Chapter 7 Bankruptcy Protection (Liquidation)

Entering Chapter 7, bankruptcy protection does not involve a repayment plan, like in chapter 13. Instead, the bankruptcy trustee gathers and sells your nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) following the provisions of the Bankruptcy Code. Bankruptcy Code allows you to keep certain “exempt” property. Chapter 7 bankruptcy protection might be your best option if you are unable to make minimum payments on credit cards, personal loans, or debts that never seem to go down, and creditors and collectors are hounding you.
  1. Alternatives to Chapter 7 Bankruptcy
  2. Chapter 7 Bankruptcy Background
  3. Chapter 7 Eligibility
  4. How Chapter 7 Bankruptcy Works
  5. Bankruptcy Courts Charges and Filing Fees
  6. Role of the Bankruptcy Case Trustee
  7. Chapter 7 Discharge
  8. Reaffirmation Agreement Forms
  9. Special Notes
  10. State Bankruptcy Courts (List with links to website)

Up |1. Alternatives to Chapter 7 Bankruptcy

There are several alternatives to chapter 7 relief. For example, if you’re engaged in business, including a corporation, partnership, or sole proprietorship, you may prefer to remain in business and avoid liquidation.

If this is your situation, consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, you may seek an adjustment of debts by reducing the debt or by extending the time for repayment, or you may seek a more comprehensive reorganization. Sole proprietorship may also be eligible for relief under chapter 13 of the Bankruptcy Code.

Also, if you have regular income may seek an adjustment of debts under chapter 13 of the Bankruptcy Code. A particular advantage of chapter 13 is that it provides you the opportunity to save your home from foreclosure by allowing you to “catch up” past due payments through a payment plan. Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of chapter 7. 11 U.S.C. § 707(b).

If your “current monthly income” is more than the state median, the Bankruptcy Code requires application of a “means test” to determine whether the chapter 7 filing is presumptively abusive. Abuse is presumed if your aggregate current monthly income over five years, net of certain statutorily allowed expenses, is more than:

(i) $11,725 or

(ii) 25% of your nonpriority unsecured debt, as long as that amount is at least $7,025.2

You may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless you overcome the presumption of abuse, the court will convert your case to chapter 13 (with your consent), or dismiss your case. 11U.S.C. § 707(b)(1).

Finally, out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.

Up | 2. Chapter 7 Bankruptcy Background

A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells your nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code.

Part of your property may be subject to liens and mortgages that pledge the property to other creditors. Also, the Bankruptcy Code will allow you to keep certain “exempt” property; but a trustee will liquidate your remaining assets.

Bottom line: The filing of a petition under chapter 7 may result in the loss of property.

Up | 3. Chapter 7 Eligibility

To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b).

Subject to the means test described above for individual debtors, relief is available under chapter 7 irrespective of the amount you owe or whether you are solvent or insolvent.

An individual cannot file under chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to your willful failure to appear before the court or comply with orders of the court, or you voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e).

Also, no individual may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.

There are exceptions in emergencies or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling.

If you develop a debt management plan during credit counseling, you must file the plan with the court. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts.

In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. 11 U.S.C. § 727(a)(1). Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and the law prohibits the discharge of certain types of debts. Moreover, a bankruptcy discharge does not extinguish a lien on your property.

Up | 4. How Chapter 7 Bankruptcy Works

A chapter 7 case begins with you filing a petition with the bankruptcy court serving the area where you live or where your business is organized or has its principal place of business or principal assets. In addition to the petition, you must also file with the court:

    1. schedules of assets and liabilities
    2. schedule of current income and expenditures
    3. statement of financial affairs; and
    4. schedule of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007(b).

You must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not filed when the case began). 11 U.S.C. § 521.

