Chapter 7 – What Really Happens In A Chapter 7 Bankruptcy?

Chapter 7 – What Really Happens In A Chapter 7 Bankruptcy?

There are several stages to a consumer bankruptcy.  They are: preparation, filing, first meeting and finally discharge of debt.  And… as you’ll see, it’s really all over the day that the Chapter 7 bankruptcy is filed.

To start, we painstakingly prepare a petition from information supplied by the client and verified by the attorney and our staff.   This requires a lot of assistance and documentation from the client.  It requires several hours worth of work for the client, the attorney and that most important person, the bankruptcy assistant or paralegal.  Usually a large worksheet is filled out and records are carefully reviewed with the help of the attorney and a paralegal.  The last 2 years of taxes and the last 6 months of wages or other income are put into a computerized bankruptcy preparation program.

The bankruptcy petition lists all of the debtor’s assets and all of their debts.  No debt or asset should be left out.  The petition also contains a statement of affairs that contains a lot of very personal information.  After the client carefully reads the petition, it is very carefully explained to them.  Then the client signs it in quite a few places.  The petition is signed under penalty of perjury, fines and even jail time.  The attorney signs it also and vouches for its proper preparation.

The petition is then filed, by computer, electronically and completely without paper.  The originals remain in the attorney’s file.  The client gets a hard copy of the petition.  Clients are instructed to keep the petition forever.

Once filed, the Bankruptcy Court immediately assigns a case number and begins to notify creditors.  Again, this is all done electronically, i.e. paperlessly.  Most of your creditors are notified of your protection in the Bankruptcy Court by electronic notice, about 20 seconds after your case is filed.

The Court  immediately issues the “automatic stay.”  This is an electronic court order to each creditor to “sit down, shut up and take a number.”  In other words, they are told to stop pursuing your collection in any manner.  This protection is the main reason people are willing to file bankruptcy.

The automatic stay is powerful.  I tell my clients to think of the Bankruptcy Court as “Godzilla.”  Nobody disobeys Godzilla.  Forget what you may have seen in other courts.  If you violate an order of the Bankruptcy Court, you will feel pain.   Real pain.  Real fast.  Real hard.  Real money.  That goes for creditors.  And it goes for debtors too.

By the way, all of my clients hate bankruptcy.  They hate having to pay a lawyer.  They hate the time they spend getting the necessary information together.  I never see clients file bankruptcy lightly.  But, clients are forced to file bankruptcy so that they can get the court’s protection from creditors.  Because, if it comes to a choice between feeding your family or filing bankruptcy, most people will choose to file…reluctantly, eventually.

After the petition is filed, the Court appoints a Bankruptcy Trustee and sets a First Meeting of Creditors for 50-to 60 days from the filing date in the Toledo, Ohio area.  Once again, it’s all done paperlessly by e-mail.  Copies follow in snail mail.  The First Meeting of Creditors in always held in an office building.  Not at the Courthouse.

At the First Meeting of Creditors, the Trustee (not the judge) will represent all of the unsecured creditors.  So the unsecured creditors will almost never show up.  Gas is expensive.  Most Chapter 7s have no assets.  With gas at present prices, why would a creditor drive to Toledo, only to be told they will get nothing?  Trustees are experts and usually have years of experience in conducting creditors meetings.  They are almost always unfailingly polite and professional to debtors.

The Trustee will check carefully to see if there are non-exempt assets that can be taken and sold for the benefit of the unsecured creditors.  Your attorney will have already checked your assets thoroughly before filing and they will advise you of any assets that may be in danger BEFORE you file your bankruptcy.  The Trustee checks assets carefully, because they get a piece of the action if he finds any assets.  Trustees have access to excellent databases and research each debtor before the meeting.

In most consumer bankruptcies there are no assets that are going to taken by the trustee.  That’s because most consumer assets are exempt in a Chapter 7 bankruptcy anyway.  Occasionally, tax refunds, motorcycles, campers, boats and vehicles are surrendered to the Trustee as nonexempt assets. But that is rare.  It’s still a very good deal for the debtors.   Debtors get discharged from tens of thousands of dollars of debt in exchange for a relatively small “haircut.”  Maybe it smarts a bit, but it’s much better than the alternative.  You need a “fresh start.”

Also at the First Meeting, the mortgage holders and auto financiers (secured creditors) may be present to ask the debtor what they intend to do with their home and cars.  Notice,… the secured creditors have a reason to be there, but they could have saved their gas money and simply called the debtor’s attorney.  Usually they will just call the attorney to discuss these matters.  Quite often, debtors choose to “reaffirm” on their mortgages and car loans so that they can keep those assets as long as they can afford to make the payments on them.

Of course debtors may also choose to “surrender” an asset that they can no longer afford to continue to pay on.   There is never a deficiency owed on surrendered goods in a Chapter 7 bankruptcy.

Less often, consumer will choose to “redeem” a car or other asset that secures a debt.  They choose to do this because the asset is worth less than the amount owed on it.  It’s “underwater.”  So, instead of reaffirming to pay $10,000.00 for a car that’s only worth $5,000.00, the consumer will get a loan and “redeem” it by paying the creditor a lump sum of $5,000.00.   Yes, there are outfits that will finance people in bankruptcy.  They are not Mother Theresa, but they have their uses.  Attorneys can help you find a financier.

Typically, a First Meeting of Creditors last about 5 to 15 minutes, if that long.  What happens at the first meeting of creditors is actually planned by the bankruptcy attorney long before filling.  So it’s no surprise.  In other words, the typical bankruptcy is over, for the consumer, at the time that it is filed.  The rest of the proceedings are usually pro forma.

Finally, About 120 days after the consumer filed the bankruptcy, the Bankruptcy Court will grant the debtor a “discharge” of all of their dischargeable debts.  Bankruptcy Court moves briskly.  The consumer receives the discharge by mail and is  instructed to keep the discharge in their records forever.  So that’s how it’s done.  Prepare, file, first meeting and discharge.

You may be aware that some debts are NOT dischargeable in a Chapter 7 Bankruptcy.  Alimony, child support, some taxes, damages due to alcohol related automobile accidents and intentional fraud are not dischargeable, among others.  Student loans are only dischargeable in cases of severe hardship.