BANKRUPTCY Chapter 7

BANKRUPTCY CHAPTER 7

Bankruptcy is a Federal Court procedure that is highly regulated by Congress, the U.S. Department of Justice and the Federal Court. Chapter 7, Bankruptcy is often thought of as the one requiring the liquidation of assets, wherein the debtors free themselves of their debts by allowing a trustee to sell or “buy back” their non-exempt property from the trustee, and then the trustee distributes the proceeds to creditors.

Prior to filing, you must collect such information as a list of creditors, debts as well as assets. A credit report needs to be pulled to help as well as recent bills or collection notices. You can acquire free credit reports online at www.annualcreditreport.com. You will need details for each creditor such as names, address, account numbers, the year of opening of account and the approximate balances. Regarding assets, anything owned becomes an asset. As far as bankruptcy is concerned, some assets are exempt (protected), while some remain non-exempt (unprotected). In order to receive your discharge of debts, the debtor might be required to give up some of the non-exempt assets or pay the Trustee under a “buy back” agreement.

Eligibility

In order to be able to seek relief under Chapter 7, the debtor has to be an individual (11 U.S.C. § 727(a)(1)), a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b). Relief is available irrespective of the amount of the debtor's debts or their insolvency.

The right to a discharge is not always absolute, as some debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

Filing would however be forbidden under this chapter 7 or any other chapter, 

a. if there had been dismissal of a prior bankruptcy petition during the preceding 180 days for debtor's 

· willful failure to appear before the court or 

· comply with orders of the court, or 

· voluntary dismissal of the previous case after creditors’ obtainment of relief from the bankruptcy court.

11 U.S.C. §§ 109(g), 362(d) and (e). 

b. unless the debtor has received credit counseling, whether individual or group, from an approved credit counseling agency within 180 days before filing. 11 U.S.C. §§ 109, 111. A debt management plan, if developed during the counseling, must be filed with the court. Exceptions exist during emergency or where the U.S. trustee/ bankruptcy administrator determines insufficiency of approved agencies to provide the required counseling. 

Preparing the Petition

Information is put in the official forms known as the bankruptcy petition, schedules, and statements that total around 50 - 60 pages. The Bankruptcy Petition is a public document, and very detailed and technical and the social security number is redacted from the public version except for the last four digits for anti-identity theft purposes.

The first part of the petition mainly comprises general information regarding identification such as name, address, last four digits of the social security number; an approximate number of creditors, assets and liabilities; signatures of both the debtor and their attorney. It is very important for the debtor to always disclose all of his/her income, assets and debts correctly; failing to do so may result in criminal charges of bankruptcy fraud. A petition might thereafter vary as per the financial circumstances of the debtor.

Means Test 

A Means Test, determines the debtor’s qualification for the Chapter 7 filing. The test usually applies to above median income filers (higher income individuals). Families with below median income for their family size may be exempt from completing the full Means Test, and the therefore may file a Chapter 7. Additionally, there are exceptions for military, non-consumer, entrepreneurs and small business owners depending on the individual facts of their case.

Filing the Petition

A debtor can represent himself or herself when filing personal bankruptcy; however, representation by an attorney is still recommended. An attorney must represent a corporation or other business entity.

As of June 1, 2015, every unrepresented party, including debtors wishing to file a voluntary bankruptcy petition and petitioning creditors wishing to file an involuntary petition in any division of the United States Bankruptcy Court for the Middle District of Florida, must provide acceptable photo identification at the time of filing, and the clerk requires debtor’s or petitioning creditor’s signatures on the petition.

All official Bankruptcy forms are available on the United States Court's website at: http://www.uscourts.gov. In filing the petition, the following needs to be taken care of:

• · documents be printed on a 8 ½ X 11 inch paper on one side of the paper only, and
• · original and signed documents to be filed with the Court.

Further, the below mentioned documents be arranged in the following sequence:

• · Voluntary Petition (B101)
• · Summary of Assets & Liabilities and Certain Statistical Information (B106Sum)
• · Schedule A/B - Property (B106A/B)
• · Schedule C - The Property You Claim as Exempt (B106C)
• · Schedule D - Creditors Who Hold Claims Secured By Property (B106D)
• · Schedule E/F - Creditors Who Have Unsecured Claims (B106E/F)
• · Schedule G - Executory Contracts and Unexpired Leases (B106G)
• · Schedule H - Your Co-debtors (B106H)
• · Schedule I - Your Income (B106I)
• · Schedule J - Your Expenses (B106J)
• · Declaration About An Individual Debtor’s Schedules (B106-Declaration)
• · Your Statement of Financial Affairs (B107)
• · Statement of Intention for Individuals Filing Under Chapter 7 (B108) 
• · Chapter 7 Statement of Current Monthly Income and Means Test Calculation (B122A-1 & 2)
• · Mailing matrix, on paper, Complete Names and Addresses only
• · A fully completed form (B121) –along with a Statement About Social Security Numbers 
• · Disk containing creditor information
• Other applicable documents that can be filed when required:
• · Application for Individuals to Pay the Filing Fee in Installments (B103A)
• · Application to Have the Chapter 7 Filing Fee Waived (B103B)
• · Disclosure of Compensation of Attorney for Debtor (B2030)
• · Disclosure of Compensation of Petition Preparer (B2800)
• · Bankruptcy Petition Preparer's Notice, Declaration and Signature (B119)
• · Statement of Military Service (B2020)

Petition Review

When a petition is prepared by an attorney the final draft petition and bankruptcy documents will be reviewed and explained by the attorney. The Debtors sign the final version and the attorney files them electronically with the Bankruptcy Court.

