Chapter 7 of the Title 11 of the United States Code (Bankruptcy Code) governs the process of liquidation under the bankruptcy laws of the United States. (In contrast, Chapters 11 and 13 govern the process of reorganization of a debtor in bankruptcy.) Chapter 7 is the most common form of bankruptcy in the United States.

For businesses
When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed almost immediately, with broad powers to examine the business’s financial affairs. The Trustee generally sells all the assets and distributes the proceeds to the creditors. This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.

Fully secured creditors, such as collateralized bondholders or mortgage lenders, have a legally enforceable right to the collateral securing their loans or to the equivalent value, a right which cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Only an individual can receive a Chapter 7 discharge (see 11 U.S.C. § 727(a)(1)). Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.

For individuals
Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 (“straight bankruptcy”, or liquidation). Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances.

In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, income taxes less than 3 years old and property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor. Spousal support is likewise not covered by a bankruptcy filing nor are property settlements through divorce. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.

A chapter 7 bankruptcy stays on an individual’s credit report for 10 years from the date of filing the chapter 7 petition. This contrasts with a chapter 13 bankruptcy, which stays on an individual’s credit report for 7 years from the date of filing the chapter 13 petition. This may make credit less available and/or terms less favorable, although high debt can have the same effect. That must be balanced against the removal of actual debt from the filer’s record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.

Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor’s Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.

It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings. Through these activities the U.S. Trustee has achieved a regulatory system that Congress and most creditor-friendly commentors have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.

Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized because by the time most debtors are ready to file for bankruptcy their credit score is already ruined. Also, new credit extended post-petition is not covered by the discharge, so creditors may offer new credit to the newly-bankrupt.

Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States.

Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities.

Chapter 13, Title 11, United States Code, more commonly known as Chapter 13, is a chapter of the U.S. Bankruptcy Code governing a form of bankruptcy in the United States.

Chapter 13 allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The Bankruptcy Code anticipates the goal of Chapter 13 as enabling income-receiving debtors a debtor rehabilitation provided they fulfill a court-approved plan. This is in contrast to the goals of Chapter 7 that offers immediate, complete relief of many oppressive debts. It is a form of debt consolidation.

Choice of chapter
An individual who is badly in debt can file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy), under Chapter 13 (reorganization), Chapter 12 (family farmer reorganization), or under Chapter 11.

Debtors may also be forced into bankruptcy by creditors in the case of an involuntary bankruptcy, but only under Chapters 7 or 11. However, in most instances the debtor may choose under which chapter to file. The debtor may also choose to convert to another chapter from a 7 or 11 when forced into an involuntary bankruptcy.

The debtor’s financial characteristics and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13, as he or she lacks the disposable income necessary to fund a viable Chapter 13 plan (see below). Furthermore, Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligible to file under Chapter 13 the debt limits for filing Chapter 13 of unsecured debts of less than $360,475.00 and secured debts of less than $1,081,400.00. These debt limits are subject to annual cost of living increases and represent values updated through April 1, 2010.

Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3- to 5-year period. This written plan details all of the transactions (and their durations) that will occur, and repayment according to the plan must begin within thirty to forty-five days after the case has started. During this period, his creditors cannot attempt to collect on the individual’s previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they are owed.

Who Is The Trustee When Filing Bankruptcy?

The trustee is appointed in your case by the United States Trustee. There is a group of trustee’s in this district, thirty some in Cook County and four or five in each of the other counties. Trustees are generally attorneys who practice bankruptcy and being a trustee is not their full time job. We have no control over who gets appointed.

The trustee’s job is to see if you have any property that could be a source for paying at least part of your debt. He/she does not come to your house except in extremely rare cases. We go to him/her at the date set for the meeting with the trustee. At that meeting the trustee will have a copy of your bankruptcy and he/she will ask you questions to verify the information contained in your bankruptcy especially concentrating on the assets we listed on your bankruptcy. This meeting usually lasts less than five minutes. If the trustee has any reason to suspect that any of the information is not correct or if he/she believes the values we put down are inaccurate he/she then could go or have an appraiser go to your house. That almost never happens. The great majority of the time the trustee concludes that you have no property that interests him/her and concludes the meeting.

What If I’m Unable To Meet On The Scheduled Date?

We can continue the meeting to a later date one time. The later date is usually about a month after the first date. We have no control over when that later date will be. You then must be at the later date. If you do not go on the second date the trustee will ask the Court to dismiss your case. Once the case is dismissed you are no longer protected from your creditors.

What If My Spouse Can’t Attend The Scheduled Meeting?

Presuming you both filed bankruptcy, the trustee wants to see both of you at the same time. So if one or the other of you can’t make it, then it will be continued to a later date for both of you to be there together. Once again if either or both of you don’t attend the next time the trustee can ask to have your case dismissed and you would then no longer be protected from your creditors.

