Facts About Chapter 7 Bankruptcy

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Facts About Chapter 7

  1. What is Chapter 7 and how does it work?
  2. What is a Chapter 7 discharge?
  3. What debts are not dischargeable under Chapter 7?
  4. What persons are not eligible for a Chapter 7 discharge?
  5. What persons are eligible to file under Chapter 7?
  6. What persons should not file under Chapter 7?
  7. What is the means test?
  8. How much is the Chapter 7 filing fee and when must it be paid?
  9. Where is a Chapter 7 case filed?
  10. May a husband and wife file jointly under Chapter 7?
  11. Under what conditions should both spouses file under Chapter 7?
  12. When should a Chapter 7 case be filed?
  13. How does the filing of a Chapter 7 case affect collection and other legal proceedings that have been filed against the debtor in other courts?
  14. May a person file under Chapter 7 if his or her debts are being administered by a financial counselor?
  15. How does filing under Chapter 7 affect a person's credit rating?
  16. Are the names of persons who file under Chapter 7 published?
  17. Are employers notified of Chapter 7 cases?
  18. Does a person lose any legal or civil right by filing under Chapter 7?
  19. May employers or governmental agencies discriminate against persons who file under Chapter 7?
  20. Does a person lose all of his or her property by filing under Chapter 7?
  21. Does a debtor have to obtain debtor education to receive a discharge of his or her debts?
  22. When must a debtor appear in court in a Chapter 7 case and what happens there?
  23. What happens after the meeting of creditors?
  24. What is a trustee in a Chapter 7 case, and what does he or she do?
  25. What are the debtor's responsibilities to the trustee?
  26. What happens to the property that the debtor turns over to the trustee?
  27. What if the debtor has only exempt property?
  28. How are secured creditors dealt with in a Chapter 7 case?
  29. How are unsecured creditors dealt with in a Chapter 7 case?
  30. Can a Chapter 7 debtor shed an unwanted residence or second home and not have to pay its mortgage?
  31. If the debtor sheds a residence how long can the debtor remain in the residence before being evicted?
  32. What secured property may a debtor retain or redeem in a Chapter 7 case?
  33. How can a debtor minimize the amount of money or property that must be turned over to the trustee in a Chapter 7 case?
  34. May a utility company refuse to provide service to a debtor if the company's utility bill is discharged under Chapter 7?
  35. What should the debtor do if he or she moves before the Chapter 7 case is closed?
  36. How is a debtor notified when his or her discharge has been granted?
  37. What if a debtor wishes to repay a dischargeable debt?
  38. How long does a Chapter 7 case last?
  39. What should a person do if a creditor later attempts to collect a debt that was discharged under Chapter 7?
  40. How does a Chapter 7 discharge affect the liability of co-signers and other parties who may be liable to a creditor on a discharged debt?
  41. Is a Chapter 7 debtor who receives a discharge required to pay taxes on the amount of debt forgiven?
  42. What is the role of the attorney for a consumer debtor in a Chapter 7 case?

  1. What is Chapter 7 and how does it work?

    Chapter 7 is that part (or Chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is that part of the federal law that deals with bankruptcy. A person who files under Chapter 7 is called a debtor. In a Chapter 7 case, the debtor must turn his /her nonexempt property over to a trustee, who then converts the property to cash and pays the debtor's creditors. In return, the debtor receives a Chapter 7 discharge, if he/she pays the filing fee, is eligible for such a discharge, and obeys the orders and rules of the court.

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  2. What is a Chapter 7 discharge?

    It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. Some debts, however, are not dischargeable under Chapter 7, and some persons are not eligible for a Chapter 7 discharge.

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  3. What debts are not dischargeable under Chapter 7?

