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CHAPTER 7 BANKRUPTCY
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A How to Guide to Chapter 7 Bankruptcy in Chicago
Consider Reading About Bankruptcy Basics First
On the Bankruptcy Basics page I discuss the two main reasons why individuals file under the Bankruptcy Code, as well as the most important bankruptcy concept you need to know about. This includes:
- The Automatic Stay (how bankruptcy protects you from creditors)
- The Bankruptcy Discharge (how bankruptcy erases your debts)
- the Property of the Estate (the crucial bankruptcy concept about what happens to your property in bankruptcy)
The concept of the Property of the Estate is significantly important to chapter 7.
Chapter 7 Bankruptcy Overview
Chapter 7 is a liquidation of assets and the discharge of debts under federal law
Chapter 7 is a liquidation proceeding under federal law that you, as the debtor, can initiate in federal court.
A a court-appointed person called a chapter 7 trustee is appointed to your case whose role is to earn a commission by selling your unencumbered, unexempt, and valuable property (if you have any such property) for the benefit of your creditors.
In exchange, any remaining balances on most debts will be discharged (eliminated) and your creditors will be prohibited from collecting the discharged debts forever.
If you have unencumbered, unexempt, and valuable property that the trustee will liquidate and you don’t want to lose it, you should not file chapter 7. You can file a chapter 13 bankruptcy or not file a bankruptcy case at all.
chapter 7 liquidation
How Does Chapter 7 Liquidation Work?
Liquidation is the process of quickly converting any of your assets that become the property of the bankruptcy estate when you file your case into cash.
A good way to think about a chapter 7 liquidation is to picture a complete stranger stepping into your shoes and inheriting all your property with the sole purpose of selling it to earn a hefty commission and to pay what’s left to your creditors.
NOTE. If you haven’t done so already, you should read about the property of the bankruptcy estate — probably the most important thing you need to know about chapter 7 bankruptcy — prior to continuing.
The person who conducts the liquidation is called the chapter 7 trustee. And the liquidation is supervised by the bankruptcy judge.
In addition to earning a commission from the liquidation sale, the trustee may also earn fees by employing himself for any legal work. As you can see, liquidating your property can be very lucrative and gives the trustee a tremendous economic incentive to take and sell your stuff.
There are no nice guys in this proceeding. The trustee or the judge will not care if you are an old lady. They won’t care if your house is your only place to live, or that you need your car to drive to work. This is because the trustee and the judge must execute the provisions of Chapter 7 of the Bankruptcy Code.
With that said, most people who file chapter 7 do not lose any of their stuff.
This is because most people don’t own any valuable assets worth liquidating, the assets are not yet paid off, or the assets are exempt from the bankruptcy estate.
The bottom line is this: when proceeding under chapter 7, working with an experienced and competent bankruptcy attorney is a must because the consequences can be severe.
What gets liquidated in your chapter 7 bankruptcy case?
The property that can get liquidated in your chapter 7 is the property that is transferred to the bankruptcy estate when you file your case — which means pretty much all of your property.
Practically speaking, the chapter 7 trustee will only liquidate an asset that can be sold at a profit after deducting encumbrances, exemptions, and the costs of liquidation.
Furthermore, according to United States Trustee guidance, before proceeding with a liquidation, the trustee should anticipate a meaningful distribution to your unsecured creditors.
In other words, the sale has to make financial sense and should, at least somewhat, benefit your unsecured creditors.
However, chapter 7 trustees come in all shapes and sizes and different temperaments.
In Cook County alone there are nearly 30 trustees, any one of which can be randomly be appointed to your case.
The more aggressive trustees may disregard U.S. Trustee guidance and liquidate your asset(s) as long as there is some profit to be made.
Accordingly, if you don’t want to lose any of your assets, you must carefully analyze all your property interests prior to filing your chapter 7 bankruptcy case.
The analysis is called a “hypothetical liquidation.”
The “hypothetical liquidation” analysis
The hypothetical liquidation analysis is the process of calculating the liquidation value of the bankruptcy estate.
This includes accounting for the fair market value of the assets, encumbrances, costs of liquidation, exemptions, your past financial and property transactions, and the trustee’s powers under the Bankruptcy Code.
If the analysis tells us that the trustee is unlikely to net a profit from selling your assets and from undoing certain transactions (to recover assets and money), you can proceed with the chapter 7 (provided you are otherwise eligible) without being concerned about losing your stuff.