Filing Fees:

The payment mode needs to be in the form of a money order, cashier's check, or cash if filing in person. Personal checks are not accepted. Current rates of the fee are available at:

http://www.flmb.uscourts.gov/filingfees/

A B103-A is required if you wish to make payments in installments. The number of installments is limited to four and the final payment must be made within 120 days after filing the petition. Bankruptcy Rule 1006(b). Also, in order to waive (B103B) a fee qualifications under 28 U.S.C. § 1930(f) must be met.

Credit Counseling

Before filing for bankruptcy, a credit-counseling course approved for bankruptcy filers needs to be taken. Debtors receive a certificate of completion following the training that needs to be filed along with the BK petition. A list of approved Credit Counseling Agencies can be located on the U.S. Trustee's website at:

www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm

There are exceptions to the credit-counseling requirement if the debtor is on active military duty in a combat zone or is physically or mentally impaired to an extent of not being able to fulfill the credit-counseling requirement. There are very limited provisions for the counseling being taken post filing. 

Bankruptcy Trustee

Upon filing, the legal control of all debts, liabilities, and any non-exempt property vests in the court. The court then appoints a trustee, whose job is to oversee the bankruptcy estate and payment of any collected funds to creditors prorata. The trustee does this thorough review of the bankruptcy petition, analysis of the assets and review of the exemptions claimed, and thereafter challenges any elements appropriate. Usually, the debtor will receive a discharge order releasing them from all dischargeable debts approximately 120 – 150 days after the petition filing date.

Automatic Stay § 362

After the filing of a petition under the bankruptcy code, an automatic stay will go into effect. The court notifies each creditor via the Bankruptcy Notice Center (BNC) of the filing and puts each creditor on notice that they must refrain from taking any further action to collect on debts, including pursuing litigation, or foreclosure actions, or any other collection efforts. 

Notices Being Sent

The court issues a “Notice of Chapter 7 Bankruptcy Case” to all listed creditors within ten (10) business days from the filing of a bankruptcy petition. It also advises both the debtor and the creditors of the date, time and location of the § 341 Meeting of Creditors (the “341 Meeting”) and the deadlines by which creditor’s objections to discharge or dischargeability of certain debts must be made. (11 U.S.C. § 341).

Meeting of Creditors

What is it?

The 341 Meeting of Creditors is a hearing held roughly 30 days after the filing where the Trustee poses questions, under oath, to the debtor about assets and liabilities. It is normally a very easy and quick process depending on how well and truthfully the petition was prepared.

Why it happens?

The meeting is held to give creditors the opportunity to be able to scrutinize debtor’s affairs. This is the Trustee and Creditors opportunity to find if any of the listed assets can be sold by the Trustee or if the Debtor failed to list any assets or disposed of any assets recently. Proceeds from any sold assets will be available to repay creditors. In asking questions, the Trustee basically attempts to determine truthfulness of the Debtor.

What happens?

On the scheduled date, debtor must present photo identification as well as verification of the social security number (11 U.S.C. § 521(h)), failing to do so will result in the meeting being rescheduled. If the Debtor fails to attend the Meeting of Creditors, this could result in dismissal of the debtor who did not attend (in joint cases) or dismissal of the entire case. Failing to attend the 341 meeting can also result in an injunction against filing for bankruptcy relief in the future.

The debtor is placed under oath and both the Trustee and any Creditors in attendance may ask questions regarding the Debtor’s acts, conduct, property, financial records or bankruptcy case documents, and the administration of the case.

Also, a copy of the Federal Income Tax Return for the most recent year ending before filing bankruptcy needs to be to the Trustee by non-business debtors within seven days prior the meeting. (11 U.S.C. § 521(e)(2)). Local rules can increase the number of tax returns required.

Most meetings are currently being held via Zoom.

Deadlines of objection

What can be objected to?

Both Creditors and the Trustee have 30 days after the 341 meeting to object to any claims of exempt property.

Creditors further have 60 days after the first date set for the Meeting of Creditors to file an objection to the discharge of a particular debt. 

Objection to the discharge, for a particular debt may be based on several reasons, here are some reasons:

a. obtained credit by false pretenses, a false representation, or actual fraud

b. obtained credit using fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny

c. debts related to injury caused by willful and malicious injury of another

d. incurred in a divorce or separation. (Child support and spousal maintenance are not dischargeable in a Chapter 7 under any circumstances.)

