While not technically correct, most people describe a chapter 7 bankruptcy case as a “straight bankruptcy.” This is where most individual consumer debtors choose to file. However, corporations, LLC’s, partnerships, and many other entities are all eligible to file chapter 7. A chapter 7 bankruptcy case usually lasts between four months and a year, but can take longer. The essential process is this:
- Upon the filing of the case, the automatic stay goes into effect. This puts a stop to any efforts by creditors to collect the debts you owe, including phone calls, letters, garnishments, liens, and other actions to enforce the obligation. (Note: There are many exceptions to the automatic stay, so be sure to check with qualified counsel.)
- A randomly selected chapter 7 bankruptcy trustee takes possession of all of the debtor’s property.
- The trustee allows the debtor to keep any exempt property. Usually, this will include one vehicle per person, a residential home, clothing, household furnishings, a limited amount of jewelry, certain retirement accounts, up to $7,500 of tools used in the debtor’s business, and more. (Note: Exemption laws are very complex, and frequently even very experienced lawyers cannot be certain about whether a particular asset may be exempt.)
- The trustee liquidates (sells or converts to cash) whatever is left. Common examples of non-exempt assets on the date of filing include cash, bank account balances, some portion of tax refund proceeds (that are received after filing), firearms, recreational vehicles, rental or vacation homes, and much more.
- The trustee uses the proceeds to pay creditors and takes a commission on the amount paid.
- The debtor receives a discharge of all dischargeable debts (many debts may not be dischargeable, such as student loans, most taxes, child support, and more). If you receive a discharge, the discharge will bar the future collection efforts of all debts subject to that discharge. The discharge is usually received about three to four months after the case is filed.
- The debtor exits bankruptcy and is no longer liable for any debt owed while in bankruptcy (only individual debtors are eligible to receive a discharge in chapter 7).
Many individuals considering bankruptcy believe that it is possible to exclude property or creditors of their own choosing from the bankruptcy case. This is absolutely incorrect. The documents that a debtor files with the bankruptcy court are signed under penalty of perjury. Excluding anything or failing to fully disclose the requested information can be grounds for denying a debtor’s discharge, meaning the debtor is stuck with the debt forever. More importantly, false information filed with the bankruptcy court can lead to federal criminal prosecution. These are very serious matters. Exemptions can be used to retain assets, but they must be disclosed. Additionally, debtors may agree to repay certain creditors (called a reaffirmation), but again, the creditors must be listed.
Another common misconception is that it may be best to dispose of assets prior to filing bankruptcy. Many times, debtors will liquidate exempt assets and use the proceeds to pay off debts to family members or make gifts to them. Unfortunately, in most such cases, the transfer can be recovered by the trustee for the benefit of all creditors. Ironically, if the debtor had simply kept the asset, they could have retained the exempt property through the bankruptcy process.
All of these comments are just generic anecdotes and are not offered to advise any particular course of action. The only advice offered here is to disclose everything to your lawyer and seek counsel before you choose to do anything. He or she can help you make the most of your situation, but only if they know all of the relevant facts.
William H. Zimmerman