Individual debtors with primarily consumer debts have additional document filing requirements. They must file:

    1. a certificate of credit counseling
    2. a copy of any debt repayment plan developed through credit counseling;
    3. evidence of payment from employers, if any, received 60 days before filing
    4. a statement of monthly net income
    5. any anticipated increase in income or expenses after filing
    6. a record of any interest in federal or state qualified education or tuition accounts

A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.

Official Bankruptcy Forms are not available from the court. They may be:

    1. Purchased at legal stationery stores or
    2. Downloaded FREE from my website: free-bankruptcy-forms

Up | 5. Bankruptcy Courts Charges and Filing Fees

Bankruptcy courts charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge (subject to change).

Normally, you pay the court clerk upon filing your bankruptcy petition. With the court’s permission, however, you may pay in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8.

The number of installments is limited to four, and you must make the final installment no later than 120 days after filing the petition. Fed. R. Bankr. P. 1006.

For cause shown, the court may extend the time of any installment, provided you pay the last installment not later than 180 days after filing the petition.

You may also pay the $39 administrative fee and the $15 trustee surcharge in installments. If you file a joint petition, the court charges only one filing fee, one administrative fee, and one trustee surcharge.

Failure to pay these fees may result in dismissal of the case. 11 U.S.C. § 707(a).

If your income is less than 150% of the poverty level (as defined in the Bankruptcy Code) and you are unable to pay the chapter 7 fees even in installments, the court may waive the fees 28 U.S.C. § 1930(f).

To complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, you must provide the following information:

    1. list of all creditors and the amount and nature of their claims
    2. The source, amount, and frequency of your income;
    3. list of all of your property; and
    4. a detailed list of your monthly living expenses, (food, clothing, shelter, utilities, taxes, transportation, medicine, etc.)

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, you still need to provide the non-filing spouse’s income and expenses so that the court, the trustee and creditors can evaluate the household’s financial position.

Among the schedules that an individual debtor will file is a schedule of “exempt” property. The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or the laws of the debtor’s home state. 11 U.S.C. § 522(b).

Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its exemption law in place of the federal exemptions. In other jurisdictions, you have the option of choosing between a federal package of exemptions or the exemptions available under state law. Thus, whether certain property is exempt and is often a question of state law, always consult an attorney to determine the exemptions available in your state.

Filing a petition under chapter 7 provides an “automatic stay” that stops most collection actions against you and your property. 11 U.S.C. § 362. But filing the petition does not stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments.

The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. Between 21 and 40 days, after you file the petition, the case trustee (described below) will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the order for relief. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee puts you under oath, and both the trustee and creditors may ask questions.

You must attend the meeting and answer questions regarding your financial affairs and property. 11 U.S.C. § 343. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions.

Within 14 days of the creditors’ meeting, the U.S. trustee will report to the court whether the case should be presumed to be an abuse under the means test described in 11 U.S.C. § 704(b). You must cooperate with the trustee and provide any financial records or documents that the trustee requests. The Bankruptcy Code requires the trustee to ask you questions at the meeting of creditors to ensure that you are aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt.

Some trustees provide written information on these topics at or before the meeting to ensure you are fully aware of this information., The law prohibits bankruptcy judges from attending the meeting of creditors to preserve their independent judgment. 11 U.S.C. § 341(c). To accord you complete relief, the Bankruptcy Code allows you to convert a chapter 7 case to a case under chapter 11, 12 or 13 as long as you are eligible under the new chapter. However, a condition of this voluntary conversion is that you have not previously been converted to chapter 7 from another chapter. 11 U.S.C. § 706(a). Thus, you will not be permitted to convert the case repeatedly from one chapter to another.

Up | 6. Role of the Bankruptcy Case Trustee

When a chapter 7 petition is filed, the U.S. trustee (or the bankruptcy court in Alabama and North Carolina) appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets. 11 U.S.C. §§ 701, 704.

If all of your assets are exempt or subject to valid liens, the trustee will normally file a “no asset” report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases. But if the case appears to be an “asset” case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. Fed. R. Bankr. P. 3002(c). A governmental unit, however, has 180 days from the date you file your case to file a claim. 11 U.S.C. § 502(b)(9).

