Bankruptcy Attorney in Michigan  

Walter A. Metzen, Michigan Bankruptcy Attorney

Board Certified Consumer Bankruptcy Specialist

American Board of Bankruptcy Certification

 


 

 Bankruptcy Basics: The Discharge in Bankruptcy
 

Chapter 7
Liquidation Under the Bankruptcy
Code


ALTERNATIVES TO CHAPTER 7
Debtors should be aware that there are several
alternatives to chapter 7 relief. For example,
debtors who are engaged in business,
including corporations, partnerships, and sole
proprietorships, may prefer to remain in
business and avoid liquidation. Such debtors
should consider filing a petition under chapter
11 of the Bankruptcy Code. Under chapter 11,
the debtor may seek an adjustment of debts,
either by reducing the debt or by extending the
time for repayment, or may seek a more
comprehensive reorganization. Sole
proprietorships may also be eligible for relief
under chapter 13 of the Bankruptcy Code.
In addition, individual debtors who have
regular income may seek an adjustment of
debts under chapter 13 of the Bankruptcy
Code. A particular advantage of chapter 13 is
that it provides individual debtors with an
opportunity to save their homes from
foreclosure by allowing them to “catch up”
past due payments through a payment plan.
Moreover, the court may dismiss a chapter 7
case filed by an individual whose debts are
primarily consumer rather than business debts
if the court finds that the granting of relief
would be an abuse of chapter 7. 11 U.S.C.
707(b).
If the debtor’s “current monthly income”1 is
more than the state median, the Bankruptcy
Code requires application of a “means test” to
determine whether the chapter 7 filing is
presumptively abusive. Abuse is presumed if
the debtor’s aggregate current monthly income
over 5 years, net of certain statutorily allowed
expenses, is more than (i) $10,950, or (ii) 25%
of the debtor’s nonpriority unsecured debt, as
long as that amount is at least $6,575.2 The
debtor may rebut a presumption of abuse only
by a showing of special circumstances that
justify additional expenses or adjustments of
current monthly income. Unless the debtor
overcomes the presumption of abuse, the case
will generally be converted to chapter 13 (with
the debtor’s consent) or will be dismissed. 11
U.S.C. 707(b)(1).
Debtors should also be aware that out-of-court
agreements with creditors or debt counseling
services may provide an alternative to a
bankruptcy filing.
BACKGROUND
A chapter 7 bankruptcy case does not involve
the filing of a plan of repayment as in chapter
13. Instead, the bankruptcy trustee gathers and
sells the debtor’s nonexempt assets and uses
the proceeds of such assets to pay holders of
claims (creditors) in accordance with the
provisions of the Bankruptcy Code. Part of the
debtor’s property may be subject to liens and
mortgages that pledge the property to other
creditors. In addition, the Bankruptcy Code
will allow the debtor to keep certain “exempt”
property; but a trustee will liquidate the
debtor’s remaining assets. Accordingly,
potential debtors should realize that the filing
of a petition under chapter 7 may result in the
loss of property.
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. 11 U.S.C. 101(41),
109(b). Subject to the means test described
above for individual debtors, 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. 11 U.S.C. 109(g),
362(d) and (e). 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. 11 U.S.C. 109, 111. There
are exceptions in emergency situations or
where the U.S. trustee (or bankruptcy
administrator) has determined that there are
insufficient approved agencies to provide the
required counseling. If a debt management
plan is developed during required credit
counseling, it must be filed with the court.
One of the primary purposes of bankruptcy is
to discharge certain debts to give an honest
individual debtor a “fresh start.” The debtor
has no liability for discharged debts. In a
chapter 7 case, however, a discharge is only
available to individual debtors, not to
partnerships or corporations. 11 U.S.C.
727(a)(1). Although an individual chapter 7
case usually results in a discharge of debts, the
right to a discharge is not absolute, and some
types of debts are not discharged. Moreover, a
bankruptcy discharge does not extinguish a
lien on property.

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.3
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. Fed.
R. Bankr. P. 1007(b). 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). 11 U.S.C. 521. 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. Id. A
husband and wife may file a joint petition or
individual petitions. 11 U.S.C. 302(a). Even
if filing jointly, a husband and wife are subject
to all the document filing requirements of
individual debtors. (The Official Forms may
be purchased at legal stationery stores or
downloaded from the internet at
http://www.uscourts.gov/bkforms/index.html.
They are not available from the court.)
The courts must charge a $245 case filing fee,
a $39 miscellaneous administrative fee, and a