    1. Debts for certain taxes, including taxes that became due within the last three years
    2. If the creditor files a complaint and if the court so rules, debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement (included here are certain debts for luxury goods or services over $500 within 90 days before the case is filed and for cash advances more than $750 made within 70 days before the case is filed)
    3. Debts intentionally withheld from the filing that do not allow the creditor time to file a timely claim (unless the creditor had knowledge of the filing and failed to make a claim in a timely manner)
    4. If the creditor files a complaint and if the court so rules, debts for fraud, embezzlement, or larceny
    5. Debts for alimony, maintenance or support
    6. If the creditor files a complaint and if the court so rules, debts for intentional or malicious injury to the person or property of another
    7. Debts for certain fines or penalties
    8. Debts for educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his/her dependents
    9. Debts for death or personal injury caused by the debtor's operation of a motor vehicle while unlawfully intoxicated
    10. Debts that were or could have been listed in previous bankruptcy case of the debtor in which the debtor did not receive a discharge

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  4. What persons are not eligible for a Chapter 7 discharge?

    The following persons are not eligible for a Chapter 7 discharge:

    1. A person who has not obtained and filed with the court a certificate of personal financial management approved by the U.S. Trustee's Office (commonly called a debtor education certificate) prior to the closing of the bankruptcy case
    2. A person who has been granted a discharge in a Chapter 7 case filed within the last eight years
    3. A person who has been granted a discharge in a Chapter 13 case filed within the last six years, unless 70 percent or more of the unsecured claims were paid off in the Chapter 13 case
    4. A person who files a waiver of discharge that is approved by the court in the Chapter 7 case
    5. A person who conceals, transfers or destroys his/her property with the intent to defraud his/her creditors or the trustee in the Chapter 7 case
    6. A person who conceals, destroys or falsifies records of his or her financial condition or business transactions
    7. A person who makes false statements or claims in the Chapter 7 case, or who withholds recorded information from the trustee
    8. A person who fails to satisfactorily explain any loss or deficiency of his or her assets
    9. A person who refuses to answer questions or obey orders of the bankruptcy court, either in his/her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he/she is associated

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  5. What persons are eligible to file under Chapter 7?

    Any person who resides in, does business in, or has property in the United States may file under Chapter 7, except a person who has been involved in another bankruptcy case that was dismissed within the last 180 days on certain grounds. A person who has not received a credit counseling certificate approved by the U.S. Trustee's Office within 180 days prior to filing the petition and who has failed to file the same may not be eligible to be a debtor in bankruptcy under most circumstances.

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  6. What persons should not file under Chapter 7?

    A person who is not eligible for Chapter 7 discharge should not file under Chapter 7. A person who has substantial debts that are not dischargeable under Chapter 7 should not file under Chapter 7. It may not be wise for a person with current income sufficient to repay a substantial portion of his or her debts within a reasonable period to file under Chapter 7, because the court may dismiss the case as constituting an abuse of Chapter 7, or the court may dismiss the case as not passing the means test.

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  7. What is the means test?

    The means test is a complicated formula devised by the Bankruptcy Code to assess the debtor's ability to pay their unsecured creditors and prevent abuse. It averages the debtors last six months of gross income prior to filing bankruptcy ending with the last day of the last calendar month. It then annualizes the average month by multiplying it by 12. If the annualized income is less than the annual median for the debtor's state of residence and household size the debtor's ability to pay will not be presumed to be an abuse of the bankruptcy code. If the annualized income exceeds the annual median income, the debtor's ability is assessed by subtracting the standards or means. The standards or means are the living, housing, transportation and other necessary expenses determined by the bankruptcy code. If after subtracting these expenses Debtors demonstrate an ability to pay unsecured creditors at least $182.50 per month or if less than $182.50, but greater than $100 per month at least 25 percent of unsecured claims, debtors will either have their case dismissed for abuse or be forced into converting to Chapter 11 or 13. Annual median family income numbers are taken from the U.S. Census Bureau and based on the number of persons in the household.

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  8. How much is the Chapter 7 filing fee and when must it be paid?

    The filing fee is $299 for either a single or a joint case. If a debtor is unable to pay the filing fee when the case is filed, it may be paid in installments. However, the entire filing fee must ultimately be paid or the case will be dismissed and the debtor will not receive a discharge. The fee charged by your attorney for handling the Chapter 7 case is in addition to the filing fee paid to the court. Your attorney may not receive payment of any fees if the filing fee is not paid to the court first.

