Handling Creditor Claims, Distributing Property and the Discharge
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 in a Chapter 7 bankruptcy. While this is happening, the trustee handling your bankruptcy case will 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 any 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). Unsecured debt 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.
If there is community property involved in the bankruptcy process, it is handled separately from individual property. It is then distributed in several stages to creditors. Community property will be discussed more in depth in another post.
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 (which we will discuss in another post)
- Marital property settlement debts
- Certain condo, coop, HOA fees
- Debts for repayment of loans from pension plans
Reaffirming a Debt
During your bankruptcy case, you have the right to 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 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 is 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 amount of time it takes to administratively close your case varies among different courts. It may be that you are ready to have the case closed more quickly than it normally takes. For example, if you need to file another bankruptcy case in another state, you may not be able to have two bankruptcy cases open at the same time. You can make a request to the court clerk or make a motion to the court to close the case more quickly.
It is also possible for claims to be filed and distributions to be made even after the court has ruled on your discharge. The trustee will continue to handle details of your case. Once she or he has filed a final report of your bankruptcy case to the court, then your case will be closed.
Because our bankruptcy attorneys have decades of experience with Tucson and Phoenix Arizona Chapter 7 bankruptcies, we encourage you to sit down with us to discuss your case. We can answer any questions you might have and give you the best advice to go through the bankruptcy process. Call our office today to set up your consultation.