THINKING ABOUT FILING A CHAPTER 7 “LIQUIDATION” CONSUMER BANKRUPTCY?

Advantages of filing a Chapter 7 Bankruptcy

1. You receive a complete fresh start.  After the bankruptcy is discharged, all your nonsecured debts are gone.  The only debts you owe will be for secured assets on which you choose to sign a “Reaffirmation Agreement.”
2. You have immediate protection against creditor’s collection efforts and wage garnishment on the date of filing.
3. Wages you earn and property you acquire (except for inheritances and the result of executor contracts) after the bankruptcy filing date are yours, not the creditors or bankruptcy court.
4. There is no minimum amount of debt required.
5. Your case is often over and completely discharged in about 3-6 months.

Disadvantages of filing a Chapter 7 “Liquidation” Consumer Bankruptcy

1. Bankruptcy discharges debts, but not liens; only a “Reorganization” bankruptcy such as Chapter 11 or 13 can handle liens by paying off the arrears and bringing the secured loans current.  However, you can file a Chapter 13 after the Chapter 7 is closed; this is called a “Chapter 20.”
2. If you want to keep a secured asset, such as a car or home, with equity, and it is not completely covered by your California bankruptcy exemptions, then Chapter 7 is not an option because the Chapter 7 Trustee can sell your property to pay off your creditors.
3. If facing foreclosure on your home, the automatic stay created by your Chapter 7 filing only serves as a temporary defense against foreclosure.
4. Co-signors of a loan can be stuck with your debt unless they also file for bankruptcy protection in a “joint petition.”
5. You can obtain a Chapter 7 bankruptcy discharge only once every eight years.

6-8 Years Before Filing a Chapter 7 Bankruptcy

• If you filed a prior Chapter 7 and received a discharge within the previous eight years  before filing, then you are ineligible for another Chapter 7 discharge.
• If you filed a prior Chapter 12 or 13 bankruptcy and received a Chapter 13 (or Chapter 12) discharge in a case filed within the previous six years, you may still be eligible for a Chapter 7 discharge generally if, in the prior case, you paid at least 70 percent of your allowed unsecured claims and your Chapter 13 Plan was a best effort good faith proposal.

1 Year Before Filing

• If you had one prior bankruptcy case open during the year before filing another bankruptcy, the Automatic Stay of the new bankruptcy case will be terminated 30 days after filing your new case unless you file and win a motion during the 30 pay period showing that your new case was filed in good faith.
• If you had two or more prior bankruptcy cases open during the year before filing another bankruptcy, there will be no Automatic Stay in the new case until you can demonstrate that your new case was filed in good faith by filing a motion to impose the stay and then winning that motion in court within 30 days of filing the new case.
• If you transferred, hid, or destroyed property during the year prior to filing, the court may deny your Chapter 7 discharge and could allow your creditors to recover the transferred property.  11 U.S.C. § 548(a)(1) (Fraudulent Transfer).
• If one of your creditors is an “insider” (a relative or close business associate), and you paid him or her back at any time during the year prior to filing, the payment may be deemed a “preference” and the court may recover all such payments and distribute them to your other creditors. 11 U.S.C. § 547(b)(4)(B) (Insider Preference).

180 Days Before Filing

• You must complete a credit counseling course – which explains financial management, alternatives to bankruptcy, and how to do a budget analysis – and receive a “CCC” (Credit Counseling Certificate) from an approved nonprofit budget and credit counseling agency any time in the six months prior to filing your new case. 11 U.S.C. § 109(h) (Credit Counseling Requirement).
• If you had a prior bankruptcy case that was dismissed because you failed to obey court orders or you voluntarily requested a dismissal, then in some circumstances you may not file a new bankruptcy case for another 180 days.

90 Days Before Filing

• You must be a resident of the state in which you intend to file your bankruptcy case for at least 90 days before filing.  If you have not lived in the state in which you intend to file your case for at least 90 days, you may only file your case in the state where you have resided, or which has been the location of your principal assets, for a majority of the prior 180 days. 28 USC § 1408 (Residency Requirement).
• If you paid back any of your creditors, even one who is not an “insider,” within 90 days of filing your bankruptcy case, the payment(s) may be considered a “preference” and the court could recover all such payments and distribute them to your other creditors. 11 U.S.C. § 547(b)(4)(B) (Non-Insider Preference).
• If you incurred new credit of $500 or more for “luxury goods or services” within 90 days of filing your case, or if you obtain a cash advance of at least $750 within 70 days before your bankruptcy, the debt is presumed to be non-dischargeable. 11 U.S.C. § 523(a)(2)(C) (Luxury Goods, Cash Advances).

• Your case is formally opened when you file your bankruptcy petition with the appropriate bankruptcy court.  The court will send a notice of your case to all of the creditors listed in your petition.  (One reason why you want to include all your creditors.)
• In most cases – see above for exceptions – the court will immediately enter an “Automatic Stay” order prohibiting your creditors from taking or continuing any collection or legal action against you.  This means no more harassing letters or phone calls for as long as the automatic stay remains in effect, and the bankruptcy automatic stay is the only thing guaranteed to stop a foreclosure sale or eviction.  The automatic stay in a Chapter 7 case can last from as little as one month to as long as the duration of the case (usually between 3 to 6 months), depending on what your creditors do. 11 U.S.C. § 362
• Next, the bankruptcy court will assign a bankruptcy trustee to oversee your case.  The trustee is appointed by the court to make sure you are eligible for bankruptcy and to monitor your case.  The trustee will review your petition, make sure that it is complete, and then schedule the “meeting of [your] creditors” (341a Hearing).

