Chapter 7 Bankruptcy
We’ve provided an overview of Chapter 7 bankruptcy below.
For more information, contact Copeland Law today to learn more about how filing for bankruptcy under Chapter 7 of the Bankruptcy Code can help you.
Overview of Individual Debtor Oklahoma Bankruptcy Chapter 7 Cases
Background of a Oklahoma Bankruptcy Chapter 7 Case
In a Chapter 7 case, a debtor agrees to relinquish all of his or her nonexempt property to the bankruptcy trustee. The bankruptcy trustee then liquidates (sells) these assets, and distributes the proceeds to pay holder of claims (creditors) against the bankruptcy estate. It is possible the debtor has property subject to liens and mortgages which will pledge that property to certain creditors.
Under the Bankruptcy Code and Oklahoma state law, a debtor is allowed to keep certain “exempt” property. However, the bankruptcy trustee will liquidate all nonexempt property. It is important for a debtor to understand that filing for bankruptcy under Chapter 7 of the Bankruptcy Code may result in the debtor losing property.
Eligibility to File a Oklahoma Bankruptcy Petition Under Chapter 7
Any individual, partnership, corporation, or other business entity is eligible to file bankruptcy under Chapter 7. 11 U.S.C. §§ 101(41), 109(b). Relief is available under Chapter 7 regardless of the amount of the debtor’s debts, or whether the debtor is solvent or insolvent with one caveat; individual debtor’s must pass the “means test” in order to file bankruptcy under Chapter 7.
The bankruptcy court may dismiss a Chapter 7 case where the court finds “abuse” of the bankruptcy process, in individual Chapter 7 cases where the individual debtor’s debts are primarily consumer. This is determined using a rebuttable presumption of abuse, under the means test formula. In a general sense, the means test is used to try and ensure that debtors who are financially able to fund a Chapter 13 plan, actually file under Chapter 13. The Bankruptcy Code frowns upon individual debtors attempting to receive a Chapter 7 discharge when they can fund a Chapter 13 plan.
An individual debtor who has filed a prior bankruptcy petition within the preceding 180 days; and the bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court, comply with court orders, or because the debtor voluntarily dismissed the previous bankruptcy filing after creditors sough relief from the bankruptcy court to recovery property subject to creditor’s liens, is ineligible to file under Chapter 7 or any other chapter of the Bankruptcy Code. 11 U.S.C. §§ 109(g), 362(d) and (e).
Individual debtors must also have received credit counseling from an approved credit counseling agency within the 180 days prior to filing a bankruptcy petition – but this can be done in an individual or group setting, and can be done over the phone or internet. 11 U.S.C. §§ 109, 111. Failure to do this will result in dismissal of the bankruptcy petition, with some extremely narrow exceptions.
One of the Main Goals of Oklahoma Bankruptcy is to Provide Honest Individual Debtors With a “Fresh Start” by Discharging Certain Debts
When a debtor receives a discharge, the debtor no longer is personally liable for those debts.
Example. Gerald owes Annie $10,000 in unsecured debt. Gerald files for bankruptcy under Chapter 7. Annie receives only $3,000 from Gerald’s bankruptcy estate. Gerald then receives a discharge for the debt he owed Annie. Annie is now barred from attempting to recover the other $7,000 from Gerald.
One limitation to Chapter 7 is that only individuals are eligible for a discharge – partnerships, corporations, or other business entities are not entitled to this benefit. 11 U.S.C. § 727(a)(1).
Generally, Chapter 7 cases result in a discharge for an individual. But, there are some debts that are not eligible to be discharged. A discharge under Chapter 7 cannot discharge a lien on property.
How an Individual Oklahoma Bankruptcy Chapter 7 Case Works
The initial event that begins a Chapter 7 case occurs when a debtor files a voluntary petition with on the Oklahoma bankruptcy courts.
Debtors must also file, in addition to the bankruptcy petition:
- schedules of their assets and liabilities;
- a schedule of their current income and expenditures
- a statement of their financial affairs; and
- a schedule of any unexpired leases or executory contracts (a contract between the debtor and another party, where both sides still have important obligations remaining under the contract). Fed. R. Bankr. P. 1007(b). Debtors must also provide the bankruptcy trustee with a copy of their tax return or transcripts for the most recent tax year, and provide copies of any tax returns filing during the case (including tax returns filed for years prior to the case, if those returns had not yet been filed at the start of the case). 11 U.S.C. § 521.
