What Is Chapter 7 Bankruptcy?
Chapter 7 is the "liquidation" chapter of the Bankruptcy Code. A case trustee takes charge of the debtor's property, sells what is not exempt, and pays creditors in the order the law sets; most individual cases have nothing to sell. Debtors who want to keep property that secures a debt, such as a car, may reaffirm the debt or redeem the property. Most individual debtors receive a discharge, but some debts survive it, creditors and the trustee can object to the discharge, and a debtor can generally convert the case to another chapter once.
What the law says
- Filing a Chapter 7 case creates a bankruptcy "estate," which technically becomes the temporary legal owner of all of the debtor's property as of the start of the case. Creditors are generally paid from the nonexempt property of the estate. U.S. Courts, Chapter 7 - Bankruptcy Basics
- In a case with assets to sell, the trustee's main job is to liquidate nonexempt assets in a way that maximizes the return to unsecured creditors. The trustee sells property that is free of liens, or property worth more than the liens on it plus any exemption the debtor holds in it. U.S. Courts, Chapter 7 - Bankruptcy Basics
- The trustee may also recover money or property using "avoiding powers," which include setting aside preferential transfers made to creditors within 90 days before the petition and undoing certain property transfers or security interests that were not properly perfected. U.S. Courts, Chapter 7 - Bankruptcy Basics
- Most Chapter 7 cases involving individual debtors are "no asset" cases. In a typical no asset case, creditors do not need to file proofs of claim because there will be no distribution; if the trustee later recovers assets, the court notifies creditors and allows more time to file claims. U.S. Courts, Chapter 7 - Bankruptcy Basics
- Section 726 of the Bankruptcy Code sets six classes of claims, and each class must be paid in full before the next lower class receives anything. The debtor receives money only if all other classes have been paid in full. U.S. Courts, Chapter 7 - Bankruptcy Basics
- To keep secured property such as a car, a debtor may "reaffirm" the debt: an agreement to stay liable and pay all or part of it, in exchange for the creditor's promise not to repossess the property while payments continue. The agreement must be signed in writing and filed with the court before the discharge is entered. U.S. Courts, Chapter 7 - Bankruptcy Basics
- A reaffirmation agreement must include detailed disclosures required by 11 U.S.C. § 524(k). If the debtor's income after expenses is not enough to pay the reaffirmed debt, undue hardship is presumed and the court may refuse to approve the agreement; unless the debtor has an attorney, the judge must approve it. U.S. Courts, Chapter 7 - Bankruptcy Basics
- Under 11 U.S.C. § 722, an individual debtor may redeem tangible personal property intended mainly for personal, family, or household use from a lien securing a dischargeable consumer debt, if the property is exempt or has been abandoned, by paying the lienholder the full amount of its allowed secured claim at the time of redemption. 11 U.S.C. § 722 (via Cornell LII)
- Under 11 U.S.C. § 523(a), debts not discharged in Chapter 7 include alimony and child support, certain taxes, certain government-made or government-guaranteed education loans or benefit overpayments, debts for willful and malicious injury, debts for death or injury caused by driving while intoxicated, and certain criminal restitution orders. Debts from false pretenses, fiduciary fraud, or willful and malicious injury are discharged unless a creditor timely files and wins an action to have them declared nondischargeable. U.S. Courts, Chapter 7 - Bankruptcy Basics
- A creditor, the case trustee, or the U.S. trustee may object to a Chapter 7 discharge by filing a complaint, which starts a lawsuit called an "adversary proceeding." Grounds under 11 U.S.C. § 727(a) include concealing or transferring property to hinder creditors, destroying records, perjury, failing to explain a loss of assets, violating a court order, and not completing a financial management course; the objecting party has the burden of proof. U.S. Courts, Discharge in Bankruptcy - Bankruptcy Basics
FAQ
How long does a Chapter 7 case usually take?
U.S. Courts says the discharge typically comes about four months after the petition is filed, once the deadlines for objecting to the discharge and for moving to dismiss for abuse have passed.
How often is a Chapter 7 discharge denied?
U.S. Courts says that, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of Chapter 7 cases. The grounds for denial are narrow and are construed against the party seeking denial.
Can I switch from Chapter 7 to Chapter 13?
A debtor may convert a Chapter 7 case to Chapter 11, 12, or 13 at any time if the case was not already converted to Chapter 7 from another chapter and the debtor is eligible under the new chapter. A waiver of this right is unenforceable, and the court may not convert a case to Chapter 12 or 13 unless the debtor requests or consents.
Is there a fee to convert from Chapter 7 to Chapter 13?
U.S. Courts says there is no fee for converting from Chapter 7 to Chapter 13. Converting from Chapter 7 to Chapter 11 at the debtor's request costs the difference between the two filing fees.
Can I repay a debt even if I don't reaffirm it?
Yes. A debtor may voluntarily repay any debt, whether or not a reaffirmation agreement exists, even though a discharged debt can no longer be legally enforced.
Can a Chapter 7 discharge be taken away later?
The court may revoke a Chapter 7 discharge at the request of the trustee, a creditor, or the U.S. trustee if, for example, it was obtained by fraud, the debtor failed to report or turn over estate property, or the debtor failed to explain misstatements or provide documents in an audit. U.S. Courts says a request typically must be filed within one year of the discharge or, in some cases, before the case is closed.
Can creditors force someone into Chapter 7?
U.S. Courts says an involuntary Chapter 7 case may be started under certain circumstances by a petition filed by creditors holding claims against the debtor (11 U.S.C. § 303).
Related
- Can You File Bankruptcy on Student Loans?
- Chapter 7 vs. Chapter 13 Bankruptcy
- Do I Need a Lawyer for Bankruptcy?
- How Long Does Bankruptcy Stay on Your Credit Report?
- How Much Does a Bankruptcy Lawyer Cost?
- How Much Does It Cost to File Bankruptcy?
- How Often Can You File Bankruptcy?
- What Happens When You File for Bankruptcy?
- What Is Chapter 13 Bankruptcy?
- Bankruptcy by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.