What is Chapter 7? Chapter 7 is what most people think of when they think of bankruptcy. When you file a Chapter 7 bankruptcy petition, a trustee is appointed to liquidate any of your assets beyond those that are exempt. Once any excess assets are sold, the money is used to pay creditors. Most debts are discharged, and you can usually keep any income you earn after the petition was filed. ________________________________________________________________________________________ Who can file Chapter 7 Bankruptcy? Individuals and businesses can both file for Chapter 7, but only individuals can receive a discharge. Since BAPCPA passed in 2005, debtors must pass a "means test" to be in Chapter 7. If your income is too high (according to Congress), you will not qualify for Chapter 7, and you will have to be in a Chapter 13. ________________________________________________________________________________________ What is the credit counseling requirement? Before you can file bankruptcy, you must obtain credit counseling from an accredited agency. A list of accredited agencies can be found in the "helpful links" section of this site. ________________________________________________________________________________________ Will I be able to keep my possessions? You are entitled to protect your possessions using exemptions under either federal or state law. You can protect some equity in your residence ($125,000 under Washington law), vehicles, household goods, life insurance, retirement plans (including IRA's and your 401(k)), clothing, and some items related to your job. If you don't own a residence, or have very little home equity, you might be able to use the federal exemption protection for personal property. ________________________________________________________________________________________ Will the calls and collections actions stop? Yes. Debt collection efforts, garnishments and foreclosure are stopped. As soon as a creditor becomes aware that you have filed for bankruptcy, the creditor must stop all efforts to collect the debt and all collection proceedings. Creditors that violate this rule can be fined or sanctioned. ________________________________________________________________________________________ Does my spouse have to file bankruptcy too? No. In some cases where only one of you has debts, or under other conditions, it might be advisable to only have one spouse file. Since Washington is a community property state, even if only one spouse files, all of the couple's community property may be subject to your bankruptcy. If you are contemplating a bankruptcy filing by only one spouse, you should consult an attorney. ________________________________________________________________________________________ May a husband and wife file jointly under chapter 7? Yes. A husband and wife may file a joint petition under chapter 7. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. ________________________________________________________________________________________ Under what conditions should both spouses file under chapter 7? If a couple is contemplating the filing of only one spouse, an attorney should be consulted. ________________________________________________________________________________________ What is a chapter 7 discharge? A chapter 7 discharge is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debtor does not have to pay discharged debt. ________________________________________________________________________________________ What debts are not dischargeable under chapter 7? All debts of any kind or amount, including out-of-state debts, are dischargeable under chapter 7 except the debts listed below. The following is a list of the most common debts that are not dischargeable under chapter 7: 1.Most tax debts and debts that were incurred to pay federal tax debts. 2.Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement if the creditor files a complaint in the case (included here are debts for luxury goods or services and debts for cash advances made within 60 days before the case is filed). 3.Debts not listed on the debtor's chapter 7 forms, unless the creditor knew of the case in time to file a claim. 4.Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the case. 5.Debts for alimony, maintenance, or support and, if the creditor files a complaint in the case, certain other divorce-related debts including property settlement debts. 6.Debts for intentional or malicious injury to the person or property of another, if the creditor files a complaint in the lease. 7.Debts for certain fines or penalties. 8.Debts for educational benefits and student loans are not dischargeable unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents. 9.Debts for personal injury or death caused by the debtor's operation of a motor vehicle while intoxicated. 10.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. ________________________________________________________________________________________ How much is the chapter 7 filing fee and when must it be paid? The filing fee is $299 for either a single or a joint case. The fee charged by the debtor's attorney for handling the chapter 7 case is in addition to the filing fee. ________________________________________________________________________________________ Where is a chapter 7 case filed? In the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the greatest portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court. ________________________________________________________________________________________ When should a chapter 7 case be filed? The answer depends on the status of the debtor's dischargeable debts, the nature and status of the debtor's nonexempt assets, and the actions taken or threatened to be taken by the debtor's creditors. The following guidelines should be followed: 1.Don't file under chapter 7 until all anticipated debts have been incurred, because it will be another eight years before the debtor is again eligible for a chapter 7 discharge. For example, a debtor who has incurred substantial medical expenses should not file under chapter 7 until the illness or injury has either been cured or covered by insurance, as it will do little good to discharge, say, $50,000 of medical debts now and then incur another $50,000 in medical debts in the next few months. 2.Don't file under chapter 7 until the debtor has received all nonexempt assets to which he or she may be entitled. If the debtor is entitled to receive an income tax refund or a similar nonexempt asset in the near future, he or she should not file under chapter 7 until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will become the property of the trustee. 