Tag Archive: Chapter 7


This discharge entered by the court in a bankruptcy case is the golden rod of every bankruptcy – the thing every debtor needs and/or wants in order to get their life back on track and enjoy their fresh start.  The discharge order is the court order that tells your creditors that they are prohibited by federal law from ever attempting to collect discharged debt from you again.  Getting a discharge is different from having the case dismissed – in fact – having the case dismissed is actually a bad thing.  It means that you did not get your discharge, and it may affect the automatic stay in a future filing.  So, to recap my point up to here: Dismissal is bad – discharge is good.  It is NOT however, the end all-be all of your case.

See, Congress actually had a little bit of foresight when the figured out this system:  They realized that the discharge is the order that protects the debtor, and they realized that the asset administration of the case can take quite some time. Under normal circumstances it would neither be fair, nor good for the debtor to have to wait for the trustee to finish up the case administration before a discharge is entered.

If you remember your Chapter 7 basics, a Chapter 7 bankruptcy is a ‘liquidation bankruptcy’ and it is the trustee’s job to review your schedules and statements to determine whether you have any assets that are not protected by law that he has to liquidate in order to pay your creditors.  Well, you can imagine that while that may be easy-breezy for most Chapter 7 debtors – it can take quite some time for others, and the same rules apply to all.  Furthermore, as part of the asset administration in your case, the trustee can keep the case open to wait for your tax return to be filed.

This is why there are two tracks and here they are:

  1. Discharge Track: If you fulfill all requirements to be eligible for a discharge (in short: pre-filing counseling, eligible for Chapter 7, post-filing counseling, attendance of 341 Meeting of Creditors) then the court will enter your discharge approximately 90 days after your creditors meeting has been concluded.
  2. Case Administration Track: Your trustee can make a determination that there are not assets in your case and file a “Report of No Distribution.”  If so, your case will be closed by the court shortly after the discharge has been entered.  However, if the trustee does not file this report, and he is working on liquidating your assets, or working on figuring out whether there are any assets, then you case will likely stay open for a little while longer after the discharge has been entered.  He may even ask you for some additional information during that time, and it is your duty to cooperate with the trustee.

The main things to keep in mind during case administration process are (a) the trustee has the power to ask the court to revoke your discharge if you are not cooperating with him; and (b) don’t forget the big picture:  Yes it may be temporarily painful to give up most or all of your tax refund, or to pay for the privilege of keeping a non-protected asset – but that is usually a small price to pay when compared to the tens or hundreds of thousands of $$$ you are discharging.

In summary, once your discharge is entered the main hurdles have been met, and the main goal has been reached, but your case is not yet closed.  The court will enter a separate case closed order at a later time and only then is your case truly and unequivocally “done.”

“Reaffirmation” is one of those words that is used quite frequently in the bankruptcy context, though often the debtor filing for bankruptcy protection does not fully understand the implications of a Reaffirmation, and in my humble opinion, that is not good enough.

When you sign a reaffirmation agreement, you – as the debtor in the case – agree that one of your debts does NOT get discharged by virtue of your bankruptcy.  Basically, you will still be on the hook for the full amount owed, even after your bankruptcy has been concluded, and if you default on your payments, the bank has every right to sue you, or make any other (legal) effort to collect the debt from you.

Why, you ask, would anyone want to do THAT…. especially since the point of every bankruptcy is a “fresh start” – to be debt free again.  The most common debts that get reaffirmed are those debts that are secured by a vehicle.  In the 9th Circuit (the federal Circuit in which Arizona is located), a debtor cannot keep a vehicle that he or she owes money on if the debt is not reaffirmed.  So, essentially, the choice becomes ‘keep your car and reaffirm the debt’ or surrender the vehicle.

Now, of course, you may think, “no brainer – I need my car – therefore I will reaffirm my debt.”  While this is often the initial reaction, it is not a good idea just to jump into a reaffirmation, simply because you think you need YOUR car. 

Here are some additional considerations to keep in mind:

  1. Is the car worth more than what you owe on the loan?
  2. Can you realistically afford your monthly payments?
  3. There are no other alternatives.

