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Common Questions Regarding Chapter 7 Bankruptcy

1. What is a Chapter 7 bankruptcy?
A Chapter 7 bankruptcy is a proceeding under federal law in which the debtor seeks relief from creditors.  In such a case, the debtor must turn his or her nonexempt property, if any exists, over to a trustee, who then converts the property to cash and pays the debtor's creditors.  Most chapter 7 cases are no asset cases which means that all the property owned by the debtor is exempt under state law. See Colorado Exemptions.  In exchange for the liquidated property, if any, the debtor receives a Chapter 7 discharge. If the case is a no asset bankruptcy the debtor must simply pay the filing fee, be eligible for discharge, and follow the rules of the bankruptcy court.

2. What is a discharge in a Chapter 7 case and how does one obtain a discharge?
A discharge in a chapter 7 case is a Court order that releases a debtor from all of his or her dischargeable debts. It is also an order from the court to creditors which prevents the creditor from attempting to collect the debt from the debtor. Once a discharged is ordered by the court the debtor is released from that debt and does not have to pay it. A Chapter 7 discharge is obtained by filing and maintaining a Chapter 7 bankruptcy case and being eligible for a Chapter 7 discharge.  Some types of debts are not dischargeable under Chapter 7 by law, such as child support, alimony, and tax debt which has not been assessed for more than three years. Debts of this type will not be discharged even if the debtor receives a Chapter 7 discharge.

3. Who can file a Chapter 7 case?
Anyone who qualifies and resides in, does business in, or has property in the United States is permitted to file a Chapter 7 bankruptcy case. The exception to that is a person who has intentionally dismissed a prior bankruptcy case within the last 180 days. To qualify for a Chapter 7 bankruptcy case a person must qualify for relief under the means test.

4. What is the means test?
The means test is a method of determining eligibility for Chapter 7. Under the means test a person’s current monthly income multiplied by twelve exceeds the median annual income, based on the person's family size. See Colorado Median Income. Essentially, to qualify, a debtor must show that he or she is not able to pay a minimum of $110 per month for 60 months to his or her unsecured creditors from his or her disposable monthly income in order to be eligible for Chapter 7. To determine disposable monthly income is a person's current monthly income less the person's permitted current monthly expenses.  If the debtor can is able to pay $110. In a nutshell if a debtor exceeds the median income then he or she will likely not qualify for Chapter 7 and the case with either be dismissed or with the debtor’s consent, converted to a Chapter 13 case.

5. Who is eligible for a Chapter 7 discharge?
Anyone who is eligible under the means test can file a Chapter 7, except:

a.  Someone who has been granted a discharge in a Chapter 7 within the last 8 years.

b.  Someone who has been granted a discharge in a Chapter 13 case within the last 6 years, unless 70 percent or more of the debtor's unsecured debts were paid in the Chapter 13.

c.  A person acts with the intent to defraud his or her creditors or the trustee in the Chapter 7 case.

d.  A person who fails to explain any loss or deficiency of his or her assets.

e.  A person who refuses to answer questions or obey orders of the bankruptcy court.

f.  A person who, after filing the case, fails to complete an instructional course on personal financial management.

If a debtor does not qualify for any reason for a Chapter 7, a Chapter 13 will likely be a viable option.

6. What debts are not dischargeable in Chapter 7?
All debts of any type or amount are dischargeable in Chapter 7, except those forbidden by law. The following is a list of the most common types of debts not dischargeable in Chapter 7:
a. Tax debts and debts that were which have been assessed within 3 years of filing.

b. Debts obtained by fraud for money, property, services, or credit.

c. Debts not listed on the debtor's Chapter 7 forms.

d. Debts for domestic support, which include alimony, maintenance, or support, and certain other divorce-related debts, including property settlement debts.

e. Debts for intentional injury to the person or property of another.

f. Debts for some fines or penalties.

g. Debts for student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor.

h. Debts for personal injury or death caused by the debtor's operation of a motor vehicle while intoxicated.

i. Debts that were or could have been listed in a previous bankruptcy case of the debtor in which the debtor did not receive a discharge.

7. What must be done before a Chapter 7 case can be filed?
Yes. A credit counseling class must be completed within 180 days of filing. A certificate of completion must be filed with the court. This class can be taken online. We recommend www.personalfinanceeducation.com. The debtor will also work with his or her attorney to complete the necessary Chapter 7 petition to file with the court It is also recommended that a debtor receive his or her most recent tax return before filing, or he or she will have to forfeit it to the trustee. 

