Chapter 7 is, in bankruptcy lingo, the "liquidation" chapter. In short, this means that all assets of the individual filer having a value in excess of the the allowed exemptions and liens will be sold and the proceeds paid over to the creditors. The individual filer's exemptions can be taken either in cash (up to the exemption cap for that kind of asset) or "in kind" (which means the asset itself if its value is no more than the exemption cap for that kind of asset). Most cases are "no asset," which means there is no value in excess of the allowed exemptions and liens and no assets are sold.

The duration for a Chapter 7 in the typical consumer case in the Western District of Pennsylvania (that is, the time from filing to discharge) is usually five to six months. The individual filer's first meeting of creditors (also called the Section 341 Meeting) will usually be held about 30 to 45 days after the case is filed. Attendance is mandatory (and the individual filers will need to have a satisfactory picture identification (such as a drivers license) and his or her social security card. All creditors receive notice of the meeting and can attend and question the individual filer about his financial condition and the bankruptcy (although most creditors do not attend). The meeting is conducted by a trustee who uses the meeting to, among other things, ask the individual filer questions about the Bankruptcy Paperwork, determine if the individual filer has any assets which exceed the amount of allowable exemptions and liens, determine whether there has been any transfers of assets that can be recovered for creditors, and ensure that the individual filers are eligible for a Chapter 7 discharge.

NOTE THAT IN ADDITION TO THE PRE-FILING CREDIT COUNSELING BRIEFING (DISCUSSED ON OUR FAQS PAGE) AN INDIVIDUAL FILER MUST ALSO COMPLETE A DEBTOR EDUCATION COURSE (AND FILE CERTIFICATION OF THE COMPLETION OF THE COURSE), WITHIN 45 DAYS AFTER THE FIRST DATE SCHEDULED FOR THE SECTION 341 MEETING. IF THE INDIVIDUAL FILER FAILS TO TAKE THE COURSE AND TIMELY FILE THE CERTIFICATION OF COMPLETION HE WILL NOT RECEIVE A DISCHARGE IN THE CASE. WE RECOMMEND THAT OUR CLIENTS TAKE THE COURSE AND PROVIDE US WITH CERTIFICATION OF COMPLETION BEFORE THE SECTION 341 MEETING. For a list of approved providers see Debtor Education Providers and scroll down to your district (in Pittsburgh its the Western District of Pennsylvania.

In the typical case, where there are no assets in excess of allowable exemptions and liens, the next milestone, after the Section 341 Meeting, is the deadline for creditors to file complaints to determine dischargeability or objections to discharge. The deadline is 60 days after the first date set for the Section 341 meeting. If that date passes without a complaint or objection (or a request that the deadline be extended), the discharge order should be entered (provided the individual filer has timely filed a certificate of completion of the debtor education course) and the case closed shortly thereafter.

If the case involves assets in excess of allowable exemptions and liens, the trustee will liquidate them and distribute the proceeds. The timing of the discharge should not be affected. However, if a complaint to determine dischargeability is filed, or there is an objection to discharge, or there is other "litigation" resulting from the case (including a motion to dismiss the case for any reason), relief from stay litigation, etc., the entry of the discharge order likely will be delayed.

Although there are no dollar limit eligibility requirements for Chapter 7 (provided, however, that where the debt is relatively small the individual filer might want to consider bankruptcy alternatives), a Chapter 7 is subject to dismissal if the Court finds that the case constitutes an "abuse." [See 11 U.S.C. Section 707(b)(1).] There are three different tests for abuse. The first is the "means test" (imposed by Section 707(b)(2)) in which an individual filer's income and expenses are compared to certain standards. If the filer's income or expense are over the standards his case is presumed to be an "abuse," and will be subject to a motion to dismiss absent special circumstances. The "means test" is designed to be objective. The other two tests - the "bad faith" and "totality of the circumstances" tests (imposed by Section 707(b)(3)) - require a Court to consider whether a filer could pay something to his creditors in a Chapter 13 based on his current and projected income and reasonable expenses, or whether he has done something to indicate lack of good faith either before or during his case. These second two tests are highly subjective.

For more information see Section 707(b) Eligibility Tests.

Reaffirmation and Liens / Leases

Bankruptcy does not avoid most liens (the exception being judicial liens and non-purchase money security interests if a motion to avoid is filed). If there are liens on, or leases for, property the individual filer wants to retain (usually his home and car), he will need to consider current income and expenses (i.e., can he truly afford the payments) and whether a reaffirmation agreement will be necessary and can be approved. For more information on liens and leases in bankruptcy and the reaffirmation of those debts, see Liens in Bankruptcy.

