Chapter 7 Bankruptcy Basics: Part Two
Let’s continue our discussion of the Chapter 7 bankruptcy process, beginning with the meeting of creditors.
The Meeting of Creditors
The meeting of creditors is where creditors and the trustee ask you, the debtor, questions they may have about your financial situation.
When you hear “meeting of creditors,” you might imagine yourself having to face a room of people representing the banks and credit card companies. The reality is that the meeting of creditors is used by the trustee to ask you questions about your financial situation. These questions and your answers will help him or her carry out the responsibilities of the trustee. Creditors will rarely show up at this meeting. Bankruptcy judges are not allowed to attend the meeting of creditors.
Before the meeting of creditors you will be required to provide the trustee with:
- Your federal income tax return
- A government issued picture I.D.
- Your social security number (or a written statement that you don’t have one)
- Evidence of your current income
- Copies of statements from any bank or investment accounts
- Documentation of any monthly expenses
At the meeting, the trustee will ask routine questions about the information that you have provided. The trustee is required to ask questions to make sure that you are aware of the potential consequences of seeking the discharge of debt. They want to make sure you understand the impact of bankruptcy on your credit history.
They must also make sure you understand that you have the ability to file bankruptcy under a different chapter of the bankruptcy law (such as Chapter 13).
Finally, the trustee will also make sure that you understand that a debt that is reaffirmed in bankruptcy means that you will be required to pay that loan back.
What Happens to My Property After the Meeting of Creditors?
As part of your filing, you were required to list all of the property you were trying to keep out of the bankruptcy process. This is often referred to as “exempt” or “excluded” property. Property that is excluded includes things such as retirement accounts or education savings accounts. Property that is exempt is personal property that you keep after bankruptcy so that you can get a fresh start. This includes but is not limited to items such as clothing, furniture, a home, and a car. There are limits on exempt property.
As part of the bankruptcy process after the meeting of creditors, your creditors or the trustee can raise an objection to property you are claiming is exempt or excluded. If no one raises an objection, then you are allowed to keep all of the property you listed in your filing.
If you have property that is either above the maximum limit for exempt property or is not exempt from bankruptcy, the trustee can make a choice as to whether he or she will take possession of the property to convert it to cash. For example, it may be that your clothing is worth more than the $500 allowed under Arizona law. Perhaps you have items that take the total to $600.
Legally, the trustee can take clothing from you up to a value of $100. But the cost of taking the property and converting it to cash may not make it worthwhile. So if the trustee closes your case and does not require you to turn over the property, you get to keep it. The trustee has legally “abandoned” the property and it goes back to whomever owned it prior to the bankruptcy filing. The decision to abandon property is final.
However, it’s important to note that if for some reason you forgot or chose not to list property in your bankruptcy paperwork, the trustee can reopen your case to decide how to deal with that property. It is important to work closely with one of our attorneys to include all of your property in your case. We want to ensure that you take full advantage of the bankruptcy laws to keep property that you are legally entitled to keep.
What Happens to Property That is Collateral for a Loan?
If you have property that secures a consumer debt you need to make a decision as to what you want to do with that property. For example, let’s say you bought a $2500 flat screen TV and financed it through the store (as opposed to using a credit card). You still owe $1800 on the loan and the TV is collateral for the loan.
When you file bankruptcy you must include a statement of what you intend to do with the TV, or any other property that was used as collateral for a consumer debt. You have several options with regard to the TV. One option, usually the least desirable, is that you can “reaffirm” the loan. When you reaffirm the debt, it means that you will continue to pay the loan after the bankruptcy and, more importantly, the original loan terms will continue.
It is important to discuss this option thoroughly with one of our attorneys. Reaffirming the loan means that bankruptcy does not change the loan in anyway. The bankruptcy court must also approve any reaffirmation.
Another option is to surrender the TV as part of the bankruptcy process. The trustee will then make whatever decision is needed regarding the TV and the loan is included in the bankruptcy process.
You can also choose to “redeem” the TV. When you redeem the TV you essentially pay the replacement value of the TV to the creditor. So, in our example, although you still owe $1800 on the loan for the TV, it may be that the TV’s replacement value is really $900. You might be able to agree to pay the creditor $900 for the TV and then be allowed to keep it.
As part of your bankruptcy, you must make these decisions prior to filing and submit a statement of intent at the beginning of the bankruptcy. You then have 30 days after the meeting of creditors to follow through on your intentions for the property. You can request a time extension from the court as long as it is before the 30-day deadline.
What Happens if I Don’t Have Any Assets?
Many cases of Chapter 7 bankruptcy are considered “no asset” cases. This doesn’t mean that you don’t own any property, but that all the property you own is either exempt or excluded from the bankruptcy process.
Alternatively, you might instead have a “nominal asset” bankruptcy. That means that any property you own is only worth slightly more than what is allowed under the Arizona property exemptions. Sometimes the terms “nominal asset” and “no asset” are used interchangeably in bankruptcy cases.
In the case of a nominal asset Chapter 7 bankruptcy, the trustee must make a decision about property that is potentially worth more than the allowed exemptions. For example, under Arizona law you can exempt a car’s value up to $5000. Let’s say your first car is worth $5000 and is covered under the exemption. However, you own a second car that is worth $600.
It may be that selling the second car would cost more than the $600 it would bring. The trustee can decide to abandon the property, in which case it reverts back to you. If the trustee decides to sell the car, you can discuss with your attorney the possibility of requesting that the trustee abandon it on the grounds that the costs of selling the car will wipe out any financial benefit to your creditors.