Do I Need Proof Of My Social Security Number?

You will need to bring to the meeting a picture ID and something with your social security number. Your driver’s license or state ID and social security card or W-2 and sometimes other forms with your social security number are acceptable.

What Else Do I Need To Bring?

Nothing other than your ID and proof of social security. The trustee usually needs nothing from you. In some rare cases at the meeting the trustee could ask for some other documents like tax returns, appraisals, or insurance statements, but we can provide these things through the mail later if requested.

Will You Be At The Meeting With The Trustee?

Yes. This is part of my job. At times I may have a scheduling conflict of some kind and may not be there myself. I will hire another attorney at my expense to be there in my place. Any attorney I would hire would also be a bankruptcy attorney who I would inform about your case.

Does Anyone Else Attend The Meeting With The Trustee?

No, not usually. All creditors are invited to attend but they usually do not show. Once in a while creditors may show for the purpose of getting reaffirmations done at the meeting but even in those cases the creditor meets with you and I in the hall and they don’t normally actually sit in on the meeting itself.

How Long Does The Meeting With The Trustee Take?

The meeting itself usually takes only three to five minutes. It is quick. But the trustees schedule many meetings on the same day and several at the same time. So we may have to wait for quite some time before your meeting is actually called.

No, not usually. Presuming everything goes as planned you will never have to see a Judge.

But if there are objections or other complications in the case, it is possible that you will be required to appear before a Judge. This is quite rare. In Chapter 7 bankruptcy, the judge’s job is basically only to get involved when there are disputes or other problems with the case.

You will however have a meeting with a trustee which is discussed in another part below.

In Chapter 13 I will appear before a judge, but in the great majority of cases, you do not.

Yes. Presuming that your house or car does not have major equity and the trustee in your case is not interested in selling it, then you will be able to keep your house or car as long as you keep up to date with the payments and maintain your insurance. You will normally be required to reaffirm any debt secured by items you intend to keep. For more information about the trustee see the section on the trustee herebelow. For more information on reaffirmations see the section on reaffirmations below.

What if I decide not to keep my house?

It is your option to not keep the house if you do not want it.

If you decide not to keep your house then the mortgage lender will have to file a foreclosure. Foreclosure is a proceeding separate from your bankruptcy and I do not represent you in the foreclosure. You generally do not need representation in foreclosure when you are willing to let the house go and generally foreclosure is a long process that takes a minimum of seven months before the sheriff’s sale. Until the sheriff’s sale you can stay in your house without making the mortgage payments or real estate tax payments but I recommend that you maintain insurance and keep paying any association dues. The debt to the mortgage will be discharged and they will never be able to collect money from you.

What if I decide not to keep my car?

You may choose to give up your car. In this case you would not have to make payments but you are required to return the car to the lender usually within a month or so after we file. I recommend that you keep the insurance until the car is returned. After it is returned the lender will sell your car and usually give you notice of the sale. Sometimes the notice says you will be responsible for any deficiency if the car sells for an amount that is less than what is owed. That notice is a form notice and that statement is not true. Your debt to them will be discharged and they will never be allowed to collect any money from you.

You can keep your computer, wedding ring and furniture after filing bankruptcy.
Presuming that there is no great equity to these things and the trustee is not interested in them you will be able to keep them. If one of your debts is secured by any of these things then the same applies to these things as with a house or car. This is typical of things you purchased at electronics stores, appliance stores, jewelry stores and furniture stores when you use that store’s credit card. The difference is that you do not have to continue making payments on these things until after we reaffirm and these debts can sometimes be negotiated down in both amount owed and payment. This will be simply a matter of negotiation. If you used some other visa, MasterCard or other card, then this usually is NOT the case and you can keep the items without having to pay.

What if I decide not to keep them?

If the lender has a secured interest which is usually the case when you buy such items at electronics stores, appliance stores, jewelry stores and furniture stores, using that store’s card, then you will have to return the item to the lender. Either they will pick it up or ask you to return it to the store where you purchased it.

Yes. The bankruptcy laws require that when you file bankruptcy all debts you owe be listed on your bankruptcy and when you sign your bankruptcy, one of the things you sign includes an oath that you listed all of your debts. This includes even dischargeable debts like taxes, child support and student loans and this even includes debts you intend to keep paying like your house and car.

Do I list debts that I co-signed for a friend or relative when filing bankruptcy?
These should be listed too. If your friend/relative continues to pay the debt, they should have no problems. Not only should this debt be listed but the friend/relative should be listed too.