3.Don't file under chapter 7 if the debtor expects to acquire property through inheritance, life insurance or divorce in the next 180 days, because the property will have to be turned over to the trustee unless it is exempt. If a hostile creditor action threatens a debtor's exempt assets or future income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a chapter 7 case, if a creditor has threatened to attach or garnishee the debtor's wages or if a foreclosure action has been instituted against the debtor's residence, it may be necessary to file a chapter 7 case immediately in order to protect the debtor's interest in the property. ________________________________________________________________________________________ How does filing under chapter 7 affect a person's credit rating? It will usually worsen it, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least eight years before they can again file under chapter 7. If there are compelling reasons for filing under chapter 7 that are not within the debtor's control (such as an illness or an injury), some credit rating agencies may take that into account in rating the debtor's credit after filing. ________________________________________________________________________________________ Are the names of persons who file under chapter 7 published? When a chapter 7 case is filed, it becomes a public record and the name of the debtor may be published by some credit-reporting agencies. However, newspapers do not usually report or publish the names of consumers who file under chapter 7. ________________________________________________________________________________________ Are employers notified of chapter 7 cases? Employers are not usually notified when a chapter 7 case is filed. However, the trustee in a chapter 7 case often contacts an employer seeking information as to the status of the debtor's wages or salary at the time the case was filed. If there are compelling reasons for not informing an employer in a particular case, the trustee should be so informed and he or she may be willing to make other arrangements to obtain the necessary information. ________________________________________________________________________________________ Does a person lose any legal or civil rights by filing under chapter 7? No. Filing under chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing. ________________________________________________________________________________________ May employers or governmental agencies discriminate against persons who file under chapter 7? No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under chapter 7. It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses (including a driver's license), permits, student loans, and similar grants because that person has filed under chapter 7. ________________________________________________________________________________________ When must a debtor appear in court in a chapter 7 case and what happens there? The first court appearance is for a hearing called the "meeting of creditors" or the "341" hearing (named for the section of the code that created it). This hearing usually takes place about a month after the case is filed. At this hearing the debtor is put under oath and questioned about his or her debts and assets by the hearing officer or trustee. In most chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the debtor. If the bankruptcy court decides not to grant the debtor a discharge or if the debtor wishes to reaffirm a debt and is not represented by an attorney, there will be another hearing about three months later which the debtor will have to attend. ________________________________________________________________________________________ What happens after the meeting of creditors? After the meeting of creditors, the trustee may contact the debtor regarding the debtor's property, and the court may issue certain orders to the debtor. These orders are sent by mail and may require the debtor to mm certain property over to the trustee, or provide the trustee with certain information. If the debtor fails to comply with these orders, the case may be dismissed and the debtor may be denied a discharge. ________________________________________________________________________________________ What is a trustee in a chapter 7 case, and what does he or she do? The trustee is an officer of the court, appointed to examine the debtor, collect the debtor's nonexempt property, and pay the expenses of the estate and the claims of creditors. In addition, the trustee has certain administrative duties in a chapter 7 case and is the officer in charge of seeing to it that the debtor performs the required duties in the case. A trustee is appointed in a chapter 7 case, even if the debtor has no nonexempt property. ________________________________________________________________________________________ What are the debtor's responsibilities to the trustee? The law requires the debtor to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the debtor's nonexempt property. If the debtor does not cooperate with the trustee, the chapter 7 case may be dismissed and the debtor may be denied a discharge. ________________________________________________________________________________________ What happens to the property that the debtor turns over to the trustee? It is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay the claims of unsecured creditors. The trustee's fee is usually $60 plus a percentage of the amount collected from the debtor. ________________________________________________________________________________________ What if the debtor has no nonexempt property for the trustee to collect? If, from the debtor's chapter 7 forms, it appears that the debtor has no nonexempt property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay creditors, that it is unnecessary for them to file claims, and that if assets are later discovered they will then be given an opportunity to file claims. This type of case is referred to as a no-asset case. Approximately one-half of all chapter 7 cases that are filed are no-asset cases. ________________________________________________________________________________________ How are secured creditors dealt with in a chapter 7 case? Secured creditors are creditors with valid mortgages or liens against property of the debtor. Property of the debtor that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose its secured property, unless the value of the secured property greatly exceeds the amount owed to the creditor. The claim of a secured creditor is called a secured claim and secured claims must be collected from or enforced against secured property. Secured claims are not paid by the trustee. A secured creditor must prove the validity of its