15 Days After Filing

• If you did not file all the required “schedules” when you filed your petition, you have 15 days to file the remaining schedules.  Your case may be dismissed upon Motion of the Trustee if all the Schedules, financial statement, and 60 days of paystubs are not filed within 15 days of the filing date. 11 U.S.C. § 707(a)(3) (15 day deadline).
• Within approximately 15 days after you file your case, the court will mail the Notice of Commencement of Case to you and to all of the creditors listed in your petition.  This notice will inform you of the date set by the court for the Meeting of Creditors, and the deadlines for your creditors to object to your case and file their claims against you.

Approximately 30 Days After Filing

• Within 30 days after you file your case, or before the meeting of your creditors if that occurs first, you are required to file a Statement of Intention.  A copy of your Statement of Intention must be served on the bankruptcy trustee and your creditors at the time you file it with the court.  In this document, you advise the court whether you intend to keep the “secured” property that serves as collateral for your debts, or whether you intend to “surrender” it to your creditors.  If you intend to keep the property, you must indicate your intention to: (1) “reaffirm” your debts and continue making all of your payments on those debts; or (2) “redeem” the property by paying the fair market value for it, in which case you will receive a discharge of debt owed over the fair market value of the item. 11 U.S.C. § 362(h)(1)

45 days After Your Statement of Intention is Filed

• You have 45 days after your Statement of Intention is filed to surrender or keep your property as you had indicated in your Statement and make all necessary payments, if any. 11 U.S.C. § 521(a)(6)

Approximately 3 to 6 Weeks After Filing

• The Meeting of Creditors (341a Hearing) will occur about three to six weeks after your bankruptcy case is filed.  At least seven days before this meeting, you are required to provide to the trustee and any creditor requesting it a copy of your most recently filed federal tax return.  If you were granted an extension to file, or were not required to file a tax return, you must indicate this. 11 U.S.C. § 521(e)(2)(A) (Filing of Tax Return).
• At the 341a Hearing, which you are required to attend, you will be asked by the Chapter 7 Trustee to testify under oath as to the accuracy of the statements in your petition.  Although it is called the “Meeting of Creditors,” creditors rarely appear.  The meeting is very informal, and in most cases the hearing will last no more than 10 minutes.  If you do not attend this hearing, your case will be dismissed.  Occasionally, the hearing is “continued” and you must appear again at a later date. 11 U.S.C. § 341
• Within 45 days after you file your petition, you must file a statement containing a certificate from your attorney that you received an explanation of the various chapters available to you under the bankruptcy code, evidence of any payments you’ve received from any employer within 60 days of your filing, an itemized statement of your monthly income, and an estimate of any increase income or expenditures you expect over the next 12 months.

30 Days After The 341a Hearing

• The bankruptcy trustee and your creditors have 30 days after the conclusion of the Meeting of Creditors in which to make objections to your exemptions.

45 Days After The 341a Hearing

• You must complete a Financial Management course and receive a “FMC” from an approved nonprofit budget and credit counseling agency.  You will not receive a discharge of any debts if you do not file the FMC. 11 U.S.C. § 727(a)(11) (Financial Management Course).
• You must act on your Statement of Intention within 45 days of the 341(a) meeting, entering into an agreement with the creditor(s) or redeeming the property. 11 U.S.C. § 521(a)(6) (Acting on Intention).

60 Days After The 341a Hearing

• Your creditors have 60 days after the date first set for the Meeting of Your Creditors to object to the discharge of any of the debts listed in your petition and schedules. 11 U.S.C. § 523(a)(2)
• The trustee must move to dismiss your case within this time period if he finds that the granting of relief would be an abuse of the provisions of Chapter 7.  11 U.S.C. § 727(a)
• Your creditors can object to your request to discharge a particular debt if the debt was obtained or incurred as a result of any of the following types of misconduct: fraud; embezzlement or larceny; and any willful or malicious injuries you have caused others; or a divorce or separation (Note:  debts for child support and spousal maintenance are never dischargeable).  Your creditors can also object to the discharge of all your debts if you have engaged in any of the following conduct: concealment or destruction of property or financial records; false statements; withholding information; failing to explain losses; failure to respond to material questions; or a discharge in a prior Chapter 12 or 13 case filed within the previous 6 years or a Chapter 7 case filed within the previous 8 years.
• You will receive your discharge as soon as the 60-day time period for objecting to discharge or moving to dismiss your case expires.  Even if you receive your discharge, the trustee may, however, move to set it aside if you do not turn over nonexempt property or if you commit other bankruptcy violations.

90 Days After The 341a Hearing

• All of your creditors (except for government entities) must file their proofs of claim (these are documents your creditors submit to the court specifying how much you owe them) within 90 days after the first date set for your 341a Hearing if they wish to share in the payments from your case if any assets are available for liquidation. Fed. R. Bankr. P. 3002(c)  Soon after this deadline passes, in most cases the Chapter 7 trustee will declare the case to be a “No Asset Case” and soon after that file a final report which will result in the discharge of your debts.

180 Days After Filing

• Government entities that have claims against you (such as the IRS) have 180 days after the filing of your case to submit their proofs of claim. Fed. R. Bankr. P. 3002(c)  (Remember that most of these debts are nondischargeable.)