8. How much is the filing fee in a Chapter 7 case?
The filing fee is $299.00 for either a single or a joint case.  The filing fee is payable when the case is filed. 

9. Filing jointly under Chapter 7?
A husband and wife may file a joint case under Chapter 7. A couple should file a joint Chapter 7 case if both are liable for one or more significant dischargeable debts.  If both spouses are liable for a debt and only one spouse files under Chapter 7, the creditor may later attempt to collect the debt from the non-filing spouse.

10. When is the best time to file Chapter 7?
The answer depends on several factors. A consultation with an attorney is the best way to gage the time to file Chapter 7. Some of the factors to consider are:

a. Have all anticipated debts have been incurred?  Only debts that have been incurred when the case is filed are dischargeable. It will be another eight years before the person is again eligible for a Chapter 7 discharge. If a person has a substantial about of anticipated debts, then that person should wait to file until those debts have actually been incurred.

b. Have all nonexempt assets been received?  If the debtor is entitled to receive an income tax refund or other similar nonexempt asset in the near future, the case should be filed after the refund or asset has been received and disposed of.  If a debtor files Chapter 7 before the asset is received, then when the asset is received it will be forfeited to the trustee.

c. Does the person filing expects to acquire non exemptproperty through inheritance, life insurance or divorce in the next 180 days?  The property may have to be forfeited over to the trustee.

d. Has an aggressive creditor threatened to attach, garnish or foreclose a person's assets or income or bank account? If so the case should be filed immediately to take advantage of the automatic stay. The automatic stay comes into immediate effect at the moment the Chapter 7 is filed. 

11. How does the filing Chapter 7 protect a person from credit collection, and other legal proceedings?
The moment Chapter 7 is filed the automatic stay goes into effect which acts as restraining order against all collection and other financial legal proceedings pending against that person.  After the case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the person. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable in damages to the person filing. 

12. What effect does Chapter 7 have on a credit score?
In most cases Chapter 7 will have a negative impact on a credit score.  However, many financial institutions openly solicit business from persons who have recently filed under Chapter 7.  Please read this highly recommended article about rebuilding after bankruptcy.

13. Will a person lose all of his or her property if he or she files a Chapter 7 case?
In most cases, no.  Property that is exempt may not be taken by creditors unless it is encumbered by a valid mortgage or lien.  A person is usually allowed to retain his or her unencumbered exempt property in a Chapter 7 case.  A person may also be allowed to retain certain encumbered exempt property.

14. What is exempt property?
Exempt property is property that is protected by law from the claims of creditors.  In Colorado, bankruptcy cases property may be exempt only under state law. Exempt property typically includes all or a portion of a person's unpaid wages, home equity, household furniture, and personal effects.  Your attorney can inform you as to the property that is exempt in your case.
See a list of Colorado Exemptions
pdf download

15. Is there a court appearance for a Chapter 7 Bankruptcy?
The first court appearance is for a hearing called the “meeting of creditors,” which is usually held about a month after the case is filed. At the meeting of creditors no judge is present and a trustee resides over the hearing.  During the preceding the person is put under oath and asked questions about his or her debts, assets, income and expenses by the hearing officer or trustee.  In most Chapter 7 consumer cases no creditors appear at the meeting of creditors, but any creditor that does appear is usually allowed to question the person. For most people this will be the only court appearance, but if the bankruptcy court decides not to grant the person a discharge or if the person wishes to reaffirm a debt, there may be another hearing about three months later which the person will have to attend.
Please See our Memo on What to Expect at the Meeting of the Creditors pdf download

16. What happens after the meeting of creditors?
After the meeting of creditors, the trustee may contact the person filing regarding his or her property and the court may issue certain orders to the person.  These orders are sent by mail and may require the person to turn certain property over to the trustee, or provide the trustee with certain information.  If the person fails to comply with these orders, the case may be dismissed, in which case his or her debts will not be discharged.  The person must also attend and complete an instructional course on personal financial management and file a statement with the court showing completion of the course.

17. Who is a trustee and what is the trustee’s role in a Chapter 7 case?
The trustee is a person, usually an attorney, appointed by the United States trustee to oversee bankruptcy cases, collect the person's nonexempt property, and pay the expenses of the estate and the claims of creditors.  The trustee also has some administrative duties in a Chapter 7 case and is responsible for making sure the person who files Chapter 7 follows the rules.  A trustee is always appointed in a Chapter 7 case, even if the filing party has no nonexempt property.

