for
marketing the property and paid the mortgage lender, there would be no
money left over to distribute to creditors other than the mortgage
lender. Similarly, if the debtor owns a car or truck without equity, the
trustee will not sell it. Under these circumstances, the debtor can
keep the home, car or truck by continuing to pay the lender with
collateral rights.
Some debts
cannot be discharged in bankruptcy. These include most taxes, child
support, alimony and most student loans. These debts will remain after
the discharge is issued.
A discharge
only acts to prevent collection of a debt from the person who filed
Chapter 7. If there is a co-signer who did not file, then that person is
still obligated to pay the debt.
In most
cases, little or no property is turned over to the trustee for
administration. Federal and state exemption laws set forth a wide
variety of property that may not be taken away from the debtor, and in
many cases, cover all assets owned by the debtor so that nothing is
taken away by the trustee. Note, however, that exemption laws only apply
to individuals, no assets owned by a business are protected by
exemption laws.
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