In the typical no asset chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim. Although a secured creditor does not need to file a proof of claim in a chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim. A creditor in a chapter 7 case who has a lien on the property should consult an attorney for advice.

Commencement of a bankruptcy case creates an “estate.” The estate technically becomes the temporary legal owner of all your property. It consists of all legal or equitable interests of your property as of the commencement of the case, including property owned or held by another person if you have an interest in the property.

Generally speaking, creditors get paid from nonexempt property of the estate. The primary role of a chapter 7 trustee in an asset case is to liquidate your nonexempt assets in a manner that maximizes the return to your unsecured creditors. The trustee accomplishes this by selling your property if it is free and clear of liens (as long as the property is not exempt) or if it is worth more than any security interest or lien attached to the property and any exemption that you hold in the property.

The trustee may also attempt to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to:

    1. set aside preferential transfers made to creditors within 90 days before the petition
    2. undo security interests and other pre-petition transfers of property that were not properly perfected under non-bankruptcy law at the time of the petition
    3. pursue non-bankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law

Also, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the business for a limited period, if such operation will benefit creditors and enhance the liquidation of the estate. 11 U.S.C. § 721. Section 726 of the Bankruptcy Code governs the distribution of the property of the estate. Under § 726, there are six classes of claims; and each class must be paid in full before the trustee pays the next lower class.

As the debtor, you receive payment only after the trustee has paid in full all other classes of claims. Accordingly, as the debtor, you are not particularly interested in the trustee’s disposition of the estate assets, except concerning the payment of those debts which, for some reason, are not dischargeable in the bankruptcy case. Your primary concerns in a chapter 7 case are 1) to retain exempt property and 2) to receive a discharge that covers as many debts as possible.

Up | 7. Chapter 7 Discharge

A discharge releases you from personal liability for most debts and prevents creditors owed those debts from taking any collection actions against you.

Because a chapter 7 discharge is subject to many exceptions, though, you should consult competent legal counsel before filing to discuss the scope of the discharge.

Generally, excluding dismissed or converted cases, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors. Fed. R. Bankr. P.4004(c).

The grounds for denying an individual debtor discharge in a chapter 7 case are narrow and construed against the moving party. Among other reasons, the court may deny you a discharge if it finds that you:

    1. failed to keep or produce adequate books or financial records
    2. failed to explain satisfactorily any loss of assets
    3. committed a bankruptcy crime such as perjury
    4. failed to obey a lawful order of the bankruptcy court
    5. fraudulently transferred, concealed, or destroyed property that would have become the property of the estate (Fraudulent Transfer Act)
    6. failed to complete an approved instructional course concerning financial management. 11 U.S.C. § 727; Fed.R. Bankr. P. 4005.

Secured creditors may retain some rights to seize property, securing an underlying debt even after discharge. Depending on individual circumstances, if you wish to keep the secured property (such as an automobile), you may decide to”reaffirm” the debt.

Up | 8. Reaffirmation Agreement Forms

Used to reaffirm loan and other credit agreements after filing bankruptcy.

    • Reaffirmation_Cover_Sheet(B27)
    • Motion_For_Approval of_Reaffirmation Agreement (B240B)
    • Reaffirmation Agreement Instructions (B240A)
    • ALT_Reaffirmation Agreement (B240AB)
    • Reaffirmation_Notes

Download the above forms at

A reaffirmation is an agreement between you and a creditor that you will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be charged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as you continue to pay the debt.

If you decide to reaffirm a debt, you must do so before the discharge is entered. You must sign a written reaffirmation agreement and file it with the court. 11 U.S.C.§ 524(c). The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in 11 U.S.C. § 524(k). Among other things, the disclosures must advise the debtor of the amount of debt you’re reaffirming, and how you calculated it and that reaffirmation means that you remain liable for the debt.

