Chapter 7 Overview – Process
From Start to Finish
1. General Benefits. A bankruptcy filing under Chapter 7 allows individuals to eliminate most unsecured debts. The main reason for filing any bankruptcy case is to obtain a “discharge” or release of debts. In a Chapter 7 case, the debtor is not required to pay any of the debts owed to most unsecured creditors, but may elect to reaffirm (remain personally liable to pay) specific debts. Index
In approximately 99 percent of all consumer Chapter 7 cases, the debtor will keep all property, and eliminate most debts. The entire process is normally over, and the case is closed, within approximately 3 1/2 months after it is filed.
After the bankruptcy is over, the debtor is legally entitled to selectively pay any or all of her debts, if she feels a moral obligation to pay. However, the debtor can not be legally compelled to pay any discharged debt. Creditors are legally required to stop all collection efforts, including all collection calls, letters, lawsuits and garnishments.
2. Liquidation Proceeding. Chapter 7 is commonly known as a “liquidation” proceeding. The trustee is entitled to seize and sell the debtor’s non-exempt assets, and distribute the proceeds to creditors. However, in almost all consumer Chapter 7 cases, the debtor will keep all property because it is either: Index
(a) exempt from seizure under federal or state law; or
(b) so low in value that the trustee will elect to abandon it (i.e. not take it from the debtor).
Therefore, the term “liquidation” proceeding is a misnomer since approximately 99 percent of all individuals keep all of their property. See the page entitled “Exemptions” for a discussion of the property that can be protected from seizure in bankruptcy.
The following is a chronological summary of the Chapter 7 bankruptcy process, the events which occur in a Chapter 7 case, and the time periods at which these events occur.
3. Office Interview with Attorney. The first step for most debtors is to consult an attorney. The debtor should meet with an attorney for at least between 30 to 60 minutes on the first visit. The initial meeting should normally include a discussion of whether a bankruptcy filing is appropriate, the form of bankruptcy relief which is proper (normally either Chapter 7, 11 or 13), alternatives to bankruptcy, the bankruptcy process, and credit considerations of a bankruptcy filing. Index
The initial meeting should include a personal consultation with a licensed attorney. Do not hire a law firm that does not permit you to meet with an attorney on the first visit. Paralegals are indispensable to the law practice of most bankruptcy attorneys. Paralegals can also be very helpful in screening potential clients and relating basic legal information. However, paralegals are not licensed to practice law nor permitted to give individual legal advice. Paralegals, even very good ones, are never an acceptable substitute for a qualified, licensed attorney.
4. Bankruptcy Paperwork. A debtor will be required to file several documents with the court if he decides to file a bankruptcy case. These documents contain disclosures of essentially everything about the debtor from a financial standpoint for several years before the case is filed. These documents are called the bankruptcy “schedules” and “statement of financial affairs,” and contain the following information: Index
4.1 Petition. The bankruptcy petition is a document filed with the bankruptcy court to begin a bankruptcy case. The petition contains basic identifying information about the debtor, including her name, address, telephone number, social security number, and the chapter under which bankruptcy relief is sought. Index
4.2 Property List. The property list must disclose all property the debtor owns on the date the case is filed, and give an estimated value for each item. The property list must be itemized, showing each item, and an estimated market value for each item. See “Bankruptcy Estate” for a discussion of the property which comprises the bankruptcy estate and must be disclosed on the property list. Index
4.3 Creditor List. The creditor list must disclose the name and address of all creditors. There are 3 separate creditor lists which categorize the creditors according to whether the debt is a secured, priority or general unsecured debt. Index
Approx. 25 percent of all debtors intend to pay one or more of their unsecured debts, even after their bankruptcy has been completed. Many debtors believe that they will be able to keep a credit card and/or rehabilitate their credit report if they omit one or more credit cards from the creditor list. Not only is this is very poor strategy from a financial standpoint, it violates the bankruptcy laws. The debtor is legally required to disclose and list all creditors, regardless of whether she debtor intends to continue paying the debt.
4.4 Budget. The debtor must list and disclose her current monthly income and expenses, and disclose any anticipated changes in income of more than 10 percent within one year after the case is filed. Index
4.5 Statement of Financial Affairs. The statement of financial affairs is a list of 25 questions inquiring about the debtor’s financial transactions over the past several years. Almost all significant financial transactions over the past several years must be disclosed on the statement of financial affairs. Index
4.6 Pay Stubs. All all pay advices or other evidence of payment received within 60 days before the date of the petition is filed from any employer; and Index
4.7 Means Test. This document contains an inflexible calculation of the debtor’s average income during the 6 months prior to the date on which the case is filed. It then compares the debtor’s average income with the median income of similar households for the same state and IRS expense allowances for the area in which the debtor lives. It also lists several categories of the debtor’s actual ongoing monthly expenses such as mortgage and car payments, tax payments, medical expenses, insurance payments, child support and alimony payments, and child support payments. Index
The purpose of the test is to attempt to determine whether the filing of a Chapter 7 case is abusive. The calculations are very complicated. They are similar to calculating a tax return, but in many respects are much more difficult. A means test should never be attempted by an individual without the assistance of a qualified attorney.
