Automatic Stay
The filing of a petition under Chapter 7 “automatically stays” most actions against the debtor or the debtor’s property. This stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuits, wage garnishment, or even telephone calls demanding payments. Creditors normally receive notice of the filing of the petition from the clerk. Debtors may also give notice to creditors.

Exempt Property
One of the schedules of assets and liabilities which will be filed by the individual debtor is a schedule of “exempt” property. Federal bankruptcy law provides that an individual debtor can protect some property from the claims of creditors either because it is exempt under federal bankruptcy law or because it is exempt under the laws of the debtor’s home state. Many states have taken advantage of a provision in the bankruptcy law that permits each state to adopt its own exemption law, in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. Legal counsel should be consulted to determine the law of the state in which the debtor lives.

Meeting of Creditors
A “meeting of creditors” is usually held 20 to 40 days after the petition is filed. The debtor must attend this meeting, at which creditors may appear and ask questions regarding the debtor’s financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting. The trustee also will attend this meeting and question the debtor on the same matters. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. The trustee is required to examine the debtor orally at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy, including the effects on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt. In some courts, trustees may provide written information on these topics at or in advance of the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.


Chapter 7 Trustee
Upon filing of the chapter 7 petition, an impartial case trustee is appointed by the United States Trustee to administer the case and liquidate the debtor’s nonexempt assets. If, as is often the case, all of the debtor’s assets are exempt or subject to valid liens, there will be no distribution to unsecured creditors. Typically, most chapter 7 cases involving individual debtors are “no asset” cases. If the case appears to be an “asset” case at the outset, however, unsecured creditors, who have claims against the debtor must file their claims with the clerk of court within 90 days after the first date set for the meeting of creditors. In the typical no asset consumer chapter 7 case, there is no need for creditors to file proofs of claim. If the trustee later recovers assets for distribution to unsecured creditors, creditors will be given notice of that fact and additional time to file proofs of claim. Although secured creditors are not required to file proofs of claim in chapter 7 cases in order to preserve their security interests or liens, there may be circumstances when it is desirable to do so. A creditor in a chapter 7 case who has a lien on the debtor’s property should consult an attorney for advice.

The commencement of a bankruptcy case creates an “estate.” The estate technically becomes the temporary legal owner of all the debtor’s property. The estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. Generally speaking, the debtor’s creditors are paid from nonexempt property of the estate.

The primary role of a chapter 7 trustee in an “asset” case is to liquidate the debtor’s nonexempt assets in a way that maximizes the return to the debtor’s unsecured creditors. The trustee will try to accomplish this in several different ways. First, the trustee will attempt to liquidate the debtor’s nonexempt property. This includes both property that the debtor owns free and clear of liens and property which has market value above the amount of any security interest or lien and any exemption that the debtor holds in the property. The trustee pursues causes of action (lawsuits) belonging to the debtor and pursues the trustee’s own causes of action to recover money or property under the trustee’s “avoiding powers.” The trustee’s avoiding powers include the power to set aside preferential transfer made to creditors within 90 days before the petition, the power to undo security interests and other pre-petition transfer of property that were not properly perfected under non-bankruptcy law at the time of the petition, and the power to pursue non-bankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the bankruptcy court may authorize the trustee to operate the debtor’s business for a limited period of time, if such operation will benefit the creditors of the estate and enhance the liquidation of the estate. All of these activities of the trustee are designed to produce the maximum return for the debtor’s unsecured creditors.

The distribution of the property of the estate is governed by section 726 of the Bankruptcy Code, which sets forth the order of payment of all claims. Under section 726, there are six classes of claims; and each class must be paid in full before the next lower class is paid anything. The debtor is not particularly interested in the trustee’s disposition of the estate assets, except with respect to the payment of those debts which for some reason are not dischargeable in the bankruptcy case. The debtor’s major interests in a chapter 7 case are in securing exempt property and in getting a discharge that covers as many debts as possible.