18. What happens to property if it is turned over to the trustee?
In the case that the trustee requires property be turned over, the trustee will liquate the property to cash and pay priority creditors, and if any remains, they will pay unsecured creditors.  Typically though, a Chapter 7 case will be a no asset case because all of the debtor’s property falls under the state exemption allowance. Most Chapter 7 cases filed by consumers are no asset cases.  In a no asset case the trustee will send notice to all creditors advising them that there are no assets to pay, and that it is unnecessary for them to file claims.

19. Who are secured creditors and how are they treated in a Chapter 7 case?
Secured creditors are creditors with a security interest in property such as a valid mortgage or lien.  A secured creditor is allowed to repossess or foreclose on its secured property. The claims of a secured creditor, a secured claim, are not collected by the trustee. The secured creditor must prove the validity of its claim obtain a court order before taking collection action. The filing of a Chapter 7 will buy time to work out an arrangement with the secured creditor.

20. Who are unsecured creditors and how are they dealt with in a Chapter 7 case?
In most Chapter 7 cases filed by consumers unsecured creditors get nothing. Unsecured creditors are creditors without a security interest such as a valid mortgage or lien.  If the debtor filing has non-exempt assets, an unsecured creditor may file a claim with the court within 90 days after the first date set the meeting of creditors.  After the trustee has collected all of the person's non-exempt property and converted it to cash the trustee will distribute to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Some unsecured creditors have priority.  Domestic support obligations, administrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits and tax claims, are given priority, in that order, in the payment of dividends by the trustee.  If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors.

21. What encumbered property can be retained in a Chapter 7 case?
A debtor may retain certain encumbered personal and household property if the property is exempt and if the mortgage or lien against the property was not made to finance the purchase of the property. A person may also keep encumbered exempt personal property by paying the secured creditor the replacement value of the property.

22. How can a person best prepare for bankruptcy in order to turn over as little as possible to the trustee in a Chapter 7 case?
Preparing for bankruptcy is wise and it is advised to take full advantage of the law and should be treated akin to preparing for taxes.  The goal of bankruptcy estate planning is to minimize the value of liquid.  The liquid assets such as cash, bank accounts, prepaid rent, landlord and utility deposits, accrued earnings and benefits, tax refunds, and sporting goods should all be minimized before filing.

23. Can a debtor still pay a discharged debt?
After discharge the debtor is no longer legally obligated to pay any discharged debts.  The only dischargeable debt that a person is legally obligated to repay is one for which the person and the creditor have signed what is called a “reaffirmation agreement.  If the debtor wishes to pay back a discharged debt, he or she may do so, but no legal obligation exists.

24. What is the length of a Chapter 7 case?
A Chapter 7 case starts with the filing of the bankruptcy forms and ends with the closing of the case by the court.  Typically a case will last between 3 and 6 months depending on the amount of assets the trustee needs to go through.

25. What to do if a creditor attempts to collect a debt that has been discharged?
When a Chapter 7 debt is discharged, the court enters an order which prohibits creditors from attempting to collect any discharged debt.  If any creditor violates this court order they may be held in contempt of court and may be liable to the person for damages.  If a creditor attempts to collect a discharged debt, the debtor should give the creditor a copy of the Chapter 7 discharge order. If a creditor files a lawsuit on a discharged debt, the debtor must inform the court in which the law suit was filed that the debt was discharged. Do not ignore this lawsuit, because fixing it later may be costly.

26. What is the role of the bankruptcy attorney for the person filing a Chapter 7?
In a typical Chapter 7 consumer case the attorney for the person filing will:

a. Analyze the financial situation of the person filing and determine the best remedy for the person's financial problems.

b. Advise the person filing of the relief available under Chapter 7, Chapter 13 and the other chapters of the Bankruptcy Code, and the advantages and disadvantages of filing bankruptcy. The attorney will also explore non-bankruptcy options.

c. Assist the person in obtaining the required pre-bankruptcy budget and credit counseling briefing. We suggest: www.personalfinanceeducation.com.

d. Assemble all the necessary information to prepare the Chapter 7 forms for filing.

e. Prepare all petitions, schedules, statements and other Chapter 7 forms for filing with the bankruptcy court.

f. Assist the person filing in estate planning for bankruptcy by arranging his or her assets so as to maximize the person’s retention of assets.

g. Filing all Chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.

h. Attending the meeting of creditors with the person and appearing with the person at any other hearings that may be held in the case.

i. If necessary, the person filing may request assistance from the attorney in reaffirming certain debts, redeeming personal property, setting aside mortgages or liens against exempt property, and otherwise carrying out the matters set forth in the statement of intention. Such actions may require additional legal fees.

If you any have more questions have them answered by an attorney today. Call 303-277-1927.