What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is the most common form of bankruptcy and is frequently referred to as “liquidation.” Under liquidation, non-exempt property of the bankruptcy estate can be sold by a bankruptcy trustee to partially or fully satisfy creditors. Following the distribution of assets to creditors, most debts are discharged, or wiped clean. Richard A. Sadoff, Attorney at Law, has helped thousands of Kentucky residents in Kenton, Campbell and Boone Counties get a fresh financial start.

What is the process to declare bankruptcy under Chapter 7?

Most bankruptcies begin with incessant calls, letters or other correspondence from creditors demanding payment. Usually, in response to these calls, the debtor comes to our office seeking solutions to their financial problems. During the first consultation, you meet with the attorney who will represent you for 60 to 90 minutes. Thereafter, you work with a paralegal to complete an initial inventory of your debts and assets. Before filing for Chapter 7 bankruptcy, you verify the information one final time. While this may sound like an excessive number of steps, this process — developed over decades of practice — prevents problems and unnecessary delays with your bankruptcy filing.

To qualify for Chapter 7, you must pass the means test. The means test compares your average current monthly income (CMI) with the median income of a family of your size in your area. For instance, if you live in Covington, Newport, Fort Thomas or anywhere in the Northern Kentucky area, you would be compared with families who also live in your area. If your income is less than the median, you pass the means test. If not, a more complex calculation to determine your monthly “disposable income” must be performed.

After your attorney files your bankruptcy petition, a trustee is appointed to oversee your case. A meeting is scheduled with your Chapter 7 Trustee, referred to as a “first meeting of creditors” or a “Section 341 meeting.” At this meeting, the trustee and creditors are entitled to ask you questions and raise objections to your plan. Following the meeting, the trustee may liquidate your non-exempt assets. However, in about 95% of cases there are no assets to sell because the assets are:

If assets are liquidated by your Trustee, the proceeds are distributed to your creditors according to a statutory priority scheme. This liquidation and distribution process does not affect the timing of getting your Discharge, which is usually granted 90 days after the bankruptcy filing unless an objection to such relief is made. A discharge is merely the legal way of saying certain debts are wiped clean.

How long does the liquidation process take?

The length of time it takes a Chapter 7 Trustee to complete the liquidation of assets is usually determined by the nature of the assets involved. Liquidating a bank account can occur in a matter of weeks, while obtaining a settlement or jury verdict on a personal injury case can take years. In any event, the bankruptcy case remains open until all assets are administered and the Trustee’s distribution to creditors is made, which is frequently years after debtor has been issued his Discharge.

Are there any debts that Chapter 7 does not take care of?

Chapter 7 is a powerful means to get a fresh financial start, but it alone cannot assure your financial health. To begin with, there are certain debts that Chapter 7 does not discharge. These debts include:

Some debts are potentially not dischargeable if the affected creditor files a timely objection and prevails. Potentially non-dischargeable debts all involve some form of debtor misconduct, and include:

• Credit card abuse, which is the most common, and heavily litigated, issue.
• Actual fraud.
• Embezzlement from an employer, or larceny
• Infliction of willful and malicious injury to another person or his property.

If the affected creditor fails to take timely action, or takes timely action but does not prevail in Court, then this type of debt is discharged. Neither the Chapter 7 Trustee nor the US Trustee is authorized to object to the dischargeability of a particular debt. If the affected creditor does not exercise its rights, it loses them.

Denial of a Chapter 7 discharge

In certain circumstances a creditor, the Chapter 7 Trustee or the US Trustee can file a complaint seeking to deny a discharge of all debts. Such complaints are rare and must be filed in a narrow window of time. The grounds include:

• Transferring, removing or concealing assets in the year prior to filing, or after the filing.
• Failing to maintain adequate books and records—this can be critical in a business bankruptcy.
• Filing materially false or misleading bankruptcy papers.
• Testifying falsely under oath.
• Failing to satisfactorily explain any loss of assets.
• Failing to cooperate with the Chapter 7 Trustee’s liquidation efforts.
• Refusing to obey a Bankruptcy Court Order.

Dismissal of debtor’s Chapter 7 case

A creditor, the Chapter 7 Trustee or the US Trustee can ask the Court to dismiss a Chapter 7 case involving consumer (i.e. non-business) debt if the granting of a discharge would constitute an “abuse” of the bankruptcy process. The grounds for such a dismissal are:

• Failing to “pass” the Means Test
• The “totality of the circumstances” of the debtor’s financial situation demonstrates abuse. This comes into play when:
  • The debtor’s actual budget (as opposed to the Means Test “budget”) has considerable disposable income left over at the end of the month.
  • The debtor attempts to maintain a lavish lifestyle rather than paying his creditors, such as continuing to make large loan payments for expensive cars or boats.

Chapter 7 in perspective

Chapter 7 only takes care of an already existing debt problem. It does not contemplate nor attempt to fix the circumstances that led to the high debt burden. For example, after losing a job many people living with a high cost of living often rapidly accrue credit card debt. Chapter 7 bankruptcy can wipe away the credit card debt but it does not correct the imbalance between your income and expenses. You have to fix your own underlying problems.

Contact us today for knowledgeable guidance with Chapter 7 bankruptcy

Chapter 7 bankruptcy can wipe the slate clean so that you have a fresh financial start. Richard A. Sadoff has helped thousands of Kentucky residents in Campbell, Kenton, and Boone County restore their financial health. For your free consultation, please call us at (859) 261-6200 or contact us online today.