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  9. Where is a Chapter 7 case filed?

    The case is electronically filed in the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the last 91 days or more. The bankruptcy court is a federal court and is a unit of the United States district court.

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  10. May a husband and wife file jointly under Chapter 7?

    Yes. A husband and wife may file a joint petition under Chapter 7. If a joint petition is filed, only one set of bankruptcy forms is needed and only one filing fee is charged.

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  11. Under what conditions should both spouses file under Chapter 7?

    A husband and wife should file jointly if one or more substantial dischargeable debts are owed by both spouses. If both spouses are liable for a substantial debt and only one spouse files under Chapter 7, the creditor may later attempt to collect the debt from the nonfiling spouse, even if he/she has no income or assets. A discharge of a debt for one spouse does not discharge the debt for a nonfiling spouse or any other co-signor or guarantor of the debt.

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  12. When should a Chapter 7 case be filed?

    The answer depends on the status of the debtor's dischargeable debts, the nature and status of the debtor's nonexempt assets, and the actions taken or threatened to be taken by the debtor's creditors. The following rules should be followed:

    1. Don't file under Chapter 7 until all anticipated debts have been incurred, because it will be another eight years before the debtor is again eligible for a Chapter 7 discharge. For example, a debtor who has incurred substantial medical expenses should not file under Chapter 7 until the illness or injury has either been cured or covered by insurance, as it will do little good to discharge, say, $50,000 of medical debts now and then incur another $50,000 in medical debts in the next few months.
    2. Don't file under Chapter 7 until the debtor has received all nonexempt assets to which he or she may be entitled. If the debtor is entitled to receive a substantial income tax refund, which may be a nonexempt asset, in the near future, he or she should not file under Chapter 7 until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will become the property of the trustee.
    3. Don't file under Chapter 7 if the debtor expects to acquire property through inheritance, life insurance or divorce in the next 180 days, because unless such property is exempt, it will become the property of the trustee.
    4. If hostile creditor action threatens a debtor's exempt assets or future income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a Chapter 7 case (see Question 12 below). If a creditor has threatened to attach or garnish the debtor's wages or if a foreclosure action has been instituted against the debtor's residence, it may be necessary to file a Chapter 7 case immediately in order to protect the debtor's interest in the property.

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  13. How does the filing of a Chapter 7 case affect collection and other legal proceedings that have been filed against the debtor in other courts?

    The filing of a Chapter 7 case automatically stays (or stops) virtually all collection and other legal proceedings pending against the debtor. A few days after a Chapter 7 case is filed, the court mails a notice to all creditors ordering them to refrain from any further action against the debtor. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable to the debtor in damages. Criminal proceedings and actions to collect alimony, maintenance, or support from exempt property or property acquired by the debtor after the Chapter 7 case was filed are not affected by the automatic stay.

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  14. May a person file under Chapter 7 if his or her debts are being administered by a financial counselor?

    Yes. A financial counselor has no legal right to prevent anyone from filing under Chapter 7.

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  15. How does filing under Chapter 7 affect a person's credit rating?

    It depends upon the lender to whom you may apply for credit in the future. Good credit is not what a credit report says about you. It is your ability to repay your loans on a timely basis from your income. If you are unable to do so, you do not have good credit, only a bankruptcy waiting to happen. Bankruptcy will eliminate bad debt to improve your debt to income ratio. Some financial institutions and landlords openly solicit business from persons who have recently filed under Chapter 7, apparently because it will be at least six years before they can again file under Chapter 7 and they have no bad debt which they are unable to pay. If there are compelling reasons for filing under Chapter 7 that are not within the debtor's control (such as an illness or an injury), some credit rating agencies may take into account in rating the debtor's credit after filing. Studies have shown that 86 percent of the persons receiving a discharge under Chapter 7 receive an offer of credit within one year following the discharge. The average number of offers were 16 per month — 23 percent of the offers came from creditors whose debts were listed in their bankruptcy case.

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  16. Are the names of persons who file under Chapter 7 published?