$15 trustee surcharge. Normally, the fees must
be paid to the clerk of the court upon filing.
With the court’s permission, however,
individual debtors may pay in installments. 28
U.S.C. 1930(a); Fed. R. Bankr. P. 1006(b);
Bankruptcy Court Miscellaneous Fee
Schedule, Item 8. The number of installments
is limited to four, and the debtor must make
the final installment no later than 120 days
after filing the petition. Fed. R. Bankr. P.
1006. For cause shown, the court may extend
the time of any installment, provided that the
last installment is paid not later than 180 days
after filing the petition. Id. The debtor may
also pay the $39 administrative fee and the
$15 trustee surcharge in installments. If a joint
petition is filed, only one filing fee, one
administrative fee, and one trustee surcharge
are charged. Debtors should be aware that
failure to pay these fees may result in
dismissal of the case. 11 U.S.C. 707(a).
If the debtor’s income is less than 150% of the
poverty level (as defined in the Bankruptcy
Code), and the debtor is unable to pay the
chapter 7 fees even in installments, the court
may waive the requirement that the fees be
paid. 28 U.S.C. 1930(f).
In order to complete the Official Bankruptcy
Forms that make up the petition, statement of
financial affairs, and schedules, the debtor
must provide the following information:
1. A list of all creditors and the amount and
nature of their claims;
2. The source, amount, and frequency of the
debtor’s income;
3. A list of all of the debtor’s property; and
4. A detailed list of the debtor’s monthly
living expenses, i.e., food, clothing, shelter,
utilities, taxes, transportation, medicine, etc.
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.
Among the schedules that an individual debtor
will file is a schedule of “exempt” property.
The Bankruptcy Code allows an individual
debtor4 to protect some property from the
claims of creditors because it is exempt under
federal bankruptcy law or under the laws of
the debtor’s home state. 11 U.S.C. 522(b).
Many states have taken advantage of a
provision in the Bankruptcy Code 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 the 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. The
debtor should consult an attorney to determine
the exemptions available in the state where the
debtor lives.
Filing a petition under chapter 7
“automatically stays” (stops) most collection
actions against the debtor or the debtor’s
property. 11 U.S.C. 362. But filing the
petition does not stay certain types of actions
listed under 11 U.S.C. 362(b), 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.
Between 21 and 40 days after the petition is
filed, the case trustee (described below) will
hold a meeting of creditors. If the U.S. trustee
or bankruptcy administrator5 schedules the
meeting at a place that does not have regular
U.S. trustee or bankruptcy administrator
staffing, the meeting may be held no more
than 60 days after the order for relief. Fed. R.
Bankr. P. 2003(a). 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. 11 U.S.C.
343. If a husband and wife have filed a joint
petition, they both must attend the creditors’
meeting and answer questions. Within 14 days
of the creditors’ meeting, the U.S. trustee will
report to the court whether the case should be
presumed to be an abuse under the means test
described in 11 U.S.C. 704(b).
It is important for the debtor to cooperate with
the trustee and to provide any financial
records or documents that the trustee requests.
The Bankruptcy Code requires the trustee to
ask the debtor questions at the meeting of
creditors to ensure that the debtor is aware of
the potential consequences of seeking a
discharge in bankruptcy such as the effect 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. Some trustees provide
written information on these topics at or
before 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. 11 U.S.C. 341(c).
In order to accord the debtor complete relief,
the Bankruptcy Code allows the debtor to
convert a chapter 7 case to case under chapter
11, 12 or 136 as long as the debtor is eligible
to be a debtor under the new chapter.
However, a condition of the debtor’s
voluntary conversion is that the case has not
previously been converted to chapter 7 from
another chapter. 11 U.S.C. 706(a). Thus, the
debtor will not be permitted to convert the
case repeatedly from one chapter to another.
ROLE OF THE CASE TRUSTEE
When a chapter 7 petition is filed, the U.S.
trustee (or the bankruptcy court in Alabama
and North Carolina) appoints an impartial case
trustee to administer the case and liquidate the
debtor’s nonexempt assets. 11 U.S.C. 701,
704. 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 creditors7 must file their
claims with the court within 90 days after the
first date set for the meeting of creditors. Fed.
R. Bankr. P. 3002(c). A governmental unit,
however, has 180 days from the date the case
is filed to file a claim. 11 U.S.C. 502(b)(9).
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. A creditor in
a chapter 7 case who has a lien on the debtor’s
property should consult an attorney for advice.
Commencement of a bankruptcy case creates
an “estate.” The estate technically becomes
the temporary legal owner of all the debtor’s
property. It 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 manner that maximizes
the return to the debtor’s unsecured creditors.
The trustee accomplishes this by selling the
debtor’s property if it is free and clear of liens
(as long as the property is not exempt) or if it
is worth more than any security interest or lien
attached to the property and any exemption
that the debtor holds in the property. The
trustee may also attempt to recover money or
property under the trustee’s “avoiding
powers.” The trustee’s avoiding powers
include the power to: set aside preferential
transfers made to creditors within 90 days
before the petition; undo security interests and
other prepetition transfers of property that
were not properly perfected under
nonbankruptcy law at the time of the petition;
and pursue nonbankruptcy 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 business for a limited period of
time, if such operation will benefit creditors
and enhance the liquidation of the estate. 11
U.S.C. 721.
Section 726 of the Bankruptcy Code governs
the distribution of the property of the estate.
Under 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 only paid if all other classes of claims have
been paid in full. Accordingly, 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 individual debtor’s
primary concerns in a chapter 7 case are to
retain exempt property and to receive a
discharge that covers as many debts as
possible.