5. Filing Petition and Schedules. The filing of the bankruptcy petition is the event which commences a bankruptcy case. When the petition is filed, the court clerk will assign a case number, judge and panel trustee. Index
In most Chapter 7 cases, the bankruptcy petition will be filed at the same time as the other required paperwork (the bankruptcy schedules and statement of financial affairs). However, the debtor may elect to file only the bankruptcy petition and list of creditors, and file the other documents later. This is normally done if the filing needs to be done quickly to prevent an impending foreclosure or repossession, or the collection of a court judgment. If the debtor elects not to file the schedules and statement of financial affairs along with the petition, these documents must be filed within 14 days after the bankruptcy petition is filed. The court will dismiss the case if these documents are not promptly filed.
6. Trustee Index
6.1 Appointment. Immediately upon the filing of the bankruptcy petition, a bankruptcy trustee will be randomly assigned from a pool of “panel trustees.” Panel trustees are individuals that have been pre-screened and hired to act as Chapter 7 trustees by the U.S. Trustee of the district in which they serve. The panel trustee will receive a copy of all bankruptcy paperwork after it is filed. Index
In the Houston Division of the Southern District of Texas, there are approximately 10 persons that serve as Chapter 7 panel trustees. All of these persons are bankruptcy attorneys, except one, who is a Certified Public Accountant.
6.2 Role of the Trustee. The basic purpose of the panel trustee is to serve as an investigator for the court. In 99 percent of all Chapter 7 cases, the debtor will never see a bankruptcy judge. The debtor will appear before a judge only if a serious question is raised about the case. In virtually all Chapter 7 cases, the trustee (or the trustee’s staff) is the only person that will review the case. The trustee has two basic investigatory roles: Index
(a) Asset Investigation. The trustee’s main role is to determine whether the debtor has any non-exempt assets which the trustee is entitled to seize from the debtor. If the debtor has non-exempt assets, the trustee may seize and sell the assets, and distribute the proceeds to creditors on a pro rata basis. Index
(b) Income / Expense Investigation. A second important role of the trustee is to determine if the debtor is abusing the bankruptcy process. A Chapter 7 case involving mostly consumer debts will be considered abusive if the debtor has sufficient income to pay a significant portion of the unsecured debt. Index
7. Creditor’s Meeting. In every Chapter 7 bankruptcy case, the debtor is required to make one appearance at a “creditor’s meeting.” The meeting for any given case will be grouped with approximately 30 other similar cases. The group of cases, commonly referred to as a “trustee panel” of cases, are all given to a single trustee. Index
7.1 Location. The creditor’s meeting for cases filed in the Houston are currently held at the U.S. Trustee’s office, located at the U.S. Courthouse. Index
7.2 Date. The creditor’s meeting is normally held between 20 and 40 days after the bankruptcy petition is filed. The meeting can never be scheduled at the convenience of the debtor or his attorney. The court will issue a notice specifying the date and time of the meeting. The debtor must attend on the scheduled date and time. If the debtor can not attend on the scheduled date, the trustee will normally agree to reschedule the meeting at least once. However, the new meeting date will be reset to one of the next available panels for that particular trustee. The trustee will never agree to appear at the courthouse and conduct a meeting for a single case. Index
7.3 Length of Meeting. Most creditor’s meetings last between 4 and 30 minutes, depending on the trustee and complexity of the case. Simple cases normally last 5 minutes or less. Complex or contentious cases can last 30 minutes or more. The meeting for each case on the panel will be scheduled to start 5 minutes apart from one another. Index
7.4 Presiding Officer – Who Comes to the Meeting? The Chapter 7 trustee will preside at the creditor’s meeting. All creditors are invited to attend and ask the debtor questions about his debts and assets. In 99 percent of all cases, no unsecured creditors will appear at the meeting. Unsecured creditors normally come only if they believe that the debtor is guilty of misconduct sufficient to warrant a denial of discharge. The only creditors that will normally appear with any frequency are secured creditors seeking to determine the debtor’s intentions with respect to their collateral, and whether the debtor will sign a reaffirmation agreement. Index
7.5 Focus of Trustee’s Investigation. The trustee will begin the meeting by asking the debtor various questions about his debts, assets and budget. The trustee’s questions are normally focused on two areas: Index
(a) Sufficient Property to Administer? Does the debtor have any non-exempt property, and if so, is the property valuable enough for the bankruptcy estate to realize a substantial dividend for creditors? In other words, does the debtor own sufficient non-exempt property to justify taking it, selling it, and distributing the proceeds to creditors. The panel trustee may ask questions directed at verifying whether the debtor has disclosed all of his property, and the accuracy of the estimated values given for the property. Index
(b) Substantial Abuse of Bankruptcy Process? The second major focus of inquiry is whether the debtor is abusing the bankruptcy process by filing a Chapter 7 case instead of proposing a repayment plan under Chapter 13.