The disclosures also require you to sign and file a statement of your current income and expenses, which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement. Unless an attorney represents you, the bankruptcy judge must approve the reaffirmation agreement. If an attorney represents you in connection with the reaffirmation agreement, your attorney must certify in writing that he or she advised you of the legal effect and consequences of the agreement, including a default under the agreement. Your attorney must also certify that you were fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for you or your dependents. 11 U.S.C. § 524(k).

The Bankruptcy Code requires a reaffirmation hearing if an attorney does not represent you during the negotiating of the agreement or if the court disapproves of the reaffirmation agreement.11 U.S.C. § 524(d) and (m).

Note: Whether or not a reaffirmation agreement exists, you may repay any debt voluntarily, 11 U.S.C. § 524(f).

You will receive a discharge for most of your debts in a chapter 7 bankruptcy case. Upon approval of the discharge, creditors may no longer initiate or continue any legal or other action against you to collect a discharged debt.

Note: In chapter 7, some debts are not discharged to include:

      1. debts for alimony and child support
      2. certain taxes
      3. debts for certain educational benefit over-payments or loans made or guaranteed by a governmental unit
      4. debts for willful and malicious injury by you to another entity or the property of another entity
      5. debts for death or personal injury caused by your operation of a motor vehicle while intoxicated from alcohol or other substances
      6. debts for certain criminal restitution orders.11 U.S.C. § 523(a).

You continue to be liable for debts not paid in the chapter 7 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by you to another entity or the property of another entity will be discharged unless a creditor files and prevails to have such debts declared nondischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).

The court might revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U.S. trustee if the discharge was obtained through fraud on your part. If you acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee, or if you (without a satisfactory explanation) make a material misstatement or fail to provide documents or other information in connection with an audit of case. 11 U.S.C. § 727(d).

Up | 9. Special Notes

  1. The “current monthly income” received by you is a defined term in the Bankruptcy Code and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and including income from your spouse if the petition is a joint petition, but not including social security income or certain payments made because you are a victim of certain crimes. 11 U.S.C. § 101(10A).
  2. To determine whether a presumption of abuse arises, all individual debtors with primarily consumer debts who file a chapter 7 case must complete Official Bankruptcy Form B22A, entitled “Statement of Current Monthly Income and Means Test Calculation – For Use in Chapter 7.”
  3. Use this Official Bankruptcy Form B22A (Means Test) to see if you are eligible for chapter 7 protection. 
  4. Official Bankruptcy Forms are not available from the court. They may be: Purchased at legal stationery stores or Downloaded FREE from my website: free-bankruptcy-forms
  5. An involuntary chapter 7 case may be commenced under certain circumstances by a petition filed by creditors holding claims against the debtor. 11 U.S.C. § 303.
  6. Each debtor in a joint case (both husband and wife) can claim exemptions under the federal bankruptcy laws. 11 U.S.C. § 522(m).
  7. In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.S. trustees perform in the remaining 48 states. These duties include establishing a panel of private trustees to serve as trustees in chapter 7 cases and supervising the administration of cases and trustees in cases under chapters 7, 11, 12, and 13 of the Bankruptcy Code. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the Department of Justice administers the U.S. trustee program. For purposes of this publication, references to U.S. trustees are also applicable to bankruptcy administrators.
  8. A fee is charged for converting, on request of the debtor, a case under chapter 7 to a case under chapter 11. The fee charged is the difference between the filing fee for a chapter 7 and the filing fee for a chapter 11. 28 U.S.C. § 1930(a). Currently, the difference is $755. There is no fee for converting from chapter 7 to chapter 13.
  9. Unsecured debts generally may be defined as those for which the extension of credit was based purely upon an evaluation by the creditor of the debtor’s ability to pay, as opposed to secured debts, for which the extension of credit was based upon the creditor’s right to seize collateral on default, in addition to the debtor’s ability to pay.