What if one of the debts on my bankruptcy was co-signed by a friend or relative?
Yes, this should be listed too. But keep in mind that just because you filed bankruptcy this does not get your friend off the hook. Even though it must be listed you can choose to pay it to protect the co-signer. If you choose not to pay it, the creditor can still collect the debt from the friend/relative. Your friend/relative should be listed too.

Do I need to list utilities when filing bankruptcy?
If you are behind with the phone, gas, electric, you should list this debt and it can be discharged. Listing the utility will prevent shut off of your service or if already shut off you can get service re-connected. The utility company can require a deposit to insure payment for future services. This is usually 1 to 2 times your average monthly bill.

Do I need to list rent to my landlord when filing bankruptcy?
If you intend to break a lease or if you are seriously past due with your landlord, it should be listed on your bankruptcy. You should keep in mind that if you intend to stay in the apartment/house you will have to pay everything owed to the landlord. If you do not intend to stay we can discharge the past due rent but you will have to get out of the apartment/house and you may be required to pay the landlord for the time you are in the apartment/house from the day we file your bankruptcy to the day you actually leave the apartment/house.

I have a checking and/or savings account at a bank that I also owe money to, can they take money out of my account?

Yes they can. I strongly advise in this situation that you close your account and open an account somewhere else at a bank that is not also a creditor.

Will any of my accounts be frozen?

No. Other than the situation described in the last question, your life goes on as normal after the bankruptcy is filed. Theoretically the trustee appointed in your case could freeze your account but that is almost unheard of. It is nothing to worry about.

You should be certain about filing bankruptcy, because once you file it is almost impossible to get out of a Chapter 7 bankruptcy.

If you find yourself wanting to get out, you should discuss this with me. Chapter 13 is much easier to terminate. In fact, it’s your right.

Technically a creditor can refuse to let you reaffirm, but this is very rare. As long as you are maintaining payments on a house or car and maintaining insurance they will almost always let you reaffirm.

Generally, reaffirming a debt that is not secured is no longer an option under the new bankruptcy laws.

I obtained a loan from a local loan company and they had me list my furniture and/or other household items I already owned. Is this a secured debt and will I have to return these items?

When you list household items you already owned as collateral for a loan, this is what we call a nonpurchase money security interest. I can usually void their lien and you can keep these items without having to pay for them.

You should refer all phone calls to me.

The normal letters and bills you are getting you can ignore at least initially. It takes some time for these creditors to receive notice and then get the information to the right department and get it out of their computer systems. We usually tolerate this kind of thing for the first month or two after filing. By the third month if you still are getting bills or letters, mail or fax them to me and I will take action to get them to stop.

If what you get in the mail is from an attorney or is a lawsuit or garnishment or something similar then bring it to me immediately so I can stop it.

In Chapter 7, they should be listed but they will not be discharged.

Chapter 13 is another story. In many cases fines can be discharged in Chapter 13.

Who will find out about my bankruptcy and is it published in the paper?

The only place I am aware that bankruptcy filings are published in the Chicago area is in the Chicago Daily Law Bulletin a paper generally subscribed to by lawyers. It is not published in any generally circulated paper that I am familiar with.

The exception may be for cases filed in Rockford where as I understand it, filings are published in the Rockford Register.

What debts do I continue to pay after filing bankruptcy?

You should continue to pay for your house and car presuming you want to keep these things.

So for your house you should continue to pay all mortgages or home equity loans and association dues and real estate taxes and insurance.

If you do not intend to keep your house you do not have to pay the mortgages and home equity loans and real estate taxes but you should continue to pay the insurance and association dues until such time as you no longer own the house.

Also continue to pay your car payments for the cars you intend to keep.

If you do not intend to keep the car then you do not have to make any payments, but once again, in either case, maintain your insurance until the car is returned to the lender.

One of the debts listed on my bankruptcy is my Doctor/Dentist/hospital. Can they refuse to see me after the bankruptcy?

A public hospital is not supposed to refuse service.

A private hospital theoretically can but this is not always the case. A doctor or dentist can refuse to see you but in my experience some will not hold it against you and some will. There is no way of knowing for sure.

If it is a doctor or dentist you wish to continue to see, I usually advise that you call them before we file or soon after we file and let them know that they will be receiving a notice from the bankruptcy court and that you were required to list all debts. If the Doctor says he will not see you unless you pay what you owe then you may reply that you will pay him and I advise that you let him know what type of payments you will make. You of course are not required to pay the Doctor it is simply your choice based on whether or not you wish to still see this doctor.

What if I forgot to list a debt on my bankruptcy, can I add it later?

Yes. Until your case is over which is approximately 3 months after we file your case, we can prepare and file an amendment to your case to add debts you may have originally forgotten.

Both the Court and I have a fee for amending your case.

Once your case is over we can’t usually re-open your case to do such an amendment, but there are things that we can do.