Chapter 7 Bankruptcy

A Chapter 7 bankruptcy, often referred to as a “liquidation” bankruptcy, entails the sale of the debtor’s nonexempt property and the distribution of the proceeds to his/her/its creditors under a predetermined scheme established by the Bankruptcy Code. In practice, however, very few individual debtors who file under Chapter 7 have any nonexempt property, and a bankruptcy discharge is routinely granted without the loss of any of the individual debtor’s few remaining assets. To qualify to file a Chapter 7 bankruptcy, individual debtors must make less than the median income for their state. Individual debtors who make more than the median income must file under either Chapter 13, or occasionally under Chapter 11. If the Chapter 7 debtor is an individual, he/she normally receives an Order of Discharge approximately 90 days after filing his/her petition. The 90 days is to give the trustee and creditors time to evaluate the assets of the bankruptcy estate and condition of the debtor, and to object to the discharge if problems are discovered.

There is no income requirement for a business entity to file under Chapter 7. But, because a business entity will not receive a discharge in bankruptcy (it simply goes out of business), the circumstances under which a business entity will file a Chapter 7 petition are limited. Most voluntary bankruptcy petitions filed by businesses are under Chapter 11.

Between 20 and 40 days after the petition is filed, the meeting of creditors is held. This meeting is also sometimes called the “341 meeting” after the section of the Bankruptcy Code that requires it. During this meeting, the trustee puts the debtor (or its representative if a business entity) under oath, and both the trustee and creditors may ask questions of the debtor. The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. As bankruptcy attorneys in Salt Lake City, we make sure our clients are fully prepared for the meeting of creditors, and we accompany them during that meeting to make sure that everything goes smoothly. Within 10 days after the creditors’ meeting, the trustee will report to the court the results of the meeting, inform the court regarding the actions, if any, that the trustee needs to take to liquidate the estate and pay creditors, and take a position as to whether individual debtors should receive a discharge.

Receiving a discharge is, of course, the ultimate objective of an individual who files bankruptcy. It releases individual debtors from personal liability for most, but not all, pre-existing debts, and prevents the creditors to whom those debts are owed from taking any further collection action against the debtor. However, because a Chapter 7 discharge is subject to exceptions, debtors should consult competent legal counsel regarding the scope of the discharge before filing. In most cases, unless a party in interest objects, the court will issue a discharge order 60 to 90 days after the meeting of creditors in a Chapter 7 case. As bankruptcy lawyers in Salt Lake City, Utah, we help our individual debtor clients obtain a discharge as quickly, and with as little hassle, as possible.

Secured creditors, such as mortgage and automobile lenders, however, retain their liens on the assets securing their loans even though the individual debtor’s obligation thereon has been discharged. Once the automatic stay has been lifted, usually by the granting of a discharge and dismissing of the case, they may foreclose on, or seize and sell, their collateral to satisfy their secured debts if the debtor is behind on any payments. If an individual debtor wishes to keep the secured property he/she may decide to “reaffirm” the debt by entering into a “reaffirmation agreement” under which the debtor agrees to remain liable on the debt, and to pay all or an agreed upon portion of the money owed. In return, the creditor generally promises that it will follow its ordinary collection procedures, rather than immediately foreclosing on or seizing and selling the property, if the debtor is late making a payment. A reaffirmation agreement must be entered into before the discharge is granted. And, it must be in the form of a writing that conforms with the requirements of the Bankruptcy Code, signed by the debtor and filed with the court. As bankruptcy attorneys in Salt Lake City, Utah, we help our clients decide whether to reaffirm a debt and, if so, make sure that the reaffirmation agreement is properly done.

After evaluating the assets of the bankruptcy estate and the condition of the debtor, and coming to the conclusion that the Chapter 7 petition was properly filed, the Chapter 7 Trustee gets about the business of gathering up the debtor’s non-exempt assets owned at the time of filing, liquidates those assets (usually by selling them off at auction), and distributes the net proceeds (after deducting administrative expenses, which include paying the trustee and his/her attorneys for their work) pro rata among the unsecured creditors according to their established priorities. Secured creditors usually receive their collateral, or its value in money, and, to the extent that their collateral doesn’t cover the full amount of the debt owed to them, probably also have an unsecured claim against the bankruptcy estate. As Utah bankruptcy attorneys in Salt Lake City, we can help you through the Chapter 7 bankruptcy process.

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JD Milliner