How Chapter Seven Bankruptcy Works

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A chapter seven bankruptcy case starts with the debtor filing a petition with the bankruptcy court serving the area where the business debtor is organized or where the individual lives or has its principal assets or principal place of business. (3) The debtor must also file with the court, in addition to the petition: (1) schedules of liabilities and assets; (2) a schedule of current expenditures and income; (3) a schedule of unexpired leases and executory contracts; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). Debtors must also provide the trustee or the assigned case with a copy of the tax transcript or tax return for the tax returns filed during the case as well as the most recent tax year. Also, tax returns for prior years that had not been filed when the case began, must be file with the court. 11 United States Code, Sub-Section- 521. Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a copy of any debt repayment plan developed through credit counseling and a certificate of credit counseling; a statement of monthly net income and any anticipated increase in expenses or income after filing; evidence of payment from employers, if any, received sixty days before filing; and a record of any interest the debtor has in state or federal qualified tuition or education accounts. A wife and husband may file a individual petitions or joint petition. 11 United States Code, Sub-Section- 302(a). Even if filing jointly, a wife and husband are subject to all the document filing requirements of individual debtors. (The Official Forms may be downloaded from the internet at uscourts.gov/bkforms/index.html or purchased at legal stationery stores. They are not available from the court.)


The courts must charge a $39 miscellaneous administrative fee, a $245 case filing fee, and a $15 trustee surcharge. Usually, upon filing, the fees must be paid to the clerk of the court. However, with the court's permission, individual debtors make installment payments. 28 United States Code, Sub-Section- 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. The number of installments is limited to four, and no later than 120 days after filing the petition, the debtor must make the final installment. Fed. R. Bankr. P. 1006. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after filing the petition. Also, the debtor may pay the $15 trustee surcharge and the $39 administrative fee in installments. If a joint petition is filed, one administrative fee, only one filing fee, and one trustee surcharge are charged. A dismissal of the case may result if the debtors fail to pay these fees. 11 United States Code, Sub-Section- 707(a).

Even in installments, if the debtor is unable to pay the chapter seven fees, and the debtor's income is less than 150% of the poverty level (as defined in the Bankruptcy Code) the court may waive the requirement that the fees be paid. 28 United States Code, Sub-Section- 1930(f).

In order to complete the Official Bankruptcy Forms that make up the petition, schedules, and statement of financial affairs, the debtor must provide the following information:

1) A list of all creditors and the nature and amount of their claims; 2) The amount, source, and frequency of the debtor's income; 3) A list of all of the debtor's property; and 4) A detailed list of the debtor's monthly living expenses, such as clothing, food, shelter, taxes, utilities, transportation, medicine, etc. 5) Married individuals must gather this information for their spouse regardless of whether they are filing a separate individual petitions, joint petition, or even if only one spouse is filing. In a situation where only one spouse files, the expenses and income of the non-filing spouse are required so that the court, the creditors and trustee can evaluate the household's financial position.

Among the schedules that an individual debtor will file is a schedule of "exempt" property. The Bankruptcy Code allows an individual debtor (4) to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor's home state. 11 United States Code, Sub-Section- 522(b). Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult an attorney to determine the exemptions available in the state where the debtor lives.

Filing a petition under chapter seven (stops) "automatically stays" most collection actions against the debtor or the debtor's property. 11 United States Code, Sub-Section- 362. However, filing the petition does not stay certain types of actions listed under 11 United States Code, Sub-Section- 362(b), and the stay may be effective only for a short time in some situations. The stay requires no judicial action and arises by operation of law. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose addresses and names are provided by the debtor.

Between twenty and forty days after the petition is filed, the case trustee (described below) will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator (5) schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the order for relief. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee puts the debtor under oath, and both the creditors and trustee may ask questions. The debtor must attend the meeting and answer questions regarding the debtor's property and financial affairs. 11 United States Code, Sub-Section- 343. If a wife and husband have filed a joint petition, they both must attend the creditors' meeting and answer questions. Within ten days of the creditors' meeting, the U.S. trustee will report to the court whether the case should be presumed to be an abuse under the means test described in 11 United States Code, Sub-Section- 704(b).

It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors. 11 United States Code, Sub-Section- 341(c).

In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to a case under chapter 11, 12, or 13 (6) as long as the debtor is eligible to be a debtor under the new chapter. However, a condition of the debtor's voluntary conversion is that the case has not previously been converted to chapter 7 from another chapter. 11 United States Code, Sub-Section- 706(a). Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another.

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