Chapter 7 bankruptcy relief, often called straight bankruptcy is available to corporations, partnerships and individuals and provides for simple debt liquidation. Chapter 7 bankruptcy essentially grants the debtor a discharge, which releases the debtor from personal liability for his or her debts.

In exchange, the debtor's nonexempt, unencumbered assets are liquidated for the benefit of the creditors. The person who performs the liquidation of assets is called a Chapter 7 trustee. Unfortunately for creditors, most Chapter 7 bankruptcies are "no-asset" cases, meaning that the debtor has nothing of value, which can be liquidated for their benefit. Note that only individuals actually receive a discharge. Chapter 7 debtors that are not individuals (such as partnerships or corporations) simply undergo a liquidation of their assets and must be dissolved or have their existence terminated in accordance with applicable state law.

A Chapter 7 case begins when the debtor files a Chapter 7 petition in the clerk's office of the appropriate bankruptcy court. Shortly after filing the petition, the debtor must file schedules, which, among other matters, will detail the debtor's income, expenses, assets, and liabilities.

Also, with respect to secured consumer debts, the debtor must, within 30 days of filing the petition, file a statement of intention in which the debtor notes his or her plans for any assets that serve as collateral (e.g., whether the debtor plans to keep the collateral and continue to make payments to the creditor or to turn the collateral over to the creditor). The schedules and statement of intention are public records and, therefore, may be examined and copied by creditors.

Often, when filing a Chapter 7 petition, a debtor will owe money to a bank where he or she has a savings or checking account. A bank then may "freeze" those accounts administratively suspending the debtor's right to use the funds in the accounts—as soon as the petition is filed. Banks should be aware that in order to freeze an account, there must be an identity of interest between the debtor and the owner of the account and that they may only freeze funds that were on deposit when the petition was filed—not funds that were deposited afterwards.

Immediately after freezing an account, a bank must request permission from the Bankruptcy Court to apply—or offset—the funds in the account to the debtor's obligations to the bank. This permission is needed because at the moment the petition is filed, an injunction called an automatic stay goes into effect and prohibits creditors from taking any activity to collect on debts that were incurred before the petition was filed. If a bank does not promptly request Bankruptcy Court permission to offset, the debtor may ask the Bankruptcy Court to hold the bank in contempt for violating the automatic stay.

Creditors other than banks or lending institutions may also offset mutual debts owed to a Chapter 7 debtor which arose pre-petition, subject to certain rules set forth in the Bankruptcy Code and the requirement that relief from stay be necessary to enable the creditor to actually effect a formal transfer of funds or application of offset.

The first event of importance after the filing of the petition is the creditors' meeting, which will be held approximately one month after the filing of the case. At this meeting, creditors may question the debtor regarding his or her assets and liabilities and on any other matter permitted by the Bankruptcy Code or Rules.

The debtor's answers are given under oath. The meeting is usually valuable to secured creditors, who can examine the debtor as to the status of their collateral (for instance, whether the collateral is properly insured) and ask the Chapter 7 trustee to abandon collateral in which there is no equity and which, therefore, cannot be liquidated for the benefit of other creditors. In addition, the meeting is a convenient time for creditors to negotiate with the debtor about the return of collateral or the resumption of payments.

Creditors should receive a notice from the Bankruptcy Court, which states the date, time, and place of the meeting. Although the creditor may be represented by an attorney at the meeting, that is not required. Creditors may appear directly or by in-house non-lawyer representatives.

The automatic stay prevents secured creditors from enforcing their lien rights. However, the stay will end when the bankruptcy case is closed, which usually occurs within five to seven months after the petition is filed in a "no-asset" case and much later in asset cases, or when the case is dismissed, which occurs infrequently. The automatic stay on property that has been abandoned by the Chapter 7 trustee ends when the discharge has been entered, which usually happens approximately 100 days after the petition is filed.

Because the stay on abandoned property ends on the date of discharge, secured creditors often ask that the Chapter 7 trustee abandon his or her interest in their collateral at the creditors' meeting. In support of this type of request, a creditor (or its lawyer) will submit a formal written request for abandonment, together with copies of documents which evidence the perfection of the creditor's lien or encumbrance and a statement of the projected wholesale value of the secured property.

Good practice suggests that the creditor request that the Chapter 7 trustee sign a copy of the abandonment request at the meeting. If the trustee abandons the creditor's collateral, the creditor may enforce its rights against the collateral (not the debtor) in accordance with its contract and applicable state law on and after the date of discharge.

