Bankruptcy: Chapter 7 Part II
In Part I, we talked about how a Chapter 7 works in detail. Just as a refresher, a Chapter 7 bankruptcy basically liquidates your assets in order to pay off some of your unsecured creditors and in turn, you can have some of your debts discharged. We left off at the role of the case trustee.
Case Trustees
Whenever someone files a Chapter 7 bankruptcy, the court appoints an impartial case trustee to handle the liquidation of the debtor’s nonexempt assets. If that debtor’s assets are exempt or subject to liens, then the trustee will file what’s known as a “no asset” report with the court, which essentially amounts to unsecured debtors getting nothing for their troubles. Over 85% of Chapter 7 filings are “no asset” cases, which means unsecured lenders take losses on folks who file bankruptcy.
If the case appears to be an asset case – meaning there are nonexempt assets to liquidate – then unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. In the more common ‘no asset’ cases, there’s not much point in a creditor filing a claim as there will be nothing to distribute; however, if assets are later uncovered, the court will notify the creditors and allow them more time to file their proof of claims.
When a bankruptcy moves forward it essentially creates an “estate” that, technically, becomes the legal owner of all the debtor’s property. It consists of all the legal or equitable interests of the debtor in property, including property owned or held by another person if the debtor has an interest in that property. All the more reason to be careful when purchasing property jointly. The trustee then liquidates the nonexempt assets within the estate in order to pay the debtor’s creditors.
Chapter 7 Discharge
A discharge releases an individual debtor from their responsibility to most of their debts and it prevents creditors who are owed these debts from taking action to collect. A discharge happens in about 99% of Chapter 7 cases; however, as with anything else, there are exceptions so it is best to speak to an attorney before filing for bankruptcy.
There are some instances when a court may deny a debtor a discharge. If the court finds that the debtor failed to keep or produce adequate financial records, failed to satisfactorily explain any loss of assets, committed perjury, failed to obey an order of the court, fraudulently transferred, concealed, or destroyed property that would have become property of the estate, or failed to complete the credit counseling, they will usually deny the discharge and/or dismiss the case. There are certainly other reasons for which a discharge can be denied, but these are the most common.
One of the drawbacks to a discharge is that it doesn’t cover all debts in all forms. Things like government taxes, child support, and student loans can’t be discharged. But, in addition to those, secured creditors may retain their rights to seize property securing a debt, even after a discharge has been granted. If the debtor wishes to keep that particular piece of property, they will have to “reaffirm” the debt. That just means that the debtor agrees to remain liable for the debt and will pay a portion or all of the money owed, even though the debt would be discharged with the bankruptcy. The upside to this is that the creditor agrees not to repossess the property so long as the debtor continues to make payments.
Clearly this would leave room for a lot of creditors to take advantage of debtors, so the court requires a little process before a debt can be reaffirmed. First of all, a reaffirmation must be submitted prior to the discharge being entered. The debtor will sign a written agreement to reaffirm the debt and file it with the court. The Bankruptcy Code requires extensive disclosures describing the amount of the debt being reaffirmed, how it’s calculated, and that reaffirming the debt means it will NOT be discharged with the bankruptcy. The debtor will once again be personally responsible for the debt.
In addition, the court requires that a debtor file a statement of their current income and expenses showing they have the net disposable income to pay for this reaffirmed debt. If, after looking at the statement, the court determines there is not enough income to cover the reaffirmed debt, there is a presumption of undue hardship, and they can decide to decline the reaffirmation agreement. But, a debtor can voluntarily repay any debt they wish, whether or not a reaffirmation agreement exists.
The court can revoke a Chapter 7 discharge at the request of a trustee, creditor, or the U.S. trustee if the discharge was obtained fraudulently, if the debtor acquired property that should have went to the estate and knowingly withheld the information, or if the debtor commits perjury. Once again, it is extremely important to be honest and cooperate with the trustee. They can make the process extremely difficult for you if you choose to withhold information from them.
This section is a little shorter than its predecessor, but I hope you still learned a thing or two. Chapter 7’s are one of the most common filings in the U.S., so there’s a lot of information available on them. If you think a bankruptcy is your only option, do a little research first to make sure this is the right one for you.
What questions do you have about Chapter 7 bankruptcy?
Related posts:
- Bankruptcy: Chapter 7 Part I
- Bankruptcy: The Basics
- Credit Card Debt After Death
- Should You Pay Off Old Debts?
- We Do… But Sign Here!
“Clearly this would leave room for a lot of creditors to take advantage of debtors, so the court requires a little process before a debt can be reaffirmed.”
Clearly I’m not connecting the dots properly – can you expand your thought about how a creditor would take advantage of the debtor?
all i know is this: there are a LOT more details to this that people may think out there! my goodness.
@ kosmo – Sorry it took me so long to get back to you. What I mean is that if lenders had the right to come behind a bankruptcy and get people to reaffirm their debt, they would put more effort into collecting that debt. They would probably hire someone specifically trained in getting people to reaffirm that debt so they wouldn’t have to write it off. You see similar situations in the case of death where they call family members and try to get them to pay the debt, even though those family members aren’t responsible. They appeal to people’s sense of justice and fairness in order to get them to pay. In the case of bankruptcies, someone who has filed probably doesn’t need to be reaffirming the debt because the debt has lead them to the bankruptcy path in the first place. The courts recognize that lenders may try to appeal to the debtors by making them feel guilty and getting them to reaffirm the debt, so they’ve created a safe wall to prevent that. Any debts that are reaffirmed have to go through the court for approval. Does that make more sense?
@ J – Yes, a bankruptcy is extremely involved and I’ve only touched on the tip of the iceberg. In this case, an attorney is your friend!