A Chapter 7 or ‘straight bankruptcy’ allows the debtor to discharge (extinguish) most debts and keep exempt property. Chapter 13 Bankruptcy is discussed in a separate article.
The Bankruptcy Petition
To begin a Chapter 7 bankruptcy, the debtor must file a petition (request) with the United States Bankruptcy Court asking it for protection under the bankruptcy law. The petition can be filed individually, or a husband and wife can file a joint petition.
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As of the date the petition is filed, all of the debtor’s assets come under the protection of the bankruptcy court. This means that creditors may not take any collection efforts against the debtor unless an order is obtained from the bankruptcy court; this is referred to as an ‘automatic stay’. The automatic stay will afford the debtor immediate relief from collection efforts by creditors. When the bankruptcy petition is filed, creditors are notified of the filing and with some exceptions, all lawsuits against the debtor are stopped and creditors cannot enforce any judgments that were not collected before the bankruptcy filing. The automatic stay also prevents creditors, except for taxing authorities, from putting a lien on the debtor’s property.
When a Chapter 7 bankruptcy petition is filed, the debtor must also file a Statement of Financial Affairs and other schedules that describe the debtor’s personal background, financial history and income. A detailed inventory of debts and assets will also be filed with the petition. Debts and liabilities are broken down by category. Certain debts, such as taxes, are referred to as ‘priority debts’ and may not be dischargeable. ‘Secured debts’ (debts for which the debtor has given security or collateral), such as automobile debts and home mortgages, must also be identified. ‘Unsecured debts’, such as credit card obligations, are those obligations for which the debtor has given no security or collateral. In addition to scheduling liabilities, the debtor will be required to schedule all assets that he/she owns, including real estate and personal property.
Meeting of Creditors
Approximately one month after the Chapter 7 bankruptcy petition is filed, the debtor must attend a ‘meeting of creditors’, sometimes called a 341 hearing. At this hearing the trustee (hearing officer) will review the bankruptcy forms and may ask any questions necessary to verify that the information contained in the petition is true and accurate. The debtor will ordinarily be required to bring with him/her copies of recent tax returns and title documents to vehicles and other assets. Creditors may also attend this meeting, however, they rarely attend. The meeting lasts only a few moments.
A Chapter 7 bankruptcy is often referred to as a ‘liquidating’ bankruptcy. This means that the debtor will lose all property that is not exempt but will be allowed to keep all exempt assets. Although the federal bankruptcy code provides a list of exemptions, these exemptions are not available in Florida. Florida law requires debtors to use the exemptions found in state law — not the U.S. bankruptcy code.
In a Chapter 7 bankruptcy, the debtor will lose “non-exempt” property and will be entitled to keep all ‘exempt property’. In Florida, it is not unusual for debtors to be able to exempt all of their property and therefore not lose any assets in a bankruptcy. Florida exempt property generally includes:
- The primary residence or homestead (except as to the mortgage lender)
- Social Security Benefits
- Civil Service Benefits
- Veteran’s Benefits
- Property held as tenancy by the entirety (in joint names by husband and wife) may be exempt against debts owed by only one spouse
- Life insurance
- Annuity contracts
- Pension and retirement savings
- Child support
- Motor vehicles to $1,000
- In certain cases, up to $10,000 of personal property
The availability of exemptions requires review by an attorney or other qualified professional.
Reaffirmation of Debt
If assets or property has been pledged as collateral on a loan (e.g., car or boat loan) and the debtor does not make required payments, the creditor has the right to take back the collateral at the conclusion of the bankruptcy proceeding. Under these circumstances, the debtor may choose to ‘reaffirm the debt’. A ‘reaffirmation agreement’ is a contract that the debtor may enter into with a secured creditor wherein the debtor agrees to bring payments current and to continue making payments in accordance with the terms of the financing agreement and/or mortgage. When a debtor and creditor have entered into a reaffirmation agreement, the debt will survive the bankruptcy and not be discharged, however, the debtor will be able to retain the property.
Certain debts are not dischargeable in Chapter 7 proceedings. These debts include any that are not listed in the bankruptcy papers; child support and alimony; debts for personal injury or death caused by a drunk driver; student loans for which the first payment became due within the past seven years; criminal fines and penalties; recent income tax debts and taxes due for years in which the debtor failed to file a tax return; credit purchases for luxury goods or services made within sixty days of filing.
If a debtor treats one creditor better by making payments to that creditor and not to others for up to a year before filing bankruptcy, the court may view these payments as “preferential”. The bankruptcy trustee will attempt to recover any preferential transfers made to a creditor and bring those payments into the bankruptcy proceeding for distribution equally to all creditors.
Some kinds of taxes can be eliminated through bankruptcy. For example, income taxes that became due more than three years before the bankruptcy was filed can be discharged if the tax return had been filed on time or if it was filed more than two years before the bankruptcy and where the taxes were assessed more than 240 days before the filing of the bankruptcy.
Objections to Discharge
Creditors may file ‘objections’ to the bankruptcy discharge if they feel that the debtor has broken a bankruptcy rule or has tried to defraud the court. In the event a creditor files objections to discharge, the court will have a hearing on the matter.
Several months after the First Meeting of Creditors, the court will conduct a final hearing to approve the bankruptcy discharge. This hearing is largely a formality and no testimony or additional documentation is required or produced. The debtor will receive a document from the court confirming that all dischargeable debts have been extinguished and the Chapter 7 bankruptcy is over. By this time, the trustee will have collected all non-exempt assets of the debtor and distributed them to secured creditors or pro-rata to non-secured creditors.
Effects of Bankruptcy
The bankruptcy proceeding will have discharged most, if not all, of the petitioner’s debts. It is possible that a creditor may mistakenly file a lawsuit to collect a debt that has already been discharged in the bankruptcy proceeding. If the debtor is sued during the pendency of the bankruptcy, he/she must file a document in the court where the suit is pending to ‘stay’ or put the action on hold and assert that a bankruptcy petition has been filed. If a lawsuit to collect a discharged debt is filed after the debtor has obtained a bankruptcy discharge, he/she must respond to the lawsuit and file a document asserting that the debt was discharged and requesting the lawsuit be dismissed. Failure to file a pleading alleging the bankruptcy discharge may result in a judgment being rendered on a debt that no longer exists.
It is very difficult to function in today’s world without a credit card. It is highly recommended that after bankruptcy, the debtor obtain an ‘equity’ credit card, or debit card- one for which the user has put money in an account to secure payment of any charges. An equity card will help an individual who has filed for bankruptcy protection re-establish credit.
Hoffman, Larin & Agnetti, PA offers a free consultation for all bankruptcy related issues. Let us evaluate the specific facts of your case and make recommendations that address your individual issues. Convenient payment plans to meet your budget are available.