Individual debtors whose debts are primarily consumer debts – “Debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8). -have even more filing requirements. Individual debtors must file:
- a certificate of credit counseling from an approved agency and any copy of a debt repayment plan which was developed through the credit counseling;
- evidence of any payment from employers – if there is any – received within 60 days before filing the bankruptcy petition
- a statement of the individual debtor’s monthly net income;
- any anticipated increase in income or expenses which will occur after filing; and
- a record of any interest the individual debtor has in any federal or state qualified education or tuition accounts. 11 U.S.C. § 521.
Married couples may file individually, or jointly. 11 U.S.C. § 302(a). Even when married couples file joint bankruptcy petitions, they are still required to file all the documents required for individual debtors.
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, an individual debtor must provide the following information:
- A list of all creditors and the amount and nature of their claims;
- The source, amount, and frequency of the debtor’s income;
- A list of all of the debtor’s property; and
- A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Individual debtors who are married are required to collect this information, whether they will be filing a joint petition with their spouse, filing individually, or only one spouse is filing.
When only one spouse files, the Bankruptcy Court, trustee, and creditors are entitled to information concerning the income and expenses of the non-filing spouse, so these parties can evaluate the household’s financial position at the time of the filing.
Exempt Property in a Oklahoma Bankruptcy Case
Individual debtors must also file a schedule of “exempt” property. Under the Bankruptcy Code, individual debtors are allowed to exempt certain property from being included in the bankruptcy estate (subject to creditors’ claims) based on the exemptions allowed under Oklahoma state law and federal laws other than the Bankruptcy Code.
Automatic Stay in a Oklahoma Bankruptcy Case
When an individual debtor files bankruptcy under Chapter 7, the “automatic stay” goes into effect. This means creditors are instantly barred from attempting almost all collection actions against the debtor or the debtor’s property. 11 U.S.C. § 362. The automatic stay goes into effect the moment the bankruptcy petition is filed, it doesn’t matter if the creditors have received notice of the filing yet.
341 Meeting in a Oklahoma Bankruptcy Chapter 7 Case
The Bankruptcy Code requires the Chapter 7 trustee hold a meeting of creditors within “a reasonable time after the order for relief” in a Chapter 7 case. 11 U.S.C. § 341(a). At this meeting the trustee will swear the debtor in, and the trustee and creditors may ask the individual debtor questions. The Bankruptcy Code requires individual debtor’s to attend the 341 meeting and to answer questions regarding their financial affairs and property. 11 U.S.C. § 343. If married couples have filed a joint bankruptcy petition, they are both required to attend under the same section of the Bankruptcy Code.
After the 341 meeting, the Chapter 7 trustee has ten (10) days to inform the bankruptcy court whether the individual debtor’s Chapter 7 case should be presumed to be an abuse on the system under the means test.
It is extremely important for individual debtors to fully cooperate with the Chapter 7 trustee, and to provide any financial records or documents requested by the trustee.
Bankruptcy trustees are required to ask individual debtors questions at the meeting of creditors to make sure the individual debtor is fully aware of the potential consequences involved in seeking a discharge in bankruptcy (i.e. effect on credit history, ability to file a bankruptcy petition under a chapter other than Chapter 7, the effect of receiving a discharge, and the effect of reaffirmation of a debt).Bankruptcy judges are prohibited from attending these meetings. 11 U.S.C. § 341(c).
Conversion of a Oklahoma Bankruptcy Chapter 7 Case to Another Chapter of the Bankruptcy Code
The Bankruptcy Code allows a debtor to convert their Chapter 7 bankruptcy case to another chapter (i.e. Chatper 11, 12, or 13) under the Bankruptcy Code.
To convert the debtor must be eligible to be a debtor under the new chapter.
Debtors whose Chapter 7 case had been previously converted from another chapter are barred from converting the Chapter 7 case to a new chapter. 11 U.S.C. § 706(a). This stops debtors from repeatedly converting cases from one chapter to another.
Role of a Oklahoma Bankruptcy Chapter 7 Trustee
When a Chapter 7 bankruptcy petition is filed in Oklahoma, a trustee is appointed to administer the case and to liquidate the debtor’s nonexempt assets. 11 U.S.C. §§ 701, 704. When the debtor either has no nonexempt property, or all of the debtor’s nonexempt property is subject to valid liens or mortgages, then the bankruptcy trustee will file a “no asset” report with the bankruptcy court. In those cases, there will be no distribution of proceeds to any unsecured creditors.