    When a Chapter 7 case is filed, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers do not usually report or publish the names of consumers who file under Chapter 7.

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  17. Are employers notified of Chapter 7 cases?

    Employers are not usually notified when a Chapter 7 case is filed. However, the trustee in a Chapter 7 case may contact an employer seeking information as to the status of the debtor's wages or salary at the time the case was filed. If there are compelling reasons for not informing an employer in a particular case, the trustee should be so informed and he/she may be willing to make other arrangements to obtain the necessary information.

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  18. Does a person lose any legal or civil right by filing under Chapter 7?

    No. Filing under Chapter 7 is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.

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  19. May employers or governmental agencies discriminate against persons who file under Chapter 7?

    No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under Chapter 7. It is also illegal for local, state or federal governmental units to discriminate against a person as to the granting of licenses (including a driver's license), permits, and similar grants because that person has filed under Chapter 7.

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  20. Does a person lose all of his or her property by filing under Chapter 7?

    Usually not. Certain property is exempt and cannot be taken by creditors, unless it is encumbered by a valid mortgage or lien. A debtor is allowed to retain his/her unencumbered (or unsecured) exempt property in a Chapter 7 case. A debtor may also be allowed to retain certain encumbered (or secured) exempt property (see Question 28, below). Depending on the law of the local state, property that is exempt in a Chapter 7 case may be either property that is exempt from creditors under state law or under the Bankruptcy Code.

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  21. Does a debtor have to obtain debtor education to receive a discharge of his or her debts?

    Yes. A debtor must obtain a certificate from a U.S. trustee-approved debtor education organization. The certificate must be obtained within 45 days after the meeting of creditors. Failure to file the certificate with the court will result in a nondischarge and may require the debtor to pay additional fees and costs in order to procure a discharge. A debtor does not have to go to class to obtain a certificate. A certificate can be obtained over the phone or online for a typical fee of $50.

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  22. When must a debtor appear in court in a Chapter 7 case and what happens there?

    The first court appearance is for a hearing called the meeting of creditors. This hearing usually takes place about a month after the case is filed. At this hearing, the debtor is put under oath and questioned about his or her debts and assets by the hearing officer or trustee. In most Chapter 7 consumer cases most creditors do not appear in court; but any creditor that does appear is usually allowed to question the debtor. There are usually five to 10 minutes of questioning and you are usually in and out in one hour.

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  23. What happens after the meeting of creditors?

    After the meeting of creditors, the trustee may contact the debtor regarding the debtor's property, and the court may issue certain orders to the debtor. These orders are sent by mail and may require the debtor to turn certain property over to the trustee, or provide the trustee with certain information. If the debtor fails to comply with these orders, the case may be dismissed and the debtor may be denied a discharge.

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  24. Who is a trustee in a Chapter 7 case, and what does he or she do?

    The trustee is an officer of the court, appointed to gather the debtor's nonexempt property, convert it to cash, and pay what is called dividends to creditors. In addition, the trustee has certain administrative duties in a Chapter 7 case, and is the officer in charge of seeing to it that the debtor performs the required duties in the case. A trustee is appointed in a Chapter 7 case even if the debtor has only exempt property.

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  25. What are the debtor's responsibilities to the trustee?

    The law requires the debtor to cooperate with the trustee in the administration of a Chapter 7 case, including the collection by the trustee of the debtor's nonexempt property. If the debtor does not cooperate with the trustee, the Chapter 7 case may be dismissed and the debtor may be denied a discharge.

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  26. What happens to the property that the debtor turns over to the trustee?

    It is usually converted to cash, which is used to pay the fees and expenses of the trustee and to pay dividends to creditors.

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  27. What if the debtor has only exempt property?

    If, from the debtor's Chapter 7 schedules, it appears that the debtor has only exempt property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay creditors. It will further state that it is unnecessary for them to file claims. If assets are later discovered, the creditors will then be given an opportunity to file claims.

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  28. are secured creditors dealt with in a Chapter 7 case?

    Secured creditors are creditors with valid mortgages or liens against property of the debtor. Property of the debtor that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually permitted to repossess or foreclose its secured property, unless the value of the secured property exceeds that amount owed to the creditor. A secured creditor must prove the validity of its mortgage or lien and obtain a court order before repossessing or foreclosing on secured property. The debtor should not turn any property over to a secured creditor until a court order has been obtained. The debtor may be permitted to retain or redeem certain secured personal property (see Question 29, below).

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Can a Chapter 7 debtor shed an unwanted residence or second home and not have to pay its mortgage?

It is not uncommon in uncertain economic times for a home to lose its value and the amount owed on its mortgage can exceed the value of the home. A discharge in a Chapter 7 case will eliminate any potential deficiency arising from the property's foreclosure and its abandonment by the debtor.

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30.

If the debtor sheds a residence how long can the debtor remain in the residence before being evicted?

The mortgage creditor must first obtain court permission through a lift of the automatic stay if the Chapter 7 case is pending. The mortgage creditor can then proceed under state foreclosure law. Michigan foreclosure law provides that a mortgage creditor must give notification of an opportunity for a loan modification prior to the commencement of the foreclosure. If there is no response to the notification after two weeks in most circumstances the mortgage creditor must publish notice of the mortgage default and sale of the residence at the civil division of the sheriff's department four weeks thereafter and post the same notice on the debtor's residence. The debtor however cannot be evicted from the residence until the expiration of a six-month (in certain circumstances twelve months) redemption period following the sale. The purchaser at the sale may then proceed to district court to evict the debtor as a trespasser.

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31.

How are unsecured creditors dealt with in a Chapter 7 case?

An unsecured creditor is a creditor without a valid lien or mortgage against property of the debtor. If the debtor has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the first date set for the meeting of creditors. The trustee will examine these claims and file objections to those deemed improper. When the trustee has collected all of the debtor's nonexempt property and converted it to cash, and when the court has ruled on the trustee's objections, the trustee will distribute the funds (i.e., pay dividends) to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Administrative expenses, claims for alimony and child support, claims for wages, salaries, and contributions to employee benefit plans, claim for the refund of certain deposits, and tax claims, are given priority, in that order, in the payment of dividends by the trustee. If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors.

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32.

What secured property may a debtor retain or redeem in a Chapter 7 case?

A debtor may retain and redeem certain secured personal and household property, such as household furniture, appliances and goods, wearing apparel, and tools of trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred for the purpose of financing secured property and is both exempt and subject only to a judgment lien. Finally, a debtor may redeem certain exempt personal, family or household property by paying to the secured creditor an amount equal to the value of the property, regardless of how much is owed to the creditor. Certain deadlines are imposed on the enforcement of these rights by the debtor.

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33.

How can a debtor minimize the amount of money or property that must be turned over to the trustee in a Chapter 7 case?

In Chapter 7 case the debtor is required to turn over to the trustee only the nonexempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets of consumer debtors are liquid in nature and tend to vary in size or amount from day to day. It is wise, therefore, for the debtor to engage in some negative estate planning so as to minimize the value or amount of these liquid assets on the day and hour that Chapter 7 case is filed. The most common nonexempt liquid assets, and the assets that the trustee will be most likely to look for, include the following:

    1. Cash
    2. Bank accounts
    3. Prepaid rent
    4. Landlord and utility deposits
    5. Accrued earnings and benefits
    6. Tax refunds
  • It is usually advantageous for the debtor to take steps to ensure that the value of each of these assets is as low as possible on the day and hour that Chapter 7 case is filed. By doing this the debtor will not be cheating or acting illegally; the debtor will simply be using the law to his or her advantage, much the same as a person who takes advantage of loopholes in the tax laws.

