An individual receives a discharge for most of his or her debts in a Chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. But not all of an individuals debts are discharged in Chapter 7. Debts not discharged include:

debts for alimony and child support; 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 certain criminal restitution orders.

The following debts will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable:

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.

The debtor will continue to be liable for these types of debts to the extent that they are not paid in the Chapter 7 case. 

Debtor’s Assets

When a Chapter 7 petition is filed, the U.S. trustee appoints an impartial case trustee to administer the case and liquidate the debtor's nonexempt assets.  If all the debtor's assets are exempt or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. Most Chapter 7 cases involving individual debtors are no asset cases. But if the case appears to be an "asset" case at the outset, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. In the typical no asset Chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the Bankruptcy Court will provide notice to creditors and will allow additional time to file proofs of claim. Although a secured creditor does not need to file a proof of claim in a Chapter 7 case to preserve its security interest or lien, there may be other reasons to file a claim. Accordingly, potential debtors should realize that the filing of a petition under Chapter 7 may result in the loss of property.

Automatic Stay

Filing a petition under Chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property.   But filing the petition does not stay certain types of actions, and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 7 Eligibility 

To qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity.   Relief is available under Chapter 7 irrespective of the amount of the debtor's debts or whether the debtor is solvent or insolvent. An individual cannot file under Chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.  In addition, no individual may be a debtor under Chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.

No individual may be a debtor under Chapter 7 if they have previously filed a Chapter 7 in the last 8 years.

How Chapter 7 Works

A Chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the petition, the debtor must also file with the court: 

(1) schedules of assets and liabilities;
(2) a schedule of current income and expenditures; 
(3) a statement of financial affairs; and 
(4) a schedule of executory contracts and unexpired leases.  

Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).   Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts.   A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. 

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household's financial position.

Filing Fee
 

The courts must charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge ($299). Normally, the fees must be paid to the clerk of the court upon filing. If the debtor's income is less than 150% of the poverty level (as defined in the Bankruptcy Code), The court may waive the requirement that the fees be paid.

Meeting of the Creditors

Between 21 and 40 days after the petition is filed, the case trustee (described below) will hold a meeting of creditors. The debtor(s) will need to have a picture ID and social security card (or W-2) as proof of identity. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer 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 and answer questions. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests.

Reaffirmation Agreements

Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property (such as an automobile), he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt. 

If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures. Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated and that reaffirmation means that the debtor's personal liability for that debt will not be discharged in the bankruptcy. The disclosures also require the debtor to sign and file a statement of his or her current income and expenses which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement. Unless the debtor is represented by an attorney, the bankruptcy judge must approve the reaffirmation agreement.

If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement. The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor's dependants. The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement. The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. 

Discharge Received

In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally 60 to 90 days after the date first set for the meeting of creditors.