On the other hand, if the analysis tells us that the trustee is likely to net a profit (particularly if the profit will yield a meaningful distribution to your creditors) you should prepare for the risk of losing your asset(s) or not file chapter 7 at all and proceed under chapter 13.
chapter 7 discharge
How the Chapter 7 Discharge Works
The chapter 7 discharge eliminates most debts
NOTE. If you haven’t done so already, you should read about the bankruptcy discharge prior to continuing.
In exchange (and this is the deal) for the liquidation of your assets any unpaid balances that remain owing to most of your creditors will be eliminated when the bankruptcy judge enters the discharge order.
Keep in mind that most people don’t lose any property to liquidation at all. They do, however, get their discharge.
This is why for the vast majority of individuals who file chapter 7 bankruptcy, chapter 7 really is the light at the end of the tunnel.
The chapter 7 discharge will wipe out most, if not all, of your debts.
Accordingly, it’ll be easier to tell you about the debts that will not be discharged in chapter 7. These debts are referred to as “nondischargeable” debts.
Common debts the chapter 7 discharge will not eliminate
Congress decided that some debts should not be discharged under chapter 7 for various public policy reasons.
Here’s a list of the most common debts the chapter 7 discharge WILL NOT eliminate:
- child support and other domestic support obligations
- recent unpaid taxes, late filed or never filed taxes, and payroll taxes (i.e. trust fund taxes)
- parking tickets and other civil government fines (although starting in 2019 the City of Chicago has agreed to waive tickets that are 3 years or older if you receive a chapter 7 discharge)
- criminal fines and restitution
- damage to property or person arising from operating a motor vehicle while under influence of alcohol or drugs
- any debts incurred after your chapter 7 case is filed
Student loans can be discharged in chapter 7 but only if you meet a certain standard of financial hardship
Student loans can be discharged in chapter 7, BUT: (1) not automatically like your other debts and (2) with a lot, a lot, of difficulty.
A lot of difficulty because to discharge student loans in bankruptcy, you have to file a lawsuit (called an “adversary proceeding” in bankruptcy lingo) against your student loan lenders inside your chapter 7 case.
In that lawsuit, you must present evidence to convince the bankruptcy judge you meet a certain standard of financial hardship referred to as “undue hardship.”
This standard is very difficult to meet.
Additionally, the student loan lenders — especially the federal government (i.e. Dept. of Education ) if you have federal loans — will hire attorneys to vigorously defend the lawsuit.
Even if you win in bankruptcy court by convincing the bankruptcy judge that you meet the undue hardship standard and your student loans should be discharged, the government (and private lenders) will usually try to get the ruling overturned by appealing to a higher court. The appeal will add even more time and expense to the adversary proceeding.
So the bottom line is this: it’s possible to discharge your student loans but it is not automatic and can be difficult and time consuming to do so — even if you have a compelling case of hardship because the lender will vigorously fight against you.
The Basic Chicago Chapter 7 Case From Filing to Discharge
This is an example of how a simple chapter 7 case should generally progress in the Bankruptcy Court for the Northern District of Illinois
For most well-advised and well-represented individuals, the process should be relatively free of surprises and should last no more than 4 months.
You File Your Chapter 7: The Relief Begins
The moment you file your chapter 7 case with the bankruptcy court federal law goes into effect with the following consequences:
- the bankruptcy estate is created and your property is legally transferred to the estate
- the automatic stay starts and stops lawsuits and collections actions
- a chapter 7 trustee is appointed to your case and the trustee meeting is scheduled
- your bankruptcy petition becomes available to your creditors, the trustee, the United States Trustee, and the public for review
The bankruptcy court sends out notices to your creditors (by law you have to include everyone you owe money to).
Many large creditors (credit cards, major banks, etc.) will receive notice of your bankruptcy case electronically within 24 hours.
The credit reporting agencies will also pick-up your bankruptcy within 24 to 48 hours and your case will show up on your credit reports.
Other creditors will receive notice within 7 to 10 days by mail.
The court will also mail you the same notice.
The notice contains your case number, your name and address, your attorney’s information, the trustee’s information, the date of filing, some deadlines, as well as the date, time and location of the trustee meeting.
You Attend the Trustee Meeting
The next step in the process (for you) is the trustee meeting.