Chapter 7 Discharge
A discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. The bankruptcy law regarding the scope of a chapter 7 discharge is complex, and debtors should consult competent legal counsel in this regard prior to filing. As a general rule, however, excluding cases which are dismissed or converted, individual debtor are discharge in more than 99 percent of chapter 7 cases. In most cases, unless a complaint has been filed objecting to the discharge or the debtor has filed a written waive, the discharge will be granted to a chapter 7 debtor relatively early in the case, i.e., 60 to 90 days after the date first set for the meeting of creditors.

The grounds for denying an individual debtor a discharge in a chapter 7 case are very narrow and are construed against a creditor or trustee seeking to deny the debtor a chapter 7 discharge. Among the grounds for denying a discharge to a chapter 7 debtor are that the debtor failed to keep or produce adequate books or financial records; the debtor failed to explain satisfactorily any loss of assets; the debtor committed a bankruptcy crime such as perjury; the debtor failed to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property that would have become property of the estate.

In certain jurisdictions, secured creditors may retain some rights to seize pledged property, even after a discharge is granted. Depending on individual circumstances, a debtor wishing to keep possession of the pledged property, such as an automobile, may find it advantageous to “reaffirm” the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will pay all or a portion of the money owed, even though the debtor has filed bankruptcy. In return, the creditor promises that as long as payments are made, the creditor will not repossess or take back the automobile or other property. Because there is a disagreement among the courts concerning whether a debtor, whose debt is not in default, may retain the property and pay under the original contract terms without reaffirming the debt, legal counsel should be consulted to ensure that the debtor’s rights are protected and that any reaffirmation is in the debtor’s best interest.

If the debtor elects to reaffirm the debt, the reaffirmation should be accomplished prior to the granting of a discharge. A written agreement to reaffirm a debt must be filed with the court and, if the debtor is not represented by an attorney, must be approved by the judge. The Bankruptcy Code requires that reaffirmation agreements contain an explicit statement advising the debtor that the agreement is not required by bankruptcy or non-bankruptcy law. In addition, the debtor’s attorney is required to advise the debtor of the legal effect and consequences of such an agreement, including a default under such an agreement. The Code requires a reaffirmation hearing only if the debtor has not been represented by an attorney during the negotiating of the agreement. The debtor may still repay any debt voluntarily, however, whether or not a reaffirmation agreement exists.

Most claims against an individual chapter 7 debtor are discharged. A creditor whose unsecured claim is discharged may no longer initiate or continue any legal or other action against the debtor to collect the obligation. A discharge under chapter 7, however, does not discharge an individual debtor from certain specific types of debts listed in section 523 of the Bankruptcy Code. Among the types of debt which are not discharged in a chapter 7 case are alimony and child support obligations; certain taxes; debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity; debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for criminal restitution orders. To the extent that these types of debts are not fully paid in the chapter 7 case, the debtor is still responsible for them after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses; debts for fraud or defalcation while acting in a fiduciary capacity; and debts for willful and malicious injury by the debtor to another entity or to the property of another entity, and debts arising from a property settlement agreement incurred during or in connection with a divorce or separation are discharged unless a creditor timely files and prevails in an action to have such debts declared excepted from the discharge.

Finally, the court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the United States trustee if the discharge was obtained through fraud by the debtor, or if the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee.

Student Loans
Student loans are one category of debt that are specifically listed as non-dischargeable in chapter 7 proceedings. However, there is an exception to this general rule. That exception is categorized under the definition of “undue hardship.”

Specifically, if the debtor can demonstrate this “undue hardship,” then student loans may be discharged. The question then becomes, what constitutes “undue hardship?”

The Ninth Circuit, in the case of In re Pena, has adopted the three-prong test used by the Second Circuit in the case of In re Brunner. These three tests, which all must be met in order for discharge of these particular student loan debts, are as follows:

(1) ... that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

Although meeting this criteria may be difficult, significant student loan debt may be discharged in certain limited situations.