| THE FOLLOWING IS GENERAL INFORMATION ONLY |
| FOR LEGAL ADVICE, CONTACT YOUR ATTORNEY |
THE FOLLOWING INFORMATION APPLIES TO THE NORTHERN AND EASTERN DISTRICTS OF TEXAS ONLY -- SPECIFICALLY THE DALLAS AND SHERMAN (PLANO) DIVISIONS. |
CHAPTER 7
WHAT IS CHAPTER 7?
Chapter 7 is the most commonly used and most commonly thought of chapter of the Bankruptcy Code. It is, generally, a liquidation of the debtor's non-exempt assets and a discharge of the debtor's liabilities. Almost anyone can declare bankruptcy under chapter 7.
A bankruptcy under chapter 7 generally has two parts or concepts. First the declaration of bankruptcy subjects all the debtor's non-exempt assets to the claims of its creditors.
Shortly after the filing of the petition, a trustee will be appointed. It will be the trustee's duty to collect and liquidate all the non-exempt assets for distribution to the creditors. Before filing the Schedules and Statement of Affairs, we will discuss with you the allowable exemptions. We will attempt, legally, to maximize them to your benefit. Most of your assets probably will be exempt and not subject to the claims of the trustee. Some examples of non-exempt assets may include stocks and bonds; savings and checking accounts; and inheritances.
The second phase of a chapter 7 bankruptcy is the discharge. Once you have received a discharge, the creditors whose claims are discharged cannot attempt to collect their debts from you or your property. Certain debts are not discharged and you should be aware of these. These debts may include:
 | Any creditor who was not properly scheduled or did not get notice of the bankruptcy; |
| Student loans; |
| Injuries caused while driving while intoxicated; |
| Most child support and alimony payments; |
| Certain taxes; and |
| Debts to a creditor who can prove that you defrauded it in obtaining credit or an extension of credit. |
Also, if you fraudulently hid assets from the trustee or creditors or filed false papers with the court, you may not get a discharge. In addition, you may subject yourself to criminal prosecution.
Although you receive a discharge, any creditor with a valid lien on your property must continue to be paid. If the payments are not made, it may recover its collateral. Therefore it is important that you continue to make the payments on your house and cars if you wish to keep them. Also there are certain types of consumer purchases where the agreements give the retailer a lien. A typical example could be a car or appliance purchase. In such cases, it may be necessary to continue the payments or surrender the items. As an alternative, you may be able to redeem the item. That means you pay the creditor, in one lump sum, the value of the item instead of the actual debt against it.
Means Testing.
Since Mid October 2005, non-business chapter 7 debtors have had to "qualify" for chapter 7. That means that they must pass a financial test that shows that they are not able to repay a part of their debt. The test is complicated, using "real" and "fake" allowed amounts for their expenses. For some things, the actual expenses are used and for others, the allowable IRS expenses are used. Usually, it is necessary to run all of the income and expense numbers through a computer program to figure out whether the client qualifies for a chapter 7. Having said all that, the first stage of the test is fairly easy -- Does the debtor's total gross income before taxes and deductions fall below the state's median income?
Schedules of Debts and Assets and Statement of Affairs; Debt Counseling.
Within 6 months prior to the filing of a bankruptcy case, you must take a Credit Counseling Course. This is mandatory and your case will be dismissed if this condition is not met. There are many companies that offer this service and it can usually be taken online and/or by telephone. Ask your attorney. Also, after filing, you will be required to take a Financial Management Course. The same company that offers the Credit Counseling Course usually offers the Financial Management Course. If you do not take the Financial Management Course, the case may be closed without granting your discharge. You will probably have to pay your attorney a lot more to reopen the case to get the discharge. Bummer!
Very shortly after the filing of the Petition, you will be required to file a Statement of Affairs and Schedules of Debts and Assets. It is very important that the Statement and Schedules are complete on all creditors and assets. You must also file your pay-stubs or other income information for the past 60 days.
If you do not file these documents within fourteen (14) days after the filing of the case, the Court may dismiss it. In doing so, the court may prohibit you from filing bankruptcy again for 180 days.
Also, you must deliver to the Trustee, prior to seven (7) days to the 341 Meeting (see below), a copy of your last filed tax return.
Once the case is filed, the court will notify all the listed creditors of the filing and give them notice of the important dates. Your creditors should no longer contact you concerning repayment. If a creditor contacts you, you should give the creditor your bankruptcy number and advise it that you filed for bankruptcy. Give the creditor the case number and tell it where you filed.
Approximately 30 to 45 days after the filing of the petition, there will be a first meeting of creditors. This is known as the "341 Meeting" because it is required by Section 341 of the Bankruptcy Code. All your scheduled creditors will be notified of the hearing and any who want may attend and ask questions concerning your financial affairs. In many consumer cases, it is common for no creditors to appear. The meeting will be presided over by your trustee. Usually the trustee will ask your attorney to question you about your financial affairs. Any creditor present also may ask questions. The Trustee's office generally schedules about 15 minutes per case and, usually, this is sufficient time to complete the meeting. You must attend this meeting. Since there are various dates that use this meeting as a "start time," it may be difficult to reset the date. Also, your attorney, generally, has no input or control as to the date -- it is set by the Bankruptcy Clerk's computer at the time your case is filed.
The creditors have 60 days from the 341 Meeting to object to your bankruptcy. These objections are generally rare and take the form of a lawsuit filed in the bankruptcy proceeding against the debtor. The most common types are fraud, such as the debtor "ran up" the credit card before filing or that the debtor lied on his bankruptcy papers. Assuming that there is no such objection, the Court will issue a discharge in about 60 to 90 days from the 341 Meeting.
REAFFIRMATION AND LIEN AVOIDANCE
A creditor who is secured (has collateral that it can repossess) can require that you sign a Reaffirmation Agreement, Redeem the collateral, or Surrender it. If you sign a Reaffirmation Agreement, it is as if you had not filed bankruptcy with respect to that creditor. That means if you thereafter fail to make the payments, the creditor can repossess the collateral and sue you for any amount owing after it sells the collateral. You may have the right to redeem the collateral by paying its value rather than the total amount that you. If you select this option, however, the creditor can require that you make one lump sum payment -- you can not require the creditor to take a pay-out.
If you have given a creditor a lien on household goods that you already owned at the time, you may be able to avoid the lien. Notify your attorney if you believe that you have such a circumstance.
INFORMATION REGARDING CERTAIN TAXES
Certain Taxes may be dischargeable. Generally, these taxes are income taxes that meet all of the following criteria:
The tax returns are more than 3 years due; and
The tax return has been on file for more than 2 years; and
In the case of an additional assessment, the assessment is more than 240 days old. (If there was an Offer in compromise, then the period is 270 days exclusive of the time the offer in compromise was outstanding.
Payroll and sales taxes that were required to be withheld from another are not dischargeable. Nor are taxes based on fraudulent returns.
Further if the IRS has filed a tax lien, the lien may survive even though the tax is discharged. That means that the IRS could still seize its collateral (such as your house, IRA, or other property).