There are many ways that a debtor can abuse the bankruptcy process. However, the main inquiry is usually whether the debtor’s budget shows that he can afford to pay at least some of the unsecured debt. If the debtor’s income exceeds her monthly expenses, the trustee may conclude that the debtor is abusing the process by attempting to discharge her debts without making any payment, rather than proposing a repayment plan under Chapter 13. Index
Most court opinions on this subject agree that if the debtor’s monthly income exceeds her reasonable monthly expenses, the case should be dismissed as an abuse of the bankruptcy process. The only way to avoid this result is if the debtor’s reasonable monthly expenses, as shown on the budget submitted to the court, equal or exceed monthly income. High income debtors (doctors, lawyers, engineers, etc.) attempting to file under Chapter 7 pose a much greater challenge for the debtor’s attorney, and have a much higher risk of drawing scrutiny from the trustee.
Under current practice, this function (determining if the bankruptcy filing is abusive) has been taken over completely by the U.S. Trustee’s office. The panel trustees generally do not concern themselves with abuse issues. The attorneys and paralegals at the U.S. Trustee’s office independently review the schedules and other documents. The focus is on the means test and the budget (Schedules I and J) to determine if the case shows an ability to repay a portion of the debt. If the U.S. Trustee has questions or believes that the case is abusive, an attorney or paralegal will request the debtor’s attorney to produce additional documents before or at the creditor’s meeting. A U.S. Trustee representative will also appear at the creditor’s meeting and ask the debtor additional questions concerning his income, expenses or other issues that could establish abuse.
(a) No-Asset / No Abuse Cases. In most cases, at the conclusion of the creditor’s meeting, the panel trustee will announce that he will allow the exemptions claimed by the debtor, abandon all non-exempt property, and close the case as a “no asset” case. This means that the trustee is satisfied that the debtor does not have any assets worth administering and the debtor has not abused the bankruptcy process. The panel trustee’s investigation will then end. Index
(b) Asset or Abuse Cases. In a small portion of cases, at the conclusion of the creditor’s meeting, the panel trustee will announce that he intends to keep his file open and continue the investigation. This can be done for several reasons: Index
(i) Potential Asset Recovery for Creditors. If the panel trustee believes that significant non-exempt assets may be available for creditors, he will keep the case open and further investigate the debtor’s assets. This could include requesting additional documents from the debtor, a personal inspection of assets, or any other action the trustee believes is necessary to properly investigate the debtor’s assets.
(ii) Abusive Filings. If the U.S. Trustee believes that the bankruptcy filing might be abusive, he may keep the case open to further investigate the debtor’s budget. If there is a question concerning the accuracy of any income or expense numbers on the budget, he may request the debtor to provide proof that they are accurate. If the trustee, after further investigation, believes that the debtor can afford to repay a portion of the unsecured debt, he will file a motion to dismiss the case.
8. Dismissal Hearing. Under current law, the U.S. Trustee, any creditor, or the court on its own initiative, may request a case to be dismissed as an abusive filing. If the U.S. Trustee or a creditor files a motion to dismiss the case, the court will conduct a hearing. The U.S. Trustee and the debtor will present evidence at the hearing. If the court believes that the filing was abusive, the debtor will normally have two options: (a) convert the case to a Chapter 13 case, and propose a plan to repay some or all of the unsecured debt; or (b) the case will be dismissed. If the case is dismissed, the debtor will be back in the same position he was in before the case was filed. Index
9. Discharge Contest. A discharge contest is a lawsuit filed by the U.S. Trustee, panel trustee, or a creditor seeking to prevent the debtor from receiving a discharge of one or more debts. A discharge contest must be filed within 60 days after the creditor’s meeting is first scheduled to start. A discharge contest may not be filed after the 60 day time period, unless an extension of the deadline is requested before the deadline expires. Index
A discharge contest must allege specific misconduct on the part of the debtor justifying the denial of a discharge. See the page entitled “Non-Dischargeable Debts” for a summary of the various forms of misconduct which will justify denial of a bankruptcy discharge. If a timely discharge contest is filed, the bankruptcy case will be kept open until the discharge contest has been decided.
Most discharge contests are filed by a single creditor claiming that the debtor should not receive a discharge of the debt owed to him. For cases filed by my office, the average likelihood of a drawing a discharge contest from a creditor or panel trustee has been less than 1 percent.
It is unusual to get more than one discharge contest in any given case. In the over 2,500 cases handled by my office, I have only encountered one case in which more than one creditor filed a discharge contest in the same case.
The panel trustee has a right to file a discharge contest which seeks to completely bar the debtor from receiving a discharge of all debts. This type of case is very unusual indeed. I have never encountered such a case in my practice.
10. Discharge Order. After the creditor’s meeting is adjourned, the debtor must wait for 60 days the court enters a discharge order. If neither a dismissal motion nor discharge contest are filed, the court will enter a discharge order declaring that all of the debts have been discharged (i.e. released, forgiven). At the same time the court issues the discharge order, it will also normally issue and order closing the case. The order closing the case is the last event that will occur in the case. Index