THE CHAPTER 7 DISCHARGE
A discharge releases individual debtors from
personal liability for most debts and prevents
the creditors owed those debts from taking any
collection actions against the debtor. Because
a chapter 7 discharge is subject to many
exceptions, though, debtors should consult
competent legal counsel before filing to
discuss the scope of the discharge. Generally,
excluding cases that are dismissed or
converted, individual debtors receive a
discharge in more than 99 percent of chapter
7 cases. 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
19
for the meeting of creditors. Fed. R. Bankr. P.
4004(c).
The grounds for denying an individual debtor
a discharge in a chapter 7 case are narrow and
are construed against the moving party.
Among other reasons, the court may deny the
debtor a discharge if it finds that the debtor:
failed to keep or produce adequate books or
financial records; failed to explain
satisfactorily any loss of assets; committed a
bankruptcy crime such as perjury; failed to
obey a lawful order of the bankruptcy court;
fraudulently transferred, concealed, or
destroyed property that would have become
property of the estate; or failed to complete an
approved instructional course concerning
financial management. 11 U.S.C. 727; Fed.
R. Bankr. P. 4005.
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. 11 U.S.C.
524(c). The Bankruptcy Code requires that
reaffirmation agreements contain an extensive
set of disclosures described in 11 U.S.C.
524(k). 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. 11 U.S.C. 524(k). 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.11 U.S.C. 524(d)
and (m). The debtor may repay any debt
voluntarily, however, whether or not a
reaffirmation agreement exists. 11 U.S.C.
524(f).
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
individual’s 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.11 U.S.C. 523(a).
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. 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 will be discharged
unless a creditor timely files and prevails in an
action to have such debts declared
nondischargeable. 11 U.S.C. 523(c); Fed. R.
Bankr. P. 4007(c).
The court may revoke a chapter 7 discharge on
the request of the trustee, a creditor, or the
U.S. trustee if the discharge was obtained
through fraud by the debtor, 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, or if the
debtor (without a satisfactory explanation)
makes a material misstatement or fails to
provide documents or other information in
connection with an audit of the debtor’s case.
11 U.S.C. 727(d).

NOTES
1. The “current monthly income” received by
the debtor is a defined term in the Bankruptcy
Code and means the average monthly income
received over the six calendar months before
commencement of the bankruptcy case,
including regular contributions to household
expenses from nondebtors and including
income from the debtor’s spouse if the
petition is a joint petition, but not including
social security income or certain payments
made because the debtor is the victim of
certain crimes. 11 U.S.C. 101(10A).
2. To determine whether a presumption of
abuse arises, all individual debtors with
primarily consumer debts who file a chapter 7
case must complete Official Bankruptcy Form
B22A, entitled “Statement of Current Monthly
Income and Means Test Calculation - For Use
in Chapter 7.” (The Official Forms may be
purchased at legal stationery stores or
downloaded from the internet at:
http://www.uscourts.gov/bkforms/index.html.
They are not available from the court.)
3. An involuntary chapter 7 case may be
commenced under certain circumstances by a
petition filed by creditors holding claims
against the debtor. 11 U.S.C. 303.
4. Each debtor in a joint case (both husband
and wife) can claim exemptions under the
federal bankruptcy laws. 11 U.S.C. 522(m).
5. In North Carolina and Alabama, bankruptcy
administrators perform similar functions that
U.S. trustees perform in the remaining 48
states. These duties include establishing a
panel of private trustees to serve as trustees in
chapter 7 cases and supervising the
administration of cases and trustees in cases

under chapters 7, 11, 12, and 13 of the
Bankruptcy Code. The bankruptcy
administrator program is administered by the
Administrative Office of the United States
Courts, while the U.S. trustee program is
administered by the Department of Justice.
For purposes of this publication, references to
U.S. trustees are also applicable to bankruptcy
administrators.
6. A fee is charged for converting, on request
of the debtor, a case under chapter 7 to a case
under chapter 11. The fee charged is the
difference between the filing fee for a chapter
7 and the filing fee for a chapter 11. 28 U.S.C.
1930(a). Currently, the difference is $755.
Id. There is no fee for converting from chapter
7 to chapter 13.
7. Unsecured debts generally may be defined
as those for which the extension of credit was
based purely upon an evaluation by the
creditor of the debtor’s ability to pay, as
opposed to secured debts, for which the
extension of credit was based upon the
creditor’s right to seize collateral on default,
in addition to the debtor’s ability to pay.

 

   
  •   Driver's License or State ID & Social Security card
  •   Pay Stubs for the past 2 months
  •   Copies of all Bills, Summons or Judgments against you by creditors
  •    Divorce Judgments or Decrees
  •   Real Estate Documents, Deeds, Recorded Mortgages, mortgage balance statements
  •   Property Tax Bills (SEV)
  •   Bank Statements for 3 months
  •   Recorded Mortgage and Deed
  •   Car Titles
  •   Income Tax Returns & W2 forms
    for the last 2 years

  •