Note that while a individual filer may be willing to reaffirm, he has no right, under Chapter 7, to cure arrears. In a case where the individual filer is in arrears on debts secured by liens in property he wants to retain, or he has equity in property in excess of non-avoidable liens and exemptions, Chapter 13 should be considered.

Exceptions to Discharge

There are a number of exceptions to discharge for particular debts. These include debts resulting from or arising in the context of: fraudulent misrepresentations; willful and malicious conduct (such as intentional torts); embezzlement and breaches of fiduciary duty; student loans; "trust fund" tax liabilities and income taxes due within the the three years prior to the case filing (assuming the returns were timely filed); domestic support obligations (including alimony, child support, and equitable distribution/property settlement obligations); fines and penalties (including those arising out of a criminal conviction); and for damages for death or personal injury arising out of the operation of a vehicle under the influence of an intoxicating substance. The extent of non-dischargeable debts needs to be considered in deciding whether to file a Chapter 7.

In addition, there are a number of grounds for denying discharge generally. These include: transferring, removing or concealing property within a year of the bankruptcy filing or after the case is filed, with the intent to hinder, delay, or defraud a creditor or the trustee; concealing, destroying, falsifying or failing to preserve, any records from which financial condition or business transactions might be ascertained; knowingly and fraudulently, in or in connection with the case, making a false oath or withholding any records related to property or financial affairs; failing to satisfactorily explain any loss of assets; and refusing to obey any lawful order of the court.

Affect of Bankruptcy on your personally owned business

If the individual filer has a wholly owned business (whether it is operated as a proprietorship or a corporation), that business (including the business's "good will") becomes an asset of the bankruptcy estate. The filer's interest in the business (or the business's assets) is subject to being sold (just like any other non-exempt asset). If you have a business you want to continue to operate after bankruptcy you need to make sure you will be able to do so before the case is filed. In many cases, where there is an ongoing business (with non-exempt assets), Chapter 13 will be indicated.

Affect of Bankruptcy on recent payments or transfers

Payments and other property transfers (either to prefer certain of creditors (such as insiders)) or as an attempt to keep the property out of the hands of creditors or trustee, may be avoidable and subject to recovery by the trustee. In addition, the fact that the transfers were made may result in the individual filer being denied a discharge (and if not disclosed, potentially result in a referral for a criminal investigation).

Affect of Bankruptcy on persons liable with the individual filer on the debts

Unlike Chapter 13 which imposes a stay on collection actions against persons liable with a individual filer on consumer debts (such as co-signers), there is no stay on creditors suing co-signers where the primary obligor files Chapter 7, provided further, however, that the co-debtor stay in Chapter 13 will only remain in affect if the individual filer is going to pay the co-signed debt in full. An individual filer should be recognize that a lawsuit against any persons liable with him on any of his debts is a likely result of bankruptcy filing.

Dismissing or converting a Chapter 7 case

On occasion a individual filer may decide, after the case was filed, to have it dismissed or converted to Chapter 11, 12 or 13. There is, however, no automatic right of either dismissal or conversion in Chapter 7. If the reason for the conversion is post-petition arrears on a mortgage or car loan (and the conversion is sought to give the filer time to cure), or the filer got an unanticipated raise or is realizing a recovery that will allow creditors to be paid in full (and the Court is satisfied the payments will be made), the request for conversion or dismissal may be granted. If, on the other hand, the request raises some question of good faith (such as being made after the trustee discovers undisclosed assets or that the disclosed assets are worth more than what the debtor said), the request is likely to be denied.

Short year tax election

Under IRC § 1398 an individual in Chapters 7 or 11 can elect to bifurcate their tax year for the year of the bankruptcy filing into that part which preceded the filing and that part which follows the filing. To the extent that an individual takes the election, those taxes accrued for the first half of the year (i.e., that which accrued on and before the day before the bankruptcy filing) will be priority taxes in the bankruptcy estate. That which accrues on the day of the bankruptcy, and thereafter, as the result of income earned by the individual filer or the liquidation of nonestate assets, will be the responsibility of the individual. If the individual does not take the election, then all taxes incurred during the year of the filing will be the responsibility of the individual (not of the bankruptcy estate).

The election may not be made by a individual filer who has only exempt assets. IRC § 1398(d)(2)(c). The election must be made on or before the due date for filing the return for the "short year", which typically is the 15th day of the fourth full month following the day before the bankruptcy filing. Once made, the election is irrevocable. On the other hand, if the deadline is missed, the ability to take the election is lost. Accordingly, timing is critical.