The following is a chronological summary of the Chapter 7 bankruptcy process, the events which occur in a Chapter 7 case, and the time periods at which these events occur.
OFFICE INTERVIEW WITH ATTORNEY
The first step for most debtors is to consult an attorney. The debtor should meet with an attorney for between 30 to 60 minutes on the first visit. The initial meeting should normally include a discussion of whether a bankruptcy filing is appropriate, the form of bankruptcy relief which is proper (normally either Chapter 7, 11 or 13), alternatives to bankruptcy, the bankruptcy process, and credit considerations of a bankruptcy filing.
The initial meeting should include a personal consultation with a licensed attorney. Do not hire a law firm that does not permit you to meet with an attorney on the first visit. Paralegals are indispensable to the law practice of most consumer bankruptcy attorneys. Paralegals can also be very helpful in screening potential clients and relating basic legal information. However, paralegals are not licensed to practice law nor permitted to give individual legal advice. Paralegals, even very good ones, are never an acceptable substitute for a qualified, licensed attorney.
If the debtor decides to proceed with the filing of a bankruptcy case, he will be required to file several documents with the court. These documents contain disclosures of essentially everything about the debtor from a financial standpoint for several years before the case is filed. These documents are called the bankruptcy “schedules” and “statement of financial affairs,” and contain the following information:
The bankruptcy petition is a document filed with the bankruptcy court to begin a bankruptcy case. The petition contains basic identifying information about the debtor, including her name, address, telephone number, social security number, and the chapter under which bankruptcy relief is sought.
The property list must disclose all property the debtor owns on the date the case is filed, and give an estimated value for each item. The property list must be itemized, showing each item, and an estimated market value for each item.
The creditor list must disclose the names, addresses and account numbers of all creditors. There are 3 separate creditor lists which categorize the creditors according to whether the debt is a secured, priority or general unsecured debt. More than 50 percent of all debtors intend to pay one or more of their unsecured debts, even after their bankruptcy has been completed. Many debtors believe that they will be able to keep a credit card and/or rehabilitate their credit report if they omit one or more credit cards from the creditor list. Not only is this is very poor strategy from a financial standpoint, it violates the bankruptcy laws. The debtor is legally required to disclose and list all creditors, regardless of whether she debtor intends to continue paying the debt
The debtor must list and disclose her current monthly income and expenses, and disclose any anticipated changes in income of more than 10 percent within one year after the case is filed.
STATEMENT OF FINANCIAL AFFAIRS
The statement of financial affairs is a list of 25 questions inquiring about the debtor’s financial transactions over the past several years. Almost all significant financial transactions over the past several years must be disclosed on the statement of financial affairs.
FILING PETITION AND SCHEDULES
The filing of the bankruptcy petition is the event which commences a bankruptcy case. When the petition is filed, the court clerk will assign a case number, judge and panel trustee. In most Chapter 7 cases, the bankruptcy petition will be filed at the same time as the other required paperwork (the bankruptcy schedules and statement of financial affairs). However, the debtor may elect to file only the bankruptcy petition, and file the other documents later. This is normally done if the filing needs to be done quickly to prevent an impending foreclosure or repossession, or the collection of a court judgment. If the debtor elects not to file the schedules and statement of financial affairs along with the petition, these documents must be filed within 15 days after the bankruptcy petition is filed. The court will dismiss the case if these documents are not promptly filed.
TRUSTEE & COURT INFORMATION
Immediately upon the filing of the bankruptcy petition, a bankruptcy trustee will be randomly assigned from a pool of “panel trustees.” Panel trustees are individuals that have been pre-screened and hired to act as Chapter 7 trustees by the U.S. Trustee of the district in which they serve. The panel trustee will receive a copy of all bankruptcy paperwork after it is filed.