If the answer is “no” to any of these questions, then you really need to put some thought into the decision to reaffirm your debt.  Reaffirming a debt has serious consequences.  With a little planning, and some good counsel by your attorney, you would be surprised how many alternatives you have, without getting stuck with a huge car loan in the long run.

Anyone who files for bankruptcy relief has to attend a Section 341 Meeting of Creditors (or Creditors Meeting).  This is a requirement under the bankruptcy code, and a debtor will not receive his discharge if he fails to appear at the date and time set for his creditors meeting.  Instead, his case will be dismissed, and the debtor has to re-file and face the consequences associated with that.

Now, the creditors meeting sounds like a pretty scary concept. For one, you have to go to the bankruptcy court for it.  Two, it’s called the ‘creditors meeting’!! Your creditors are the reason why you are here in the first place, and many of you have had just about enough of them.  All in all, though,  it is not that scary, and 9 out of 10 of my clients walk out of their creditors meeting going “that was it?”. 

As I said, the code mandates that a creditors meeting takes place. This process is virtually the same for Chapter 7 debtors as well as Chapter 13 debtors.   The court schedules the date and time of your creditors meeting after your petition has been filed and a trustee has been assigned to your case.  This date can only be changed in extraordinary circumstances, and I typically recommend not changing it, as delaying your creditors meeting inevitably means a delay of your discharge.  The date is approximately 30 days after your petition has been filed.  As your attorney, I get notified via email within about 24 – 48 hours of the exact time and date.  Within a few days after that, the official Notice of Creditors Meeting is sent not only to you, but to all of your creditors as well. 

In Arizona, the appointments are set in half-hour increments, and each half-hour portion of the day is assigned to a number of different cases filed in the same Chapter.  This of course means that (a) your creditors meeting is neither private nor confidential, but (b) all the other folks there are there for the same reason you are: To avail yourself of the relief granted to you by the bankruptcy code. 

While the creditors meeting may take place in the actual court building, it is not held in the court room, and the judge will not be there.  Instead, the trustee assigned to your case runs the show.  On your appointed time, you will enter the room along with your attorney, and all the other debtors assigned for the same time slot. The trustee will call your name and you are then required to provide him with a photo id as well as proof of your social security number (i.e. your social security card).

The trustee then swears you in.  The law requires that the trustee asks you a number of questions under oath.  This is important, because even if you have to discuss something that may cause your case to hiccup a bit with the trustee, doing so is really the only option that you have: Perjury – or lying under oath – is a crime – and whatever the hiccup, it’s not worth it.  The standard questions the trustee asks are always pretty much the same.  A few examples include:

  • Have you assisted in the preparation of the petition and schedules filed in your case?
  • Is all the information true and accurate? 
  • How long have you lived in Arizona?
  • Have you ever filed for bankruptcy before?

You know, standard stuff – things your attorney can talk to you about before the creditors meeting ever takes place, if only to calm your nerves.  Once that portion of the questioning is done, the trustee then has the chance to ask you any other questions he may have about the information contained in your schedules. These questions are typically related to your assets, such as ‘how did you come up with the value for that grandfather clock’ or ‘what is your interest in the XYZ partnership exactly, and what kind of returns are you expecting’.  These questions are a little harder to predict, as they are based on your specific case, but a good attorney will know how to issue spot your petition and give you an idea of what kind of questions might be expected, if any.

Now, about the creditors…. it is called a creditors meeting after all.  The bottom line on that is they have the right to appear and question you under oath, but they hardly ever do.  I have only had one instance of a creditor showing up, and that was coordinate the surrender of my clients vehicle.  Now, I am not saying they never show up – it happens and it can happen to you.  In the event that it does, just remember to stay calm, TRUTHFULLY answer all of their questions (as you are still under oath) and don’t forget to breathe. 

Remember, no matter how scary, stressful or frustrating this feels right now, you will likely be relieved when the meeting is over, and wonder why you were so worried in the first place.

In 2005, Congress amended the Bankruptcy Code to include what is now commonly referred as the means test.  The means test is the analysis that is required to determine whether a potential debtor qualifies for Chapter 7 relief or Chapter 13 relief, and even though it is called a test, it is not as simple as filling out a questionnaire to determine the result.