    Cash. If possible, the debtor should have no cash on hand when Chapter 7 case is filed. Further, if the debtor has received cash or the equivalent of cash in the form of a paycheck or the closing of a bank account shortly before the filing of the case, the debtor should obtain receipts when disposing of the funds in order to prove to the trustee and the court that the funds were disposed of prior to the filing of the case. Money possessed by the debtor shortly before the filing of Chapter 7 case may be spent on such items as food and groceries, Chapter 7 filing fee, the attorney's fee in Chapter 7 case, and the payment of up to $600 to creditors whom the debtor intends to continue paying after the filing of Chapter 7 case. Payments should not be made to a friend or relatives, however, as the trustee may later recover these payments.

    Bank accounts. The best practice is to minimize but not close out all bank accounts before filing under Chapter 7. The balance of the account should be as close to zero as the bank will allow and all outstanding checks must clear the account before the case is filed. If the debtor has written a check to someone for, say, $50.00 and if the check has not cleared the account when the case is filed, the $50.00 in the account to cover the outstanding check may be deemed an asset of the debtor and may have to be paid to the trustee unless exempted.

    Prepaid rent. If the debtor's rent is paid on the first day of the month and if the debtor's Chapter 7 case is filed on the tenth day of the month, the portion of the rent covering the last 20 days of the month, if not exempt, will be deemed an asset of the debtor and will later have to be paid to the trustee. If possible, the debtor should make arrangements with the landlord to pay rent only through the date that the case is to be filed and to pay the balance of the rent from funds acquired after the case is filed. If this is not possible, the case should be filed near the end of the rent period.

    Landlord and utility deposits. Unless they are exempt, the debtor should attempt to obtain the refund of all landlord and utility deposits before filing Chapter 7 case. Otherwise, the deposits, or their cash equivalents, will have to be paid to the trustee.

    Accrued earnings and benefits. In most states, and under the federal law, only a certain percentage (usually 75 percent) of a debtor's earnings are exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25 percent) of any accrued and unpaid wages, salary, commissions, vacation pay, sick leave pay, and other accrued and nonexempt employee benefits. Normally, then, the best time to file Chapter 7 case is the morning after payday. Even then, if the pay period does not end on payday, the debtor may have accrued earnings unless special arrangements are made with the employer. If annual leave or vacation pay is convertible to cash, it should be collected by the debtor before Chapter 7 case is filed, as should any other nonexempt employee benefits that are convertible to cash.

    Tax refunds. In most states, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the debtor prior to the filing of Chapter 7 case. If the debtor is scheduled to receive a tax refund, Chapter 7 case should not be filed until after the refund has been received and disposed of unless it can be exempted. Even if the case is filed before the end of the tax year, if the debtor later receives a refund, the trustee may be entitled to the portion of the refund earned prior to the filing of the case. The best practice, then, is to either file Chapter 7 case early in the tax year (but after the refund from the previous year has been received) or make arrangements to ensure that there will be no tax refund for that year.

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34.

May a utility company refuse to provide service to a debtor if the company's utility bill is discharged under Chapter 7?

It is illegal for a utility company to refuse to provide future utility service to the debtor, or to otherwise discriminate against the debtor for unpaid past utility services that were discharged in the Chapter 7 case. However, within 20 days after a Chapter 7 case if filed, the debtor may be required to furnish a utility company with a deposit or other security requested by the utility to insure the payment of future utility services.

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35.

What should the debtor do if he or she moves before the Chapter 7 case is closed?

The debtor should immediately notify his attorney who will notify the bankruptcy court of the new address. Because most communications between a debtor and the bankruptcy court are by mail, it is important that the bankruptcy court always have the debtor's current address. Otherwise, the debtor may fail to receive important notices and the Chapter 7 case may be dismissed.

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36.

How is a debtor notified when his or her discharge has been granted?

Most courts send an order called a Discharge of Debtor to the debtor and to all creditors. This court order discharges the debtor from his or her dischargeable debts. It serves as notice that the debtor's discharge has been granted. It is usually mailed about four months after a Chapter 7 case is filed.

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37.

What if a debtor wishes to repay a dischargeable debt?

