The Fresh Start

Chapter 7 is the most common form of Bankruptcy. It purpose is to give the Debtor a "fresh start". It is a liquidation proceeding in that a trustee is appointed to review the Debtor's assets to determine if there are assets that can be sold to pay creditors. In reality, the vast majority of consumer Chapter 7's are closed as "no asset" as the Debtor is able to claim all his or her assets exempt.

Bankruptcy papers consist of a three-page "Petition", a 15 to 21 question Statement of Financial Affairs, a Means Test Calculation, and the following Schedules:

  ASSETS A. Real Property. B. Personal Property. C. Property Claimed as Exempt. DEBTS D. Creditors Holding Secured Claims. E. Creditors Holding Unsecured Priority Claims(Taxes, etc.) F. Creditors Holding Unsecured Non Priority Claims. G. Executory Contracts and Unexpired Leases. H. Co debtors. INCOME & EXPENSES I. Current Income of Individual Debtors. J. Current Expenditures of Individual Debtors.

It is essential to list all creditors and to list them at their current and correct address. Collection agencies and attorneys should also be listed, as should the original seller or dealer on any debt which involved a third party lender such as a bank or has been assigned to a finance company, etc.

Assets Concerning assets, all assets must be listed. Debtor will be allowed to keep all "exempt" assets, but the bankruptcy trustee will be entitled to take possession of and liquidate "non-exempt" assets for the benefit of creditors. We will of course have to determine whether any of your assets are not or might be exempt. Every Debtor has basic exemptions for household goods some equity in an automobile, retirement accounts and tools of the trade.  A married couple or head of household can claim $75,000.00 exemption in the equity in a house, single persons can claim $50,000.00

Also, all of a couple's community property is subject to the bankruptcy case even though only one spouse filed bankruptcy.

Normally, any property earned or obtained after the filing of the petition is not an asset administered in the Chapter 7.  One exception is an inheritance of life insurance payment received within six months after the filing, which assets can be taken by the Trustee and liquidated to pay creditors.

It is vitally important to list all property that the filer owns or has any interest in. Failure to do so could result in loss of the Discharge.

Means Test

Under the Bankruptcy Code changes passed by Congress in 2005, all Debtors filing Chapter 7 have to meet a Ameans test.@  Basically, each Debtor=s income and expenses are put through a test to determine whether, based on the median allowances for expenses, the Debtor could reasonably pay his creditors back a portion of his or her debts in a Chapter 13.  If the Court finds the Debtor could pay back a reasonable sum to creditors, the Court may dismiss the case or require the Debtor to convert to Chapter 13 and propose a repayment plan.

 Credit Counseling

Under the Bankruptcy Code changes passed by Congress in 2005, all Debtors filing Chapter 7 must complete a credit counseling program before filing for Chapter 7.  This can be done over the internet or over the phone.  A certificate showing completion of that program must be filed with the Court.

After filing, you need to do a Financial Planning course and also provide that certificate.

Debts Discharged

The goal of a Chapter 7 bankruptcy is to discharge all unsecured debts. The Bankruptcy Code, however, provides that certain unsecured debts are not dischargeable under any circumstances, and that other debts are not dischargeable if an objecting creditor proves to the Court that grounds exist why that debt, or all debts, should not be discharged by the bankruptcy.

Bankruptcy Code Section 523 provides that a particular debt to a particular creditor is not discharged by bankruptcy. A brief and incomplete summary of such debts follows:

1. Certain tax debts.

 2. Loans and debts arising from: A. Fraud, false pretenses, etc. B. Materially false written financial statement. C. Luxury goods or services incurred within 90 days before bankruptcy in excess of $500.00 owed to one creditor or within 70 days before bankruptcy for cash advances in excess of $750.00.

3. Unscheduled creditors or those scheduled at an incorrect or incomplete address.

 4. Embezzlement, larceny, certain fiduciary debts.

5. Spousal support and child support, and other debts arising out of dissolution of marriage.

6. Intentional and malicious injuries.

7. Certain government debts.

8. Certain student loans.

9. Liability arising from drunk driving.

10. Related to prior bankruptcy.

11..  Restitution for Federal criminal offense.

12.  Any debt (including credit card charges) incurred to pay a tax to the Federal government or a state government, if that tax would have been non-dischargeable.