ROLE OF THE TRUSTEE
The basic purpose of the panel trustee is to serve as an investigator for the court. In 99 percent of all Chapter 7 cases, the debtor will never see a bankruptcy judge. The debtor will appear before a judge only if a serious question is raised about the case. In virtually all Chapter 7 cases, the trustee (or the trustee’s staff) is the only person that will review the case. The trustee has two basic investigatory roles:
(a) Asset Investigation. The trustee’s main role is to determine whether the debtor has any non-exempt assets which the trustee is entitled to seize from the debtor. If the debtor has non-exempt assets, the trustee may seize and sell the assets, and distribute the proceeds to creditors on a pro rata basis.
(b) Income / Expense Investigation. A second important role of the trustee is to determine if the debtor is abusing the bankruptcy process. A Chapter 7 case involving mostly consumer debts will be considered abusive if the debtor has sufficient income to pay a significant portion of the unsecured debt.
In every Chapter 7 bankruptcy case, the debtor is required to make one appearance at a “creditor’s meeting.” The creditor’s meeting for any given case will be grouped with approximately 30 other similar cases. The group of cases, commonly referred to as a “trustee panel” of cases, are all given to a single trustee.
The creditor’s meeting is normally held between 30 and 45 days after the bankruptcy petition is filed. The meeting can never be scheduled at the convenience of the debtor or his attorney. The court will issue a notice specifying the date and time of the meeting. The debtor must attend the meeting on the scheduled date and time. If the debtor can not attend on the scheduled date, the trustee will normally agree to reschedule the meeting at least once. However, the new meeting date will be reset to one of the next available trustee panels for that particular trustee. The trustee will never agree to appear at the courthouse and conduct a meeting for a single case.
LENGTH OF MEETING
In consumer cases, most creditor’s meetings last 5 minutes or less. In complex or contentious cases the meeting can last 30 minutes or more. The meeting for each successive case on the panel will be scheduled to start every 5 minutes.
PRESIDING OFFICER – WHO COMES TO MEETING?
The Chapter 7 trustee will preside at the creditor’s meeting. All creditors are invited to attend and ask the debtor questions about his debts and assets. In 99 percent of all cases, no unsecured creditors will appear at the meeting. Unsecured creditors normally come to the meeting only if they believe that the debtor is guilty of misconduct sufficient to warrant a denial of discharge. The only creditors that will normally appear with any frequency at a creditor’s meeting are secured creditors seeking to determine the debtor’s intentions with respect to their collateral, and whether the debtor will sign a reaffirmation agreement.
FOCUS OF TRUSTEE’S INVESTIGATION
The trustee will begin the meeting by asking the debtor various questions about his debts, assets and budget. The trustee’s questions are normally focused on two areas:
(a) Sufficient Property to Administer? Does the debtor have any non-exempt property, and if so, is the property valuable enough for the bankruptcy estate to realize a substantial dividend for creditors? In other words, does the debtor own sufficient non-exempt property to justify taking it, selling it, and distributing the proceeds to creditors. The trustee may ask questions directed at verifying whether the debtor has disclosed all of his property, and the accuracy of the estimated values given for the property.
(b) Substantial Abuse of Bankruptcy Process? The trustee’s second major focus is normally directed at whether the debtor is abusing the bankruptcy process by filing under Chapter 7, instead of proposing a repayment plan under Chapter 13. There are many ways that a debtor can be deemed to have abused the bankruptcy process. However, the main inquiry is usually whether the debtor’s budget shows that he can afford to pay at least some of the unsecured debt. If the debtor’s income exceeds her monthly expenses, the trustee may conclude that the debtor is abusing the process by attempting to discharge her debts without making any payment, rather than proposing a repayment plan under Chapter 13.
Most court opinions on the subject agree that if the debtor’s monthly income exceed her reasonable monthly expenses to any significant degree, the case should be dismissed as an abuse of the bankruptcy process. The only way to avoid this result is if the debtor’s reasonable monthly expenses, as shown on the budget submitted to the court, equal or exceed monthly income. High income debtors (doctors, lawyers, engineers, etc.) attempting to file under Chapter 7 pose a much greater challenge for the debtor’s attorney, and have a much higher risk of drawing scrutiny from the trustee.
