By: Trev E. Peterson

Congress requires that I disclose that our firm is a “debt relief agency” under the Bankruptcy Code. We help people file for bankruptcy relief under the Bankruptcy Code.  As with all articles on this website, the contents of this article are not intended as legal advice for any specific legal problem. Nothing in this article is intended to create an attorney-client relationship between the author and the reader. The author is licensed to practice law in Nebraska only. If you are considering filing bankruptcy in a state other than Nebraska you are encouraged to consult with an attorney licensed in the state in which the bankruptcy case will be filed.

A Chapter 7 bankruptcy case is what most people think of when they think about bankruptcy. In a Chapter 7, the case is filed, a trustee is appointed and the trustee takes possession of and sells the debtors’ non-exempt assets, if there are any, and makes a distribution of the proceeds from the sale to the priority and unsecured creditors. The Chapter 7 trustee can also avoid certain payments or other transfers made by the debtors within 90 days prior to the filing of the case, or within the year prior to the filing of a case if the transferee is an insider (a friend or family member of the debtors).

The goal in any bankruptcy case is for the debtors to obtain a discharge order. A discharge order discharges the debtors from any personal liability for the payment of any debts listed in the bankruptcy schedules, except for certain debts that are not subject to being discharged in a bankruptcy case. These nondischargeable debts include most taxes, child support, alimony and student loans. If a creditor’s claim is secured by a lien on an asset, such as a lien on the debtors’ home, the lien is not discharged. In order to keep the asset the debtors have to make monthly payments on the debt. Many secured creditors require that the debtors reaffirm the debt (give up their discharge) to keep the secured property. This is more typical for loans secured by vehicles, since the loss of the personal liability of the debtors means that the debtors have little incentive to make payments on the vehicle or to maintain the vehicle.

From the debtors’ perspective the advantage of a Chapter 7 case is that the case can be completed in 90 to 120 days from the filing date. A Chapter 13, in comparison, takes from 36 to 60 months to complete. If debtors qualify for a Chapter 7, and that generally means that the debtors do not make too much money to file a Chapter 7, the following steps are necessary to file the case and obtain a discharge:

  • The debtors must complete the required credit counseling class. This class is required for all individual debtors, whether they are consumer or business debtors. The class, sometimes referred to as the “first class,” is provided by non-profit groups authorized to provide the class by the U.S. Trustee’s office. Classes are available online, over the phone, or in some cases in person. When the class is completed the class sponsor provides the debtors (or their attorney) with certificates of completion which are filed with the debtors’ other bankruptcy filings when the case is filed. Except in extraordinary cases, and those are few, the certificate has to be filed with the initial bankruptcy filing.
  • Filing of the schedules and statement of financial affairs. The debtors are required to file a complete list of their assets and liabilities. Debtors do not get to pick and choose what creditors may be listed in their case—all creditors, even those that the debtors intend to repay—have to be listed, along with their mailing addresses and account balances. The debtors are also required to list all of their property in connection with the filing of the case. This includes any amounts due to the debtors and any pending lawsuits or claims against third parties. Gifts, payments and transfers of property to family members, friends and other “insiders” made within one year before the filing of the case are also required to be disclosed. The bankruptcy system is based on voluntary disclosure of assets and liabilities. The sanction for a debtor who does not disclose all of his or her assets or liabilities is the denial of a discharge or, in some cases, criminal prosecution for bankruptcy fraud. The schedules and statement of financial affairs should be completed carefully by the debtors to avoid missing any assets or creditors and to avoid any claim that the debtors are secreting assets.
  • After the case is filed the debtors have to complete a second, or financial education class. The debtors should complete the financial education class as soon after the case is filed as possible. The certificate is supposed to be filed within 45 days after the case is filed, but in reality as long as the class is completed before the discharge deadline, the discharge order will be entered. The sanction for failing to complete the class on time is that the case will be closed without a discharge. That means that the debtors do not get the benefit of the filing of the case. If the debtors complete the financial education class later, the case can be reopened (for which the debtors get to pay another filing fee) and the discharge order will be entered. My preference is that the financial education class be completed before the 341 meeting.
  • Attend the section 341 meeting, or first meeting of creditors. This is the only appearance that the debtors make in the bankruptcy case. The 341 meeting is conducted by the trustee, who confirms the debtors’ identity, places the debtors under oath and asks questions about the schedules filed in the case. See my article on the 341 meeting on our website:
  • The discharge order. Sixty days after the section 341 meeting, the Court enters a discharge order discharging individual debtors[1] from all debts except for those debts that are not subject to being discharged—taxes, support obligations and student loans—and any debts that have been reaffirmed by the debtors.

The major advantage of the Chapter 7 case is speed. Qualified debtors can get their discharge fairly quickly. Chapter 7 cases are also less expensive in terms of attorney’s fees than is a Chapter 13 case. One disadvantage to a Chapter 7 is that the Bankruptcy Code does not allow a Chapter 7 debtor to get another Chapter 7 discharge for 8 years after the Chapter 7 case is filed. Most debtors are not serial filers, so the 8 year prohibition is not usually a problem. If a Chapter 7 debtor gets into financial trouble more than 4 years after the filing of their Chapter 7 case, they can file a Chapter 13, if they qualify and obtain a Chapter 13 discharge after completion of the Chapter 13 plan.

The decision about whether a person qualifies for a Chapter 7 or Chapter 13 depends on the facts and circumstances of each debtor’s case, and anyone interested in considering bankruptcy should consult with a knowledgeable bankruptcy attorney.

[1] Debtors that are not individuals, such as corporations, partnerships, limited liability companies, and limited partnerships do not receive discharges. Technically the claims of the creditors of these entities survive an entity Chapter 7 case. However, most of the time creditors of entities who file Chapter 7 cases do not bother to pursue their claims because all of the property of the entity has been liquidated by the Chapter 7 trustee and there are no assets for the creditors to obtain to satisfy their claims.