mortgage or lien and obtain a court order before repossessing or foreclosing on secured property. The debtor should not turn any property over to a secured creditor until a court order has been obtained. The debtor may be permitted to retain or redeem certain types of secured personal property (addressed below). ________________________________________________________________________________________ How are unsecured creditors dealt with in a chapter 7 case? An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the first date set for the meeting of creditors. The trustee will examine these claims and file objections to those deemed improper. When the trustee has collected all of the debtor's nonexempt property and converted it to cash, and when the court has ruled on the trustee's objections to improper claims, the trustee will distribute the funds in the form of dividends to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Administrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits, claims for alimony, maintenance support, 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. ________________________________________________________________________________________ What secured property may a debtor retain or redeem in a chapter 7 case? A debtor may retain and redeem certain secured personal and household property, such as household furniture, appliances and goods, wearing apparel, and tools of trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred for the purpose of financing the purchase of the property. A debtor may also retain and redeem without payment to the secured creditor any secured property that is both exempt and subject only to a judgment lien. Finally, a debtor may redeem certain exempt personal, family, or household property by paying to the secured creditor an amount equal to the value of the property, regardless of how much is owed to the creditor. Deadlines are imposed on the enforcement of these rights by the debtor during the bankruptcy case. ________________________________________________________________________________________ What if a debtor wishes to repay a dischargeable debt? A debtor may repay as many dischargeable debts as desired after filing under chapter 7. By repaying one creditor, a debtor does not become legally obligated to repay any other creditor. The only dischargeable debt that a debtor is legally obligated to repay is one for which the debtor and the creditor have signed what is called a "reaffirmation agreement." if the debtor was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid, if the debtor was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and the attorney's statement with the court in order for the agreement to be valid, if a dischargeable debt is not covered by a reaffirmation agreement, a debtor is not legally obligated to repay the debt, even if the debtor has made a payment on the debt since filing under chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt. ________________________________________________________________________________________ How long does a chapter 7 case last? A chapter 7 case begins with the filing of the case and ends with the closing of the case by the court. If the debtor has no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the debtor receives his or her discharge, which is usually about four months after the case is filed. If the debtor has nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most consumer cases with assets last about six months. ________________________________________________________________________________________ What should a person do if a creditor later attempts to collect a debt that was discharged under chapter 7? When a chapter 7 discharge is granted, the court enters an order prohibiting the debtor's creditors from later attempting to collect any discharged debt from the debtor. Any creditor who violates this court order may be held in contempt of court and may be liable to the debtor in damages. If a creditor later attempts to collect a discharged debt from the debtor, the debtor should give the creditor a copy of the order of discharge and inform the creditor in writing that the debt has been discharged under chapter 7. If the creditor persists, the debtor should contact an attorney. If a creditor files a lawsuit against the debtor on a discharged debt, it is important not to ignore the matter, because even though a judgment entered against the debtor on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly to the debtor. ________________________________________________________________________________________ How does a chapter 7 discharge affect the liability of cosigners and other parties who may be liable to a creditor on a discharged debt? A chapter 7 discharge releases only the debtor. The liability of any other party on a debt is not affected by a chapter 7 discharge. Therefore, a person who has cosigned or guaranteed a debt for the debtor is still liable for the debt regardless of the debtor's chapter 7 discharge. The only exception to this rule is in community property states where the spouse of a debtor is released from certain community debts by the debtor's chapter 7 discharge. ________________________________________________________________________________________ What is the role of the attorney for a consumer debtor in a chapter 7 case? The debtor's attorney performs the following functions in the chapter 7 case of a typical consumer debtor: 1.Analyze the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor's financial problems. 2.Advise the debtor of the relief available under both chapter 7 and chapter 13 of the Bankruptcy Code, and of the advisability of proceeding under each chapter 3.Assemble the information and data necessary to prepare the chapter 7 forms for filing. 4.Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court. 5.Assist the debtor in arranging his or her assets so as to enable the debtor to retain as many of the assets as possible after the chapter 7 case. 6.Filing the chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case. 7.If necessary, assisting the debtor 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 debtor's statement of intention. 8.Attending the meeting of creditors with the debtor and appearing with the debtor at any other hearings that may be held in the case. 9.If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor. 10.If necessary, assisting the debtor in overcoming obstacles that may arise to the granting of a chapter 7 discharge. The fee paid, or agreed to be paid, to an attorney representing a debtor in a chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Many attorneys collect all or most of their fee before the case is fried.