By this time, my office would have already provided certain income and tax information to the trustee. And the trustee, the U.S. Trustee, and your creditors would likely have reviewed your bankruptcy petition.
Everyone filing under chapter 7 has to attend a meeting with the chapter 7 trustee.
This meeting is commonly referred to as the “trustee meeting,” the “341 meeting,” the “meeting of creditors,” or simply the “341.”
Moving forward we will refer to it as the “341.”
The 341 usually takes place within three to four weeks from the date of the bankruptcy filing.
The 341 is the first opportunity for the trustee and any creditors that decide to attend to question you under oath.
Your attorney will attend the meeting with you. (Please be aware that many attorneys do not attend this meeting and instead pay another attorney to attend this meeting with you — sometimes without your approval or knowledge.) Absent serious conflicts, I always attend this meeting with my clients because I understand that the 341 can be a stressful part of the process and you should have your attorney with you.
If you don’t attend, your case may be scrutinized by the trustee and United States Trustee or/and it may get dismissed.
The trustee meeting gives the chapter 7 trustee and any creditors that attend the opportunity to examine you under oath about anything relevant to your chapter 7 case (i.e. assets, debts, income, expenses, financial transactions, etc.).
The purpose of the meeting is to help ensure the integrity of the bankruptcy system by creating a record of your testimony (the trustee records the meeting).
Another purpose is to give the other interested parties (trustee, creditors, and U.S. Trustee) an opportunity to ask questions about the disclosures in your petition, to obtain additional information about your situation, circumstances, assets, transactions, etc. so that each party can make well-informed decisions about the case.
In most cases, creditors do not attend the meeting.
In most no-asset cases (cases where the trustee will not liquidate any assets), with truthful and complete disclosures, the trustee will conclude the meeting and you will have satisfied this requirement.
On the other hand, if the trustee finds some discrepancies in your disclosures and testimony or potential assets or transactions he or she may want to investigate further, the trustee may continue the meeting to a later date.
The meeting itself may be as short as a few minutes or as long as 15 to 20 minutes.
The 60-Day Period and Tasks
Parties complete tasks, make decisions, file motions and objections
There is a 60-day waiting period between your initial trustee meeting and your discharge.
This is a mandatory time period during which parties (including yourself as the debtor) can complete tasks, make certain decisions, and file motions and objections.
The 60-day period can be extended for a valid reason, but it cannot be shortened.
Generally, absent some fraud, when this period expires, the parties will no longer be able to object to your entire discharge or object to the dischargeability of a particular debt.
The debtor’s (your) tasks
In the typical no-asset chapter 7 bankruptcy case, the debtor (you) will have to complete the following tasks (if applicable) during the 60-day period:
The second credit counseling course is called the debtor education course or the financial management course.
This online course is longer than the first course you took prior to filing your case.
It is a mandatory requirement.
If you don’t complete the course and file the certificate of completion with the court, the court will close your case without a discharge.
A reaffirmation agreement is an agreement with your secured creditor (usually a car loan or mortgage) through which you agree not to discharge the debt in your chapter 7.
In turn, your creditor agrees to the original terms of the agreement or to a set of renegotiated terms (depending on your situation).
Debtors enter into reaffirmation agreements when they want to continue to make payments to a creditor to keep property (the “collateral”) that secures the loan they took out to purchase that property — usually a vehicle.
Sometimes, debtors will also enter into a reaffirmation agreement with their home lender.
Executing a reaffirmation agreement may help ensure the creditor continues to report your payment history to credit reporting agencies because by reaffirming you remain responsible for the debt.
Just remember this: if you execute a reaffirmation agreement your debt will not get discharged in your chapter 7.
And if you default on the debt in the future, the creditor will be able to go after you for the unpaid debt regardless of your chapter 7 discharge.
Therefore, you need to consider the decision to reaffirm a debt very carefully as it may jeopardize your fresh start.
You can eliminate certain liens creditors have on your property.
Typically, debtors avoid judgment liens.
These are liens creditors obtain by winning lawsuits in court. The then attach these liens to your home.
If you meet certain requirements (not discussed here) you can eliminate (“avoid”) the lien(s) in your chapter 7.
The chapter 7 trustee’s tasks
The chapter 7 trustee’s main task during the 60-day period after the initial trustee meeting is to determine if you have any assets worth liquidating.
The trustee will then file an “asset report” if he decides you may have assets he wants to liquidate, or a “no-asset report” if he decides you have nothing worth liquidating.