The majority of Chapter 7 cases involving individual debtors are “no asset” cases.
When a Chapter 7 case appears to involve nonexempt assets, unsecured creditors have 90 days after the first date set for the 341 meeting to file claims with the bankruptcy court. Fed. R. Bankr. P. 3002(c). The Bankruptcy Code is more generous to governmental units, allowing them 180 days from the date the bankruptcy case is filed to file their claims with the bankruptcy court. 11 U.S.C. § 502(b)(9).
In the usual “no asset” Chapter 7 case there will be no distribution. This means there will be no reason for creditors to file claims with the bankruptcy court. If the bankruptcy trustee later recovers nonexempt assets from the individual debtor – which were not originally present at the time the petition was filed – the bankruptcy court will provide notice to the debtor’s creditors, and will allow them additional time to file their claims with the court. Secured creditors are not required to file a proof of their claim with the court to preserve their security interest or lien, but there are often other reasons for them to file the claim.
In a Oklahoma Bankruptcy Chapter 7 Case Involving Assets, the Trustee’s Main Role is to Liquidate Nonexempt Assets and Distribute the Proceeds to the Creditors
Where the debtor has nonexempt assets in a Chapter 7 case, the trustee’s main role is to liquidate the nonexempt assetsin a manner that maximizes the return to the debtor’s unsecured creditors.
The trustee performs this function by selling the debtor’s nonexempt property if it is free and clear of liens or if the nonexempt property is worth more than any lien or security interest attached to the property.
The Bankruptcy Code provides the trustee with “avoiding powers.” These include the powers to:
- set aside preferential transfers made to creditors within 90 days before the bankruptcy petition;
- undo security interests and other transfers of property made prior to the commencement of the bankruptcy case that were not properly perfected under non-bankruptcy law at the time the case was filed; and
- pursue non-bankruptcy claims such as fraudulent conveyances and bulk transfer remedies available under state law.
Bankruptcy Estate in a Oklahoma Bankruptcy Chapter 7 Case
Filing for bankruptcy creates an “estate.” The bankruptcy estate is a separate legal entity from the debtor. The estate becomes the temporary legal owner of all of the debtor’s assets. The estate is comprised of all legal or equitable interests in property the debtor holds at the commencement of the bankruptcy case. This includes property owned or held by another party if the debtor actually has an interest in that property. The general rule is creditors will be paid based on the liquidation of the debtor’s nonexempt property included in the estate.
Distribution of the Property of the Estate in a Oklahoma Bankruptcy Chapter 7 Case
Section 726 of the Bankruptcy Code provides the order of the distribution of the property of the estate. There are six classes of claims found in § 726, and each class of claims must be paid in full before the next class is paid anything. A debtor will only receive proceeds from the liquidation of the nonexempt assets if all six classes of claims have been paid.
Usually this means individual debtors will not be concerned with how the trustee distributes the proceeds, except for payments on debts which for one reason or another are not dischargeable in the Chapter 7 bankruptcy case.
Discharges in Individual Debtor Cases in Oklahoma Bankruptcy Chapter 7 Cases
A discharge under the Bankruptcy Code only relieves a debtor of personal liability for the debt. This bars creditors from taking any collection actions against the debtor for discharge debts. Because Chapter 7 only discharges certain debts, individual debtors should talk with an Oklahoma Bankruptcy Lawyer before filing for bankruptcy, to make certain their debts will be dischargeable.
In most cases (except for those which are dismissed or converted to another chapter) individual debtors will receive a discharge in their Chapter 7 cases. Generally, unless a party in interest files a complaint with the bankruptcy court objecting to a discharge, the bankruptcy court will issue an order of discharge withing 60 to 90 days after the date first set for the 341 meeting. Fed. R. Bankr. P. 4004(c).
Reasons for denying an individual debtor a Chapter 7 discharge are very narrow, and will be construed against the moving party.
Reasons for denial of a discharge may include:
- failure to keep or produce adequate books or financial records;
- failure to satisfactorily explain any loss of the debtor’s assets;
- commission of a bankruptcy crime (i.e. perjury);
- failure to obey a lawful bankruptcy court order;
- fraudulent transfer, concealment, or destruction of property which should have become property of the bankruptcy estate; and
- failure to complete an approved course on financial management.11 U.S.C. § 727; Fed. R. Bankr. P. 4005.
Reaffirmation Agreements in a Oklahoma Bankruptcy Chapter 7 Case
Even though an individual debtor has received a discharge, a secured creditor may still be able to seize property securing the underly debt. There are times when an individual debtor might want to keep secured property (i.e. a car), and the individual debtor might choose to “reaffirm” the debt.