Creditors can also object to the discharge of all the debt claimed in Chapter 7 Bankruptcy 60 days from the first date set for the 341 meeting to file an objection to the discharge of all debt claimed, which can be done based on one of the following:

a. Any misconduct including transfer, destruction or concealment of property;

b. concealment, destruction, falsification or failure to keep financial records;

c. making of false statements; withholding information; failing to explain losses; or failure to respond to material questions

d. having received a discharge in a prior Chapter 7 case filed within the last 8 years.

Financial Management Requirements

Every debtor in a Chapter 7 case in which § 1141(d)(3) applies must complete a financial management course, for which a proof of completion must be filed with the court, within 60 days of the first date set for the meeting of creditors (341).

If the course provider has not already filed a certificate of completion on behalf of the debtor, an individual debtor must file the Official Bankruptcy Form 423 “Certification about a Financial Management Course” to notify the court that the debtor has met this requirement or that he falls under an exception to meeting this requirement. Bankruptcy Rule 1007(b)(7). This certification is also required in case of a joint petition, where each spouse must complete and file a separate certification. Bankruptcy Rule 1007(c).

Reaffirmation

A debtor may choose to “reaffirm” certain debts. A reaffirmation is an agreement between both the debtor and the creditor stating the debtor will remain liable for the debt and will repay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor agrees that it will not repossess or take back the property so long as the debtor continues to pay the debt. 

Reaffirmation agreements must be signed by the debtor, debtor’s attorney, if applicable, the creditor and filed with the court before entry of the discharge. A court hearing will be held in case of a pro se debtor, those debtors whose calculations contained within the reaffirmation agreement determine that the reaffirming of the debt will cause an undue hardship, or those debtors whose attorney has advised against reaffirming the debt.

The Reaffirmation Agreement (Form B 2400A) and Reaffirmation Agreement Cover Sheet (Form B 427) are available on the Bankruptcy Forms page of the U.S. Courts website.

Redemption

In Chapter 7, if an asset worth less than the amount owed to a secured creditor, it may be purchased or redeemed from the creditor, thus requiring the debtor to pay a lump sum amount to the creditor based on what the fair market value of the property/asset is at the time they filed for bankruptcy relief. The balance of the debt over the present market value of the property will be discharged.

Motion to avoid judicial lien

A lien on an individual debtor’s exempt property maybe avoided if it is: (a) a judicial lien, other than one that secures a debt of the kind specified in Section 523(a)(5) [for a domestic support obligation]; or (b) a nonpossessory, non-purchase money security in certain listed items, including but not limited to household furnishings, professional tools of trade, or professionally prescribed health aids. 11 U.S.C. § 522(f)(1). This section does not apply to statutory liens, e.g., liens held by the IRS.

Motion for relief from stay

If the debtor is surrendering secured assets to the creditor holding a valid lien, the creditor may wish to move forward in getting possession of the asset/property prior to the normal expiration of the bankruptcy’s automatic stay. All motions for relief from the automatic stay must contain:

a. a short and plain statement of the facts upon which the request for relief is based, including a statement of any “cause” if based on 11 U.S.C. §362(d)(1);

b. a statement of the amount of the debt, the estimated value of the collateral and the source of the valuation if based on 11 U.S.C. §362(d)(2); and

c. if a Chapter 7 individual case, a statement whether or not the property has been claimed exempt by the debtor or abandoned by the trustee.

Motion for abandonment

The debtor, a creditor or the trustee may seek a court order to abandon the estate’s interest in property of the estate. Most commonly, the trustee may file this type of motion if an asset exists but would not generate any proceeds for the estate after necessary expenses are factored into the cost of administration.

Adversarial

An adversary proceeding is a lawsuit filed separately from but related to the bankruptcy case. Certain types of disputes cannot be handled in the bankruptcy case, but instead require the commencement of an adversary proceeding. These types of actions are found in Rule 7001 of the Federal Rules of Bankruptcy Procedure. Common adversary matters often involve dischargeability of a particular debt or denial of a discharge of all debts, preference payment (an action to recover money paid to an insider or creditor just prior to filing bankruptcy), violation of the automatic stay, or fraudulent transfer issues. An adversary proceeding is typically filed by a creditor, a trustee or the debtor.

What is dischargeable?

Dischargeable means that a debt can be “taken care of,” forgiven or removed by the bankruptcy, while non-dischargeable cannot be “taken care of,” forgiven or removed and must be paid in full, or handled in another way.

What common items are not dischargeable?

Student loans, restitution, certain recent taxes, child support, marital support obligations, alcohol-related injury judgments and loans for certain luxury goods or cash advancements taken just prior to filing are not discharged.

When is the case discharged?

Normally within 15 - 30 days of the deadline for creditors to file dischargeability claims.

What is a discharge?

A discharge is a permanent court order releasing the debtor from the responsibility of having to pay the debt. Further, the discharge prohibits a creditor from taking any collection action against the debtor. In most cases, seeking to obtain a discharge will be the primary reason why a debtor files for bankruptcy.