Prior to filing the report, the trustee may decide to use the 60-day period to take a more thorough look into your financial matters.
The investigation may be triggered by your disclosures in the bankruptcy petition, by your answers and conduct at the trustee meeting, the trustee’s own review of public records, communications with your creditors, etc.
During the investigation, the trustee may request you to provide documents, additional information, and he may even depose you or others.
The trustee has the power — and my even have the obligation — to object to your discharge or refer your matter to the U.S. Trustee.
The objection to discharge comes into play when there is some foul play by the debtor (the person filing the chapter 7).
The foul play usually involves hiding of assets and the false disclosures that are organic to the scheme to conceal.
The creditors’ tasks
In most chapter 7 cases creditors do nothing. But there are, of course, exceptions.
The most common exceptions are:
- the trustee files an asset report and the creditors must file claims
- there is some kind of fraud involved when incurring the debt
- the creditor is an individual or a small private entity
When creditors participate, unless the creditor is an individual, they will retain attorneys and file motions and may conduct investigations into the debtor’s affairs by making document production requests and taking depositions.
The creditor can then object to the dischargeability of the debt or to the entire discharge.
The creditor may also work with the trustee (even subsidize the trustee’s expenses and fees) if the trustee is willing to participate.
The United States Trustee’s tasks
The U.S. Trustee (UST) will review your case for eligibility, i.e. bankruptcy abuse and for bankruptcy fraud.
According to the UST, every chapter 7 case is reviewed.
Above median cases are scrutinized.
The UST will review your case for consistency in disclosures, reasonableness of expenses, history of income, amount of debt and how quickly it was incurred, and so forth.
The UST may also attend the trustee meeting to listen in or ask you questions.
The UST is yet another party who may initiate an investigation into your affairs by making document requests and conducting depositions.
Finally, the UST has the power to object to your discharge, to request dismissal of your case, and to make referrals to the U.S. attorney for criminal prosecution of bankruptcy fraud.
The Discharge Is Entered
Once the 60-day period expires and all parties have completed their tasks and there are no extensions to the 60-day period or any objections, the court will enter the discharge order.
One the court enters the discharge order the automatic stay will terminate because it is no longer needed.
The stay is not needed because the discharge order permanently prohibits creditors from collecting discharged debts.
A copy of the discharge order will be sent to you and your creditors.
The credit reporting agencies will also pick-up the discharge and your credit file will be updated.
The discharge order is like any other court judgment and will show up under the public records section of your credit report.
A notation of “discharged in chapter 7” or “chapter 7 discharge” or something similar will also attach to each creditor’s tradeline on your credit report.
Finally, you will not be eligible for another chapter 7 discharge for 8 years from the date of filing of your case. And you will not be eligible for a chapter 13 discharge for 4 years from the date of filing.
A few days after you receive your discharge, your case will be closed.
The entire process took about 4 months.
Are You Eligible? Keys to Determining Eligibility for Chapter 7
You must pass 3 tests to become eligible for chapter 7
The first test is the “means test.” The second is the “totality of the circumstances” test. And the third is the “good faith” test.
If you fail any of these tests, you will need to convert your case to chapter 13 or your case will be dismissed.
The Means Test
The means test is the gateway to chapter 7.
It’s a mechanical formula that considers your household income, statutory expenses, and some actual expenses.
You have to take the Means Test if your income is above the median income for your household. If your household income is below the median income for your household size, you don’t have to take the Means Test and can proceed under chapter 7 if you pass the other 2 tests, discussed below.
The median income is adjusted periodically. Refer to the table below for the most recent median income figures:
The Totality of Circumstances Test
You have to pass the totality of circumstances test even if you pass the means test.
Whereas the means test is a mechanical formula solely based on numbers (your income and expenses), the totality test considers your entire situation to determine if you, in the practical sense, truly cannot pay back your debts.
Although the test considers your situation as a whole, the emphasis is really on expenses.
Because under the Bankruptcy Code, to qualify for relief, your expenses have to be reasonable and necessary.
This means you can’t spend your income on discretionary or luxury items when seeking relief under the Bankruptcy Code.
You should be using that income to pay back your creditors.
The Good Faith Test
This test considers your intent in seeking chapter 7 relief.
The question is are you filing chapter 7 for the right reasons and not for any improper purpose.
This test is rarely the basis for dismissal of a chapter 7 case.