Chapter 7: Liquidation
Under the Bankruptcy Code
Background: A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's NONEXEMPT assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors, In addition, the Bankruptcy Code will ALLOW the debtor to keep certain "exempt" property; but a trustee will liquidate the debtor's remaining assets.
Chapter 7 Eligibility: To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a 'fresh start," The debtor has no liability for discharged debts. A bankruptcy discharge does not extinguish a lien on property.
How Chapter 7 Works: A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). Individual debtors with primarily consumer debts must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase In income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must provide the following information:
1. A list
of all creditors and the amount and nature of their claims;
2. The
source, amount, and frequency of the debtor's income;
3. A list
of all of the debtor's property; and
4. A
detailed list of the debtor's monthly living expenses, food, clothing, shelter,
utilities, taxes, transportation, medicine, etc,
Among the schedules that an individual debtor will file is a schedule of "exempt" property. The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor's home state. 11 U.S.C, ยง 522(b). Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions, In Texas, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under Texas state law. Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property.
The Chapter 7 Discharge: A discharge releases Individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case - generally, 60 to 90 days after the date first set for the meeting of creditors.When an individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case, a creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt.