Bankruptcy Rules - Chapter 7

Filing bankruptcy under Chapter 7, gives the debtor an opportunity to make a fresh start in life by accepting the individual's inability to discharge most debts. However, the petitioner will still be liable for loans that were incurred for paying alimony and child support. The debtor is also liable to pay certain taxes, repay loans availed for higher education and loans disbursed or guaranteed by a government entity. Debts, that are a result of criminal offense or negligence on the part of the debtor, also have to be requited. One may delve into the eligibility criteria for filing bankruptcy; the procedure and the monetary cost of filing in accordance with bankruptcy Chapter 7 rules; the schedule of exempt and non-exempt assets and the role of the trustee for a better understanding of the Chapter 7 bankruptcy rules.

Eligibility Criteria: Seeking relief, by filing bankruptcy under chapter 7 of the US Bankruptcy Code, is subject to an individual or a sole proprietor qualifying the Means Test for bankruptcy, irrespective of the extent of debts and the solvency of the debtor. A petitioner, whose prior bankruptcy petition has been dismissed during the preceding 180 days, on account of the debtor's willful failure to appear before the bankruptcy court or comply with court orders, is not eligible to file under Chapter 7. Voluntary dismissal of the previous case, due to creditors seeking relief from the bankruptcy court to recover debts, also disqualifies the debtor from filing bankruptcy. Credit counseling should have been sought by the debtor at least 180 days before filing bankruptcy, if not earlier, unless the debtor has been exempt on account of emergency situations or the trustee, appointed by the court, has determined the dearth of approved agencies to provide the requisite counseling. Any debt management plan, that is developed during the required credit counseling session, must also be filed with the court.

Procedure: The debtor is expected to file a petition, a schedule of assets and liabilities, a list of contracts that can be executed and details regarding unexpired lease. One needs to provide additional documents in case of consumer debts. Couples may file a joint petition or individual petitions. Filing a bankruptcy petition includes filling out Official Bankruptcy Forms and providing details regarding creditors and their dues, the frequency of income, assets, monthly living expenses and any anticipated increase in income and expenses. In case of couples, the income and expense of the non-filing spouse is used to evaluate the financial position of the debtor.

Monetary Cost of Filing Bankruptcy: The monetary cost of filing bankruptcy works out to $299. The break-up of the cost is as follows: $245 case filing fee, $39 miscellaneous administrative fee and $15 trustee fee. Debtors may pay in installments of 4 provided the duration between paying the final installment and filing the petition does not exceed 120 days. In case the debtor does not pay these fees, the case may be dismissed by the bankruptcy court. If the debtor's income is less than 150% of the poverty level, the court may waive the requirement for paying fees.

Exempt and Non-exempt Assets: The debtor is required to file a list of exempt assets with court since the Bankruptcy Code allows an individual debtor to protect certain assets. People living in Washington D.C or individuals residing in one of the following 14 states may opt for Federal bankruptcy Chapter 7 exemptions over state exemptions since certain provisions, in the Bankruptcy Code, allow states to adopt their own laws in place of Federal laws regarding exemptions: Arkansas, Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont and Wisconsin.

Role of the Trustee: After 20 days of filing the petition, the trustee is expected to hold a meeting with the creditors and the debtor. The latter is put under oath and is expected to answer questions regarding his/her financial position. Couples, who are filing jointly, are expected to attend the meeting and answer relevant questions posed by the trustee as well as other creditors. The trustee is expected to reach a conclusion regarding the debtor's eligibility to file under Chapter 7 within 10 days of the creditors' meet. The meeting has to be held within 40 days of filing the petition although a 20 day grace period is customary in case of unavailability of trustees. The trustee also ensures that the debtor is aware of the consequences of seeking bankruptcy discharge under Chapter 7. The impact 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 are also impressed upon the debtor.

Chapter 7 bankruptcy rules make the trustee responsible for liquidating nonexempt lien-free assets, or exempt assets with liens, provided the value of the liens against the property is worth more than the money owed to the creditors. The trustee also has the power to obtain additional money by using the avoiding powers conferred upon him/her and may operate the debtor's business for a limited period of time, provided doing so enhances the returns to unsecured creditors. Generally, debtor's filing under chapter 7 do not have any assets. Hence, the creditors need not file proof of claim. If the debtor has assets, the unsecured creditors are expected to file a claim within 90 days of the proposed creditor's meet. Government entities would need to file the claims within 180 days.

Filing bankruptcy has a number of negative consequences. It reduces the ability of the borrower to avail loans and mortgage for buying a home. It impacts a person's standing in society since bankruptcy public records carry detailed information regarding bankruptcy. Moreover, a bankruptcy remains on record for 10 years from the date of filing and it results in a person's credit score declining by as much as 300 points.