Chapter 7 bankruptcy cases are direct liquidations sought by debtors who want most or all of their debts paid off. In Chapter 7 cases, the Chapter 7 trustee obtains control of the debtor’s assets and assesses whether there is equity that would offset the costs of selling those assets. While the bankruptcy estate is likely to benefit from the sale of the debtor’s assets, the Chapter 7 trustee will liquidate the assets and distribute the proceeds to the creditors. This is called an “active case”.
Individual consumers and businesses can apply for Chapter 7 relief. Usually, businesses file Chapter 7 cases when they are no longer operating or when they are in the process of closing their doors. We have put together a high-level or “life cycle” overview of a Chapter 7 case, with a focus on concepts and milestones of particular importance to creditors. Plus, we’ve created a preliminary checklist that will help you navigate the early stages of Chapter 7 bankruptcy.
Liquidation of assets and exemptions
Often, Chapter 7 debtors have little or no assets to liquidate, and the Chapter 7 trustee will file a “No Assets Report”. Compare this with debtors who have substantial equity in the assets they wish to keep. These debtors will file for Chapter 13 or Chapter 11 bankruptcy, where they can come up with a plan to pay off their creditors over time and may otherwise be allowed to keep most of their assets.
Debtors can retain certain assets by claiming them as “exemptions” under Section 522, which are disclosed in Schedule C. Depending on the state in which a debtor files for bankruptcy, the Federal Bankruptcy Code exemptions or the Particular state exemptions can be claimed in the bankruptcy case. For example, in Florida, debtors can claim 100% of the equity in their property (personal residence) as exempt under Florida law. On the other hand, Illinois debtors can only claim $ 15,000, or $ 30,000 for married couples jointly filing, of the equity in their property as exempt under Illinois law.
Determination of assets by trustee and liquidation
A typical case of Chapter 7 lasts only a few months. Once the debtor files his claim for redress, the Chapter 7 Trustee will hold the 341 Creditors Meeting, so named because it refers to Section 341 of the Bankruptcy Code. At the 341 meeting, the trustee will question the debtor about the information in their schedules and statements and determine whether the debtor has enough equity in the non-exempt assets for the trustee to liquidate them. Creditors may attend the meeting 341 and will generally have limited time to ask questions of the debtor. If the Trustee determines that the Debtor does not have enough assets to liquidate, the Trustee will file a No Assets Report.
However, if the trustee decides that there are assets in the estate that can be liquidated and distributed to creditors, the trustee will file a notice directing the creditors to file proof of claim within a certain time frame. A proof of claim describes how much the debtor owed a creditor on the date of filing the bankruptcy petition. The claim is designated as secured or unsecured, and documents justifying the existence of the claim (as well as the perfection of any security) are attached.
Once the trustee has liquidated the assets of the estate, he will distribute the proceeds among the creditors who have filed proof of claim according to the priority regime of article 507 of the Bankruptcy Code and the order of distribution of article 726 of the Bankruptcy Code. Accordingly, it is very important that creditors monitor notices of time limits for filing proof of claim in Chapter 7 asset cases and ensure that their proofs of claim are filed in a timely manner so that they can receive at least a pro-rata distribution of their total debt.
The automatic stay and the relief of the stay
When a debtor files a request for receivership, the automatic stay is immediately and automatically imposed. This stay acts as an order to stop all collection efforts. This includes initiating or continuing legal proceedings, wage garnishments, or even phone calls demanding payment. A creditor who violates the automatic stay by continuing or initiating collection efforts during the stay period may be subject to potentially significant liability.
For collateral that is fully secured by a creditor’s claim and unnecessary for reorganization, secured creditors may file a petition to lift the automatic stay. After the suspension is lifted, creditors can proceed with the foreclosure or take other in rem action against the property which is no longer the object of the stay. More information on automatic stay and stay relief will be included in future blog posts.
Chapter 7 Disclaimer
After the 341 meeting and the deadline for objecting to the discharge or discharge of the debtor’s debts, as long as no objections have been filed and the debtor is otherwise eligible, the bankruptcy court will issue a discharge order for the debtor. Chapter 7 debtors must meet the conditions set out in section 727 to be discharged. The creditors, the trustee or the trustee of the United States may object to the discharge of the debtor, alleging that the debtor does not meet one or more of the requirements of section 727. In addition, the creditors or the trustee of the Chapter 7 may object to the discharge of one or more particular debts of a debtor under section 523. More information on objections to discharge and discharge will be detailed in future blog posts .
The discharge order provides that the debts discharged from the debtor can no longer be collected. Creditors who attempt to collect discharged debts can be held liable for violations of discharge orders, which can be extremely costly. As such, creditors should pay close attention to receiving a discharge notice and immediately update their records accordingly to avoid inadvertent violation of the discharge order.
In particular, only individual debtors of Chapter 7 can receive a discharge. Companies that file for Chapter 7 bankruptcy are not eligible for release.
A note on the means test
The Bankruptcy Code was revised in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One of the changes made by the BAPCPA was the “means test,” which determines a debtor’s eligibility for Chapter 7 bankruptcy relief. In short, the means test separates debtors who earn a debt. sufficient monthly disposable income for those who cannot afford to repay anything to their creditors. Debtors with more monthly disposable income than allowed under the means test are likely to be dismissed from Chapter 7 and can instead seek relief under Chapter 13 or Chapter 11, in which they would repay their payments. creditors over time in accordance with a repayment plan.