Bankruptcy – Business and Individual Chapter 7 Liquidations

Chapter 7 of the Bankruptcy Code (Title 11 of the United States Code) generally concerns the liquidation of available assets by a Chapter 7 trustee for distribution to creditors. In an individual case, the debtor’s assets, if any, are divided into two groups – exempt and non-exempt. Exempt assets are exempt under applicable bankruptcy and state laws and are unavailable for the trustee to liquidate, whereas non-exempt assets are subject to liquidation by the trustee. Certain entities can also file Chapter 7 bankruptcies, such as corporations and limited liability companies. In such a situation, the entity usually ceases operations, and a trustee assumes all control over any business assets and proceeds to liquidate them if they have any value. There are no asset exemptions for non-individual bankruptcies.

Individuals often file Chapter 7 bankruptcies to discharge certain of their pre-bankruptcy debts.

Businesses frequently file Chapter 7 bankruptcies to orderly wind down their operations.

Generally, Section 362 of the Bankruptcy Code invokes an “automatic stay” of specific creditor activity upon the filing of a bankruptcy petition.  This, for example, causes pending litigation in which the debtor is a defendant to be stopped as well as any collection activity.  There are exceptions to the application of the automatic stay.  In addition, creditors may seek relief from stay under certain circumstances, and the stay will continue only for so long depending on the specific case status (such as it ceases to exist if the case is closed or dismissed). 

Chapter 7 individual bankruptcies involve the appointment of a Chapter 7 trustee to liquidate non-exempt assets for the benefit of creditors with the bankruptcy court often entering a discharge order often four to six months after the filing. Chapter 13 individual bankruptcies require confirmation of a plan of reorganization for debtors to pay their creditors certain amounts of money over several years, with the debtors generally getting to keep, at least initially, their assets. The discharge usually does not enter until all such plan payments are made. In addition, Chapter 13 cases have debt limits that if exceeded preclude proceeding under this chapter (under such a situation Chapter 7 liquidation or Chapter 11 reorganization may be potential alternatives).

All bankruptcy filings require at the outset, at a minimum, a petition for relief and a listing of creditor information. Other documents are also required to be filed, like schedules and a statement of financial affairs, some of which can wait until a few weeks after the commencement of the case. Great care needs to be taken in preparing all documents filed with the bankruptcy court, ensuring that they are as accurate as possible and timely filed. 

Yes. Individuals are generally required to take a credit counseling class within 180 days before the filing and include a certificate evidencing completion of the class with the petition. Similarly, individuals are required to take a personal financial management course after the filing within a period of time and file a certificate proving that the person finished the class. Providers of these classes can be found at https://www.justice.gov/ust/eo/bapcpa/ccde/CC_Files/CC_Approved_Agencies_HTML/cc_colorado/cc_colorado.htm. Depending on the provider; the courses can be taken over the phone or via the internet.

A meeting of creditors, or Section 341 meeting, is a statutory and mandatory meeting convened in a Chapter 7 case by the trustee approximately 30 days after the filing of the petition. The trustee swears in the debtor (in an individual case) or the debtor’s representative in a non-individual case, and the trustee asks the person questions to be answered under oath concerning the bankruptcy. Creditors of the debtor also have an opportunity to ask the person questions.

Yes. A court filing fee is usually paid at the commencement of the Chapter 7 case. See http://www.cob.uscourts.gov/fees.  

Generally, my firm charges a flat fee for most expected services in a Chapter 7 bankruptcy case, which varies by type of debtor (individual vs. non-debtor), amount and type of debt at issue, anticipated issues, and sophistication of case. Certain services outside the ordinary course of a typical Chapter 7 case, however, will be charged at hourly rates, such as those related to adversary proceedings where creditors object to the discharge of debts. In addition, if the matter requires meaningful pre-bankruptcy counseling, my firm may charge hourly for those services. Whatever the legal arrangement, it will be documented at the outset of the matter in an engagement letter to avoid any miscommunication.  

The Law Offices of Kevin S. Neiman, pc represents all types of participants in Chapter 7 cases, including individual and non-individual (like companies) debtors, secured and unsecured creditors, trustees, and purchasers of assets.

The “means test” is a statutory test created to, among other things, ensure that the Chapter 7 process is not abused in individual bankruptcy cases whereby people who have the ability to pay off at worst some of their debt are pushed toward one of the reorganization chapters (Chapters 11 and 13).

Financial distress is frequently why Chapter 7 liquidations are considered. Also, while there are other reasons, expensive or risky litigation often leads to this potential alternative.

In individual bankruptcy cases, assets are divided into two pools: exempt and non-exempt. Those that are exempt are unavailable to the claims of creditors or the trustee under applicable state or federal law, while non-exempt are subject to such claims. Businesses in bankruptcy cases do not have any exemptions for their assets.

While individuals can represent themselves throughout their Chapter 7 bankruptcies, the process can be complex and failing to appreciate all rights, duties, and obligations under the Bankruptcy Code and related law could have serious adverse consequences. With knowledge and experience, able counsel usually provides meaningful benefits by assisting people navigate through the bankruptcy process.