Bankruptcy Basics – What is a Chapter 7?

What is the difference between a Chapter 7 case and a Chapter 13 case?

A Chapter 7 bankruptcy case is sometimes called a “no asset case”.  A Chapter 7 debtor will usually file a bankruptcy case in order to discharge all of his/her unsecured debt such as credit cards, bank lines of credit and judgments from lawsuits.  In theory, a Chapter 7 debtor must turn all of his/her assets over to the Trustee, who will reduce the assets into cash and make pro rata distributions to creditors.  However, each Chapter 7 debtor is allowed “exempt assets” which no Bankruptcy Trustee or creditor can attach.  An example of exempt assets includes

Therefore, in most Chapter 7 cases a debtor has no real “non-exempt assets” to turn over to the Trustee for distribution to his/her creditors.  This is why Chapter 7 cases are usually called “no asset cases”.  All unsecured creditors therefore receive zero distribution.  The debt owed to these unsecured creditors is forever discharged. If a creditor holds a “secured claim” (such as a mortgage secured by house or a car loan secured by a car), then the Chapter 7 debtor must provide adequate protection to the secured creditor in order to keep the collateral (by paying the mortgage on the home or continuing to pay the car loan).

A Chapter 7 debtor normally receives a discharge within 4 months after the Petition is filed.

A Chapter 7 debtor may be an individual, a partnership, a corporation or any other business entity.  However, a Chapter 7 debtor may only file a Chapter 7 bankruptcy once in every 8 year period.

A Chapter 7 debtor, like a Chapter 13 and Chapter 11 debtor, must file a Petition with the Bankruptcy Court, which is approximately 60 pages long, including schedules of assets and liabilities, current income and expenses, statement of financial affairs, a schedule of contracts, leases, tax debt, and a certificate of credit counseling.

A Chapter 7 case costs $335 to file as opposed to a Chapter 13 case which costs $310 and a Chapter 11 case which costs $1,717 to file.  Certain debtors are entitled to pay their filing fee in installments.

The filing of a Chapter 7, Chapter 13 and Chapter 11 Bankruptcy Petition “automatically stays” (stops) most collection against the debtor or the debtor’s property.  The Stay is “automatic” and requires no action by the debtor except for the filing of a Bankruptcy Petition.  As long as the Stay is in effect, creditors may usually not continue any lawsuits, collection efforts, wage garnishments, foreclosures, bank restraints, or even telephone calls or demands for payment.  All creditors are given notice of the bankruptcy case.

Approximately 30 days after the Bankruptcy Petition is filed, a Chapter 7 Trustee will be appointed to review the bankruptcy schedules, administer the Chapter 7 case, and conduct the 341 Trustee’s Meeting.  During this meeting, the Trustee puts the debtor under oath.  Interestingly enough, the Bankruptcy Judge is prohibited from attending the 341 Meeting.

In certain instances, the Chapter 7 debtor will convert his/her case into a Chapter 13 or Chapter 11 case if the conversion is more beneficial to the debtor than the Chapter 7 case.

After the 341 Meeting, the Chapter 7 Trustee will file a report to the Clerk that this is a “no asset case” and close the meeting and the Court will grant the debtor his/her Chapter 7 discharge.

The Chapter 7, Chapter 13 or Chapter 11 Trustee will rarely, if ever, visit a debtor’s home or business.  In rare cases when a business wishes to surrender to its creditors and liquidate all of its remaining assets (furniture, fixtures, equipment, inventory), the Trustee will usually appoint an Examiner or Adjuster to proceed to the business location to take an inventory of the assets available to creditors.

Although the Chapter 7 Trustee has the ability to compel a “turnover” of assets for distribution to the creditors, the Trustee has no ability to obtain “non-exempt assets” such as

The Chapter 7 “discharge” releases the individual debtor from personal liability for most debts and prevents the creditors from taking any collection actions against the debtor forever.  Individual Chapter 7 debtors receive a discharge of debt in more than 99% of Chapter 7 cases, and generally 60 to 90 days after the 341 Meeting is concluded.

As always, please feel free to contact me for a free consultation regarding your specific financial circumstances.

For more Foreclosure and Bankruptcy FAQ’s and articles, please see my website at www.allenkolber.com.  I have been practicing Foreclosure Defense, Bankruptcy Law and Business Law and Litigation for over 25 years.

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