That said, don’t fill out an online means test – chances are the results are wrong, and it may mislead you into thinking no relief is available for you, or that you are qualified to file, when really you are not.  This post will discuss the three step system that the means test uses.

1.  The first step is to determine your income for the last 6 months.  That is all that is relevant…. it doesn’t matter if you made 200K in 2009, if you didn’t make any money in the last 6 months… It is backwards looking, but only to an extent.  The relevant time period is the 6 months prior to filing, not including the month that you are filing in.  So, if you were to file in February, we are looking at August 2009 through January 2010. Once your total gross income for the last 6 months has been determined, you multiply it by 2, to give you a yearly average.  Then you compare your yearly average with the median household income for a household of your size in the county you live in.  This number is determined by the IRS, and the most current listing can be found at http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm

2. If you are under the median household income you qualify for relief under Chapter 7.  You can still file a Chapter 13, provided you have disposable income at the end of the month to make your plan payment, and, if you do go the Chapter 13 route, you have the option of making your plan only 3 years long (instead of the otherwise mandatory 5 years).  Now, typically this is not a problem, but you also need to review your current income and expenses – the expected future numbers so to speak:  If you have a lot of money left over at the end of the month, the US Trustee may argue that you have the ability to repay some of your debts, and your slam dunk 7 gets itself in some trouble.  Your attorney will review this numbers and check the likelihood of a problem for you BEFORE filing, so you know what is ahead.  In my experience, those with an income that is less than the median household income hardly ever run into that problem.  Nevertheless, I always check.

Now, if you are OVER the median household income for a household of your size, not all is lost.  The second step of the means test comes into play, and you may still qualify for Chapter 7.  More on that in my next post.

One of the consequences of the real estate bubble of the early 2000s is that most people are now faced with not only one, but two mortgages secured by their home – and more often than not the home’s value is actually less than the mortgages on it.  Yesterday’s blog post discussed how your home is affected when you file for bankruptcy, but it discussed mostly information relevant to your first mortgage. 

The “rules” for your second mortgage are essentially the same, but have a little reality twist to them.  Let’s start with how it works in a Chapter 7 bankruptcy:  Technically, in order to keep your house through the bankruptcy, you must be current on the date of filing your petition.  Otherwise the bank will file a Motion for Relief of Stay, which essentially asks the court for permission to sell your house at auction.  However, if the value of your home is less than what you owe on your first mortgage, or only a little bit more, the second mortgage really has no incentive to do this.  You see,  the sales proceeds from the sale are paid to the creditors in order of priority.  Therefore, if you owe 200K to the first, and 100K to the second, but the house only sells for 150K at auction – the second gets nothing – and if the second bank is the one initiating the sale, not only do they get nothing, they also incur all the expenses associated with the sale.   This reality-based twist means that while the law gives the bank the right to foreclose if you are not current on your second mortgage when you file your Chapter 7 bankruptcy, they generally don’t.

 The only time the bank may have incentive to proceed anyway, is if the first and second mortgage are through the same bank.  If that is the case, you must be current on your second mortgage as well as your first mortgage in order to make sure that you can keep the house.

The next question then turns to what happens to the second mortgage in the bankruptcy, especially if you are not current with payments.   You have to look at your mortgage as a two-part deal.  Whenever you have a mortgage, and you default, the bank has the right to (1) proceed against the house, by selling it at auction; and/or (2) proceeding against you personally, by suing you in civil court.

Your Chapter 7 discharge will protect you from a future law suit by the mortgage company because as long as you do not reaffirm the debt (which is not a requirement in order to keep real property – don’t let your bank tell you otherwise) your PERSONAL liability on the loan is discharged.  However, the bank still has a security interest in your property, meaning they can still use option (1) and proceed against your house.  This is why you need to make sure that you deal with the second mortgage eventually (settlement, modification, catch it up) – otherwise there is a chance that when your house has increased in value, the bank holding the second mortgage forecloses….and after having paid on your first mortgage for so long, that would truly be unfortunate. 

There are some other alternatives available to you in a Chapter 13 setting – more on that tomorrow, so stay tuned, or if you cannot wait and wish to speak to me about your options – please call 480-275-4894 to set up a free consultation.