CONCLUSION OF MEETING
(a) No-Asset / No Abuse Cases. In most cases, at the conclusion of the creditor’s meeting, the trustee will announce that he will allow the exemptions claimed by the debtor, abandon all non-exempt property, and close the case as a “no asset” case. This means that the trustee is satisfied that the debtor does not have any assets worth administering and the debtor has not abused the bankruptcy process. The trustee’s investigation will then end.
(b) Asset or Abuse Cases. In a small portion of cases, at the conclusion of the creditor’s meeting, the trustee will announce that he intends to keep his file open and continue the investigation. This can be done for several reasons:
POTENTIAL ASSET RECOVERY FOR CREDITORS
If the trustee believes that significant non-exempt assets may be available for creditors, he will keep the case open and further investigate the debtor’s assets. This could include requesting additional documents from the debtor, a personal inspection of assets, or any other action the trustee believes is necessary to properly investigate the debtor’s assets.=
If the trustee believes that the bankruptcy filing might be abusive, he may keep the case open to further investigate the debtor’s budget. If there is a question concerning the accuracy of any income or expense numbers on the budget, he may request the debtor to provide proof that they are accurate. If the trustee, after further investigation, believes that the debtor can afford to repay a portion of the unsecured debt, he will refer the case to the U.S. Trustee’s office for a second review. If the U.S. Trustee agrees that the case is abusive, he has the option to file a motion to dismiss the case. Under current law, the U.S. Trustee or the court on its own initiative, are the only persons that may request a case to be dismissed as an abusive filing. Neither the panel trustee nor any creditor are entitled to file a motion to dismiss a Chapter 7 case as an abusive filing.
If the U.S. Trustee files a motion to dismiss the case, the court will conduct a hearing. The U.S. Trustee and the debtor will be able to present evidence at the hearing. If the court believes that the filing was abusive, the debtor will normally have two options: (a) convert the case to a Chapter 13 case, and propose a plan to repay some or all of the unsecured debt; or (b) the case will be dismissed. If the case is dismissed, the debtor will be back in the same position he was in before the case was filed.
A discharge contest is a lawsuit filed by a creditor or panel trustee seeking to prevent the debtor from receiving a discharge of one or more debts. A discharge contest must be filed within 60 days after the creditor’s meeting is first scheduled to start. The trustee and all creditors are legally prohibited from filing a discharge contest after the 60 day time period.
A discharge contest must allege specific misconduct on the part of the debtor justifying the denial of a discharge. See the page entitled “Non-Dischargeable Debts” for a summary of the various forms of misconduct which will justify denial of a bankruptcy discharge. If a timely discharge contest is filed, the bankruptcy case will be kept open until the discharge contest has been decided.
Most discharge contests are filed by a single creditor claiming that the debtor should not receive a discharge of the debt owed to him. For cases filed by my office during 2000 and 2001, the average likelihood of a drawing a discharge contest from a creditor has been about 2 or 3 percent. This is up from about 1 percent or less in prior years. It is unusual to get more than one discharge contest in any given case. In the over 1,000 cases handled by my office, I have only encountered one case in which more than one creditor filed a discharge contest in the same case.
The panel trustee has a right to file a discharge contest which seeks to completely bar the debtor from receiving a discharge of all debts. This type of case is very unusual indeed. I have never encountered such a case.
After the creditor’s meeting is adjourned, the debtor is waiting for the passage of time until the court enters a discharge order. If neither a dismissal motion nor discharge contest are filed, the court will enter a discharge order declaring that all of the debts have been discharged (i.e. released, forgiven). The discharge order will normally be issued approximately 60 days after the creditor’s meeting is first scheduled. At the same time the court issues the discharge order, it will also normally issue and order closing the case. The order closing the case is the last event that will occur in the case.