A debtor may repay as many dischargeable debts as desired after filing under Chapter 7. By repaying one creditor, a debtor does not become legally obligated to repay any other creditor. The only dischargeable debt that a debtor is legally obligated to repay is one for which the debtor and the creditor have signed what is called a reaffirmation agreement. If the debtor was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid. If the debtor was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and the attorney's statement with the court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, a debtor is not legally obligated to repay the debt, even if the debtor has made a payment on the debt since filing under Chapter 7, has agreed in writing to repay the debt, or has waived the discharge of the debt.

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38.

How long does a Chapter 7 case last?

A Chapter 7 case begins with the filing of the petition and ends with the closing of the case by the court. If the debtor has only exempt assets and nothing therefore for the trustee to collect, the case will most likely be closed shortly after the debtor receives his/her discharge. It is usually about four months after the case is filed. If the debtor has nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his/her other duties in the case.

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39.

What should a person do if a creditor later attempts to collect a debt that was discharged under Chapter 7?

When a Chapter 7 discharge is granted, the court enters an order prohibiting the debtor's creditors from later attempting to collect any discharged debt from the debtor. Any creditor who violates this court order may be held in contempt of court and may be liable to the debtor for damages. If a creditor later attempts to collect a discharged debt from the debtor, the debtor should give the creditor a copy of the order of discharge and inform the creditor in writing that the debt has been discharged under Chapter 7. If the creditor persists, the debtor should contact an attorney. If a creditor files a lawsuit against the debtor on a discharged debt, it is important not to ignore the matter, because even though a judgment entered against the debtor on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly to the debtor.

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40.

How does a Chapter 7 discharge affect the liability of co-signers and other parties who may be liable to a creditor on a discharged debt?

A Chapter 7 discharge releases only the debtor. The liability of any other party on a debt is not affected by a Chapter 7 discharge.

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41.

Is a Chapter 7 debtor who receives a discharge required to pay taxes on the amount of debt forgiven?

No. Even though the IRS considers debt relief a taxable event, filing bankruptcy protects the debtor from having to claim the amount forgiven as income.

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42.

What is the role of the attorney for a consumer debtor in a Chapter 7 case?

The debtor's attorney performs the following functions in the Chapter 7 case of a typical consumer debtor:

    1. Analyzing the amount and nature of the debts owed by the debtor and determine the best remedy for the debtor's financial problems
    2. Advising the debtor of the relief available under both Chapter 7 and Chapter 13 of the Bankruptcy Code, and of the advisability of proceeding under each chapter.
    3. Assembling the information and data necessary to prepare the Chapter 7 forms for filing
    4. Preparing the petitions, schedules, statements and other Chapter 7 forms for filing with the bankruptcy court
    5. Assisting the debtor in arranging his or her assets so as to enable the debtor to retain as many of the assets as possible after the Chapter 7 case
    6. Filing the Chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case
    7. If necessary, assisting the debtor in the redemption of personal property, the setting aside of mortgages or liens against exempt property, and otherwise carrying out the matters set forth in the debtor's statement of intention
    8. Attending the meeting of creditors with the debtor
    9. If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the debtor
    10. If necessary, attending the discharge and reaffirmation hearing with the debtor and assisting the debtor in reaffirming certain debts and in overcoming obstacles to the granting of a Chapter 7 discharge

    The fee paid, or agreed to be paid, to an attorney representing a debtor in a Chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Many attorneys collect all or most of their fee before the case is filed.

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Glossary of Terms

Secured creditor — A person or entity with a claim for money owed who has a right to repossess or foreclose collateral such as an auto loan with a lien on a title to a car or a bank with a mortgage on a home.

Unsecured creditor — A person or entity with a claim for money owed but is not secured.

Exempt property — An amount of property in which the debtor has a right to keep in order to make a fresh start in life after filing Chapter 7 Bankruptcy.

Nonexempt property — Property owned by the debtor which is greater than the amount the debtor is allowed to keep after filing Chapter 7 Bankruptcy.

Charles J. Schneider, P.C., is your personal bankruptcy firm serving Westland, Dearborn, Flint, Ann Arbor, Livonia, and the counties of Wayne, Oakland, Livingston, and Washtenaw in Michigan since1977. Contact the firm today for a free consultation.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.