Selling Non-exempt Property
If your bankruptcy case includes assets that can be sold, you must turn over the property to the trustee after the meeting of creditors. It is possible that the trustee will give you the option to buy non-exempt property before selling to a third party. If this happens, you would pay the value of the property to the trustee and that would be combined with any other money from the sale of your other property and given to your creditors.
It can be hard to predict whether a trustee will decide to sell non-exempt property. He or she will consider the value of the property, how much it will cost to sell the property, and whether or not the amount left after the selling costs are paid are enough to go through with the sale. If the trustee decides that the costs of selling are higher than the value of the property, he or she can decide to abandon it and the property will come back to you as the owner.
As part of the process, the trustee gives notice to you and your creditors that he or she will be selling the non-exempt property. This gives you and your creditors a chance to object to the sale.
Handling Creditor Claims, Distributing Property, and the Discharge
After the meeting of creditors, the trustee will begin to sell or convert to cash any of your property available. While this is happening, the trustee will also evaluate the claims made by your creditors. A claim is made by a creditor to establish their right to get money from the sale of your assets. If the trustee decides that a claim by a creditor is improper, the trustee will make an objection to the claim directly to the court.
In rare cases, as the debtor, you might make an objection to one of your creditor’s claims. Debtors will only object to a creditor’s claim if rejecting the claim would mean there is more money available to pay debts that are not dischargeable. The other circumstances under which you, as the debtor, can object to a claim is if there will be money left over after other claims are paid. Objections made to creditor claims are handled by the court. Once the court rules on the status of the claims, the trustee is free to distribute money to creditors.
Distributing Property to Creditors
Once the property that is available in your bankruptcy case is sold, and the amounts of the claims by your creditors are decided, the trustee will distribute money (or property) to your creditors. The rules established in bankruptcy laws determine which of your creditors will be paid first. The trustee will follow these rules for prioritizing payments to your creditors.
The general priority for paying claims to your creditors is as follows. This list does not include all types of claims, but those that are most applicable to the clients we serve in bankruptcy cases. First are secured claims (debt that is secured by property). Unsecured claims that involve spousal or child support are next (minus any costs incurred by the trustee). After these come unsecured debts that involved child or spousal support that is owed to a government entity (also minus any costs incurred by the trustee). Then administrative expenses for the bankruptcy and, finally, unsecured claims.
Discharge and the Discharge Hearing
In order to receive a discharge in your bankruptcy case, you must complete a personal financial management course. We have available for our clients a list of those companies that have been approved by the court. You can take the course in person, over the phone, or over the internet. You must file a statement that certifies you’ve completed the course within 45 days after the first date set for the meeting of creditors.
In your bankruptcy case only certain debts are covered in the discharge. The following list is not complete, but includes most of those debts that are NOT covered in the discharge. This means that you must continue to pay these debts after your bankruptcy case is concluded.
What debts are not dischargeable in your bankruptcy?
- Certain taxes
- Some debts not listed in the schedule you submitted in your filing
- Most fines and penalties owed to government
- Most student loans
- Debts which were or could have been listed in a prior bankruptcy where your discharge was either denied or waived
- Certain debts incurred while driving under the influence (DUI)
- Debts ruled nondischargeable during the case
- Marital property settlement debts
- Certain condo, co-op, and HOA fees
- Debts for repayment of loans from pension plans
Reaffirming a Debt
During your bankruptcy case, you may choose to reaffirm a debt. When you reaffirm a debt, you enter into a new agreement with a creditor to pay back the money you owe them. After the bankruptcy discharge you are legally obligated to pay this debt based on the terms of the reaffirmation.
Sometimes individuals will want to negotiate with a lender to reaffirm a debt without being represented by a lawyer. When you want to reaffirm a debt and you are not represented by a lawyer, the court is required to hold a discharge hearing. The court can make a decision to discharge that debt, even if you want to reaffirm the debt. This happens when the documentation you submit for reaffirming the debt raises red flags for the court.
The reaffirmation of a debt cannot cause undue hardship for you or your family. Some creditors will push you to reaffirm your debt with them. Because there is concern about banks and creditors coercing individuals in bankruptcy to reaffirm their debts, the bankruptcy laws require that you get an in-depth explanation either at the hearing or from your attorney before the court will approve the request to reaffirm the debt.
If your debt is secured by property, the court must approve the reaffirmation of the debt in order for it to be valid. If you are represented by an attorney in negotiating the reaffirmation, your attorney will file a written document with the court stating the agreement you made with the creditor was not coerced and you were fully informed. The reaffirmation must still be approved by the court.
There have been cases where an individual wants to reaffirm a debt and there is not enough money in the person’s budget to make the payments. Even if you negotiated the reaffirmation with an attorney representing you, the court assumes that this will cause undue hardship to you and your family. The bottom line for the court approving your reaffirmation is that it must not cause undue hardship and it must be in the best interests of you, the debtor.
Closing the Case in Chapter 7 Bankruptcy
In a no-asset Chapter 7 bankruptcy, once the discharge order from the court is entered the court will send out a notice of discharge to you and all of your creditors. Unless new property comes into your Chapter 7 case within 180 days from filing your petition, there is nothing left to be done by the court. Closing your bankruptcy case is an administrative process that happens separately from the court entering your discharge. The discharge and the closing are two different actions.
The process of Arizona bankruptcy can be difficult and unique for each situation. If you are looking into filing for bankruptcy, it is in your best interest to consult with a competent Tucson bankruptcy attorney before taking any action. I am one of Tucson’s most prolific filers of bankruptcy petitions. That didn’t just happen by luck. My staff and I work hard to make sure our clients have a superior experience with our firm. If you are considering filing for bankruptcy in Arizona, contact us for a free consultation to find out how we can help.