When a debtor enters into a reaffirmation agreement with a creditor, the debtor agrees to remain personally liable on the debt and to pay all or a portion of the money owed under the debt – even though the debt could have been discharged in bankruptcy. The creditor agrees not to repossess the property as long as the debtor continues to make timely payments on the debt.
Reaffirmation agreements must be entered into before a discharge is entered by the bankruptcy court. The reaffirmation agreement must be written, signed by the debtor, and filed with the court. 11 U.S.C. § 524(c).
Required Disclosures for Reaffirmation Agreements in Oklahoma Bankruptcy Chapter 7 Cases
Section 524(k) of the Bankruptcy Code requires an extensive set of disclosure which must be provided to the debtor when a reaffirmation agreement is involved. Along with other information, the disclosures must advise the individual debtor of the amount of debt which is being reaffirmed, and how the debt is being calculated. The individual debtor must also be advised the debtor’s personal liability will not be discharged in bankruptcy as a result. The debtor must also sign and file a statement of their current income and expenses, showing their balance of income will be enough to allow them to pay off the reaffirmed debt.
If the balance of income is not enough to allow the debtor to pay off the reaffirmed debt, there will be a presumption of undue hardship, and the bankruptcy court is allowed to not approve the reaffirmation agreement.
Responsibility of Lawyers in Oklahoma Bankruptcy Chapter 7 Cases Involving Reaffirmation Agreements
When an individual debtor is represented by a Oklahoma Bankruptcy Lawyers when negotiating a reaffirmation agreement, the Oklahoma Bankruptcy Lawyer is required to certify, in writing, that they advised the individual debtor of the legal consequences of entering into the reaffirmation agreement, including the consequences of failing to make the required payments under the agreement. The Oklahoma Bankruptcy Lawyer must also certify the individual debtor was fully informed and voluntarily entered into the reaffirmation agreement. The Oklahoma Bankruptcy Lawyer must also certify the reaffirmation agreement will not result in an undue hardship for the individual debtor or the individual debtor’s dependents. 11 U.S.C. § 524(k).
The bankruptcy court must hold a reaffirmation hearing if the individual debtor was not represented by an Oklahoma Bankruptcy Lawyer, or if the bankruptcy court disapproves the reaffirmation agreement. 11 U.S.C. § 524(d) and (m).
Effect of a Oklahoma Bankruptcy Chapter 7 Case Discharge
Individual debtors will usually receive a discharge for most of their debts in a Chapter 7 bankruptcy case. Creditors will be barred from starting or continuing any legal or other collection attempts against the individual debtor, in an effort to recover on the discharged debts.
Not All of an Individual Debtor’s Debts are Discharged in a Oklahoma Bankruptcy Chapter 7 Case
There are debts which are not eligible for a discharge under Chapter 7. Examples of nondischargeable debts include:
- debts for domestic support obligations (i.e. alimony, child support, etc.);
- certain tax debts;
- debts for certain educational benefit over payments or loans which have been guaranteed by a governmental unit (i.e. student loans);
- debts for willful or malicious injury to another party or that party’s property;
- debts for death or personal injury caused by operation of a motor vehicle while intoxicated from alcohol or other substances; and
- debts for certain criminal restitution orders. 11 U.S.C. § 523(a).
While proceeds from the bankruptcy estate will be used to pay on the nondischargeable debts, to the extent there is any amount left owing after the bankruptcy case the individual debtor will still be personally liable for these debts after the Chapter 7 case ends.
Debts for money or property obtained by false pretenses, debts for fraud or defalcation (bad act while acting as a fiduciary), and debs for willful and malicious injury to another party or that party’s property will be discharge unless a creditor timely files and prevails in an action to have these debts declared nondischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).
A Oklahoma Bankruptcy Chapter 7 Case Discharge May be Revoked by the Bankruptcy Court
The bankruptcy court has the power to revoke a Chapter 7 discharge at the request of the Chapter 7 trustee, a creditor, or the U.S. trustee if:
- the discharge was obtained fraudulently;
- the debtor acquired property which should have been included in the estate and knowingly and fraudulently failed to report this acquisition, or surrender this property to the trustee; or
- the debtor (without a satisfactory explanation) made a material misstatement or failed to provide documents or other information as part of an audit of the debtor’s bankruptcy case. 11 U.S.C. § 727(d).