Secured creditors who are not content to wait for the discharge (for example, because their collateral is depreciating) often will request that the Bankruptcy Court lift the automatic stay on their collateral by having their attorney file a written motion. There is a fee to file a motion to lift stay (currently $75) and there may be as many as two hearings before the matter will be decided.

The process normally will be resolved either by consent or, at the latest, approximately 60 days after the motion is filed. Typical grounds for lifting the stay are the debtor's nonpayment on the debt secured by the collateral, the fact that the collateral is worth less than the debt owed, or the fact that the collateral's value will be jeopardized unless the creditor recovers it.

An attorney who is experienced in bankruptcy litigation should file a motion for relief from the stay.

The debtor's goal in a Chapter 7 case is to receive a discharge, meaning that the debtor's personal liability for pre-petition debts is ended. However, certain debts are automatically non-dischargeable in a Chapter 7 case (e.g., debts for alimony, spousal and child support, student loans and certain taxes). Other debts may be found to be non-dischargeable in Chapter 7 (e.g., debts incurred through fraud, embezzlement, larceny, breach of fiduciary duty, willful tort and drunk driving) if the creditor files a complaint by a certain deadline and obtains a judgment of non-discharge ability in the Bankruptcy Court.

The deadline is set forth in the notice of meeting of creditors and is usually 90 days after the petition is filed. If a complaint is timely filed, a trial on will be scheduled and the Bankruptcy Court will decide whether or not the particular debt is dischargeable. If the debtor's pre- or post-petition conduct has been particularly egregious (e.g., he or she has hidden assets, concealed or destroyed records, failed to adequately explain the loss of assets, failed to obey a court order or committed a perjury), the Bankruptcy Code permits either a creditor or the bankruptcy trustee to file a complaint objecting to the discharge of any debts.

If such a complaint is successful, the debtor's assets will still be liquidated, but the debtor will not receive a discharge, meaning that creditors may pursue the debtor for payment of their debts.

The deadline for filing this type of complaint also is usually 90 days after the petition is filed.

Debtors are allowed to reaffirm a debt to a particular creditor so that the bankruptcy discharge will not apply to the debt. Usually, a debtor, such as car or home loans, will reaffirm only secured debts. In order for a reaffirmation of a debt to be valid, however, the agreement (and in the Eastern District of Virginia, a summary of the reaffirmation agreement) must be filed with the Bankruptcy Court clerk's office prior to the date on which the discharge is granted.

Note that a debtor can rescind a reaffirmation agreement until the time the discharge is granted or 60 days after the agreement is filed with the court, whichever is later. Therefore, creditors are well advised to not demand payment from debtors during the period in which they may rescind the reaffirmation agreement.

If no complaint is filed objecting to the debtor's discharge, the court will enter the discharge approximately 100 days after the petition was filed. If a complaint objecting to the discharge is timely filed, the discharge will not be entered unless and until the complaint is defeated. A copy of the discharge order is mailed to all creditors and parties in interest.

If the Chapter 7 is an asset case (or a notice is later sent out in a "no asset" Chapter 7 case disclosing that assets have been discovered and that claims should be filed), a creditor must file a proof of claim in order to share in any distribution of the money generated by the liquidation of the debtor's assets. The Bankruptcy Court clerk's office will mail creditors a notice of the date by which proofs of claim must be filed shortly after the petition is filed or after assets are discovered. Creditors usually have 90 days from the date of the notice in which to file proofs of claim.

A proof of claim may be filed only for the amount owed to the creditor on the date the petition was filed. A creditor may be able to claim interest on its debt, as well as attorney fees and costs, but this depends on a number of factors, such as the date on which the fees and costs were incurred, the extent to which the creditor's contract provides for such additional costs and fees, and whether the debt is secured by collateral.

Legal advice is usually advisable in addressing these issues.

One type of asset that the Chapter 7 trustee often pursues is the avoidance and recovery of preferential transfers. Preferential transfers are payments the debtor made shortly before bankruptcy that allowed the debtor to "prefer" certain creditors instead of providing equal treatment to all creditors.

It is not illegal under state or federal law to receive a preference payment, but the creditor may have to return the payment to the Chapter 7 trustee. There are defenses to preference suits, and often a trustee may be willing to compromise to settle a case. If a creditor is sued to recover a preference, legal advice and representation is recommended.

More related Info:

• Chapter 7 bankruptcy
  
• Chapter 13 bankruptcy

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