  Under Paragraphs 2, 4, and 6 above, the creditor is required to file a Non-dischargeability Complaint during the first several months of the bankruptcy or the debt to them will be discharged despite the fraudulent, etc., nature of the debt.

While none of these may relate to you. we provide the foregoing information, as well as the information below, so that you can determine in advance whether the possibility exists that a particular creditor might object to the discharge of the debt owed to it on any of the grounds set forth above, or might object to the entire bankruptcy on any of the grounds set forth below.

Under Chapter 7, Bankruptcy Code Section 727 provides that the entire bankruptcy can be thrown out (none of the debts are discharged) if certain acts occurred, including the following:

A. Property was transferred or concealed within one year before bankruptcy with the intent to hinder, delay or defraud creditors, or after bankruptcy with the intent to hinder, delay or defraud the bankruptcy trustee.

B. The person has concealed, destroyed, falsified, or failed to keep books, documents and records from which his or her financial condition or business transaction might be ascertained.

C. The bankruptcy papers contain falsities, the person testifies falsely, or the person withholds books and records, etc., from the bankruptcy trustee. (This can also be subject to Criminal proceedings). 

 D. The person fails to satisfactorily explain any loss of assets or deficiency of assets to meet his or her debts.

E. The person refuses to obey any lawful court order.

F. Certain acts in other bankruptcy cases or prior bankruptcy discharge within six years. Please note that unsecured debts, with the exceptions noted above, are discharged. On secured debts, such as home loans, car loans, and most loans on major appliances, if you want to keep the property you will have to keep making payments.


 There are other alternatives to Chapter 7. If the Debts are consumer debts, non-profit organizations such as Consumer Credit Counselors can negotiate a payment plan with creditors to stop interest and late charges. Also, within the Bankruptcy system there are alternatives.

 Anyone can file a Chapter 11. This is a reorganization. It is usually used by businesses in distress or persons with real property in foreclosure. It advantage is the Debtor holds on to the property and, if the Bankruptcy Court approves, can greatly reduce the debts while holding onto control of property. The disadvantage is that a Chapter 11 is very expensive and unless there is income, there will not be a basis for a Plan the Judge will approve.

 For individuals, Chapter 13 is an alternative. It allows a Debtor to come up with a plan to pay a portion of the debt over three to five years. It can be good for payment of taxes over a plan term, or to cure an arrearage on a home to save if from foreclosure.

 Effect on Credit

 A Chapter 7 Bankruptcy, like any Bankruptcy filing, goes onto your credit reports and can stay on the reports for up to 10 years.


You can expect the following when you file for Chapter 7

After you provide your attorney with all the required information, a petition and schedules will be prepared, which Debtor must sign under penalty of perjury.  This document is then filed with the Bankruptcy Court.  Upon filing, the Stay is created which stops any collection activity by creditors. 

A Trustee is appointed and a meeting is scheduled about 5 weeks after the filing.  Creditors are invited to attend, most do not.  The Trustee will question the Debtor about the information in the schedules and the Debtors financial situation.  The Trustee will be looking for property that cannot be exempted.   If none is found, the Trustee will close his case as a Ano asset@ case.   At least 7 days prior to hearing, you must supply the Trustee with a copy of your most recent tax return.  At the hearing, you need to show the Trustee proof of a drivers licsnce or other government issued photo I.D. and proof of your Social security number, i.e. social security card or other similar proof.

 He can also pursue payments made to creditors within 90 days prior to the filing of the Bankruptcy (and  up to one year for payments to relatives and other close associates,  Ainsiders@.)  These payments are considered preferences and the creditor who received it can be required to refund the preference

It is important to be completely honest with the Trustee, as failure to respond honestly could result in a loss off discharge.
After the first meeting with the Trustee, there is a 60 day period during which creditors or the U.S. Trustee can bring Complaints or motions regarding the dischargeability of the debts, the right of the Debtor to receive a discharge and/or for dismissal on the grounds the Debtor has the ability to pay back his or her creditors.  If no motion or complaint is filed, a Discharge of the debts is issued by the Clerk of the Court.

 Finally, the Financial Management course must be completed and a certificate filed. This completes the Chapter 7 proceeding for the Debtor.  Under the present law, no new Chapter 7 can be filed by the Debtor for eight years.


What to Expect When You File

Chapter 7

Winters Law Firm is a Bankruptcy firm located at 23046 Avenida de la Carlota, Suite 600 Laguna Hills California 92653. (714) 836-1381,