Chapter 7 Bankruptcy Petition
A debtor initiates a Chapter 7 bankruptcy by filing a Petition with the bankruptcy court. The bankruptcy petition is a universal federal form that covers a substantial amount of financial information about the debtor and his family. Debtors must sign their Petition under oath.
The bankruptcy Petition requires the debtor to list all his secured debts separately from his secured debts. Unsecured debts include personal loans and credit cards issued by banks, such as Visa, MasterCard, American Express, or Discover, and other credit cards used to purchase consumable items. Vehicle leases, medical bills, and personal loans are also unsecured debts. Tax debt is also unsecured until the IRS issues a tax lien.
Secured debts include those debts where the creditor has a security interest in the debtor’s property to guarantee payment. Examples of secured debts include mortgages, car loans, and loans from finance companies (usually secured by household items. If a debtor has purchased goods using a store credit card, such as a card from Rooms to Go, Best Buy, etc., the store probably has a security interest in certain items purchased, which makes the store a secured creditor.
The debtor must indicate on the bankruptcy Petition whether he wants to either reaffirm or redeem each secured debt or surrender the secured property to the secured creditor. A bankruptcy debtor is entitled to keep any secured property if the debtor continues to pay the loan for that property in a timely manner. If, however, the debtor elects to surrender secured property, the secured creditor may not thereafter recover any money from the debtor.
Chapter 7 Bankruptcy Procedures
The Chapter 7 bankruptcy debtor is required to list all liabilities, no matter how remote. The Petition should list any claim that anyone might have against the debtor even if the claim has not yet matured. For example, if the bankruptcy debtor is a co-debtor on a note, has personally guaranteed corporate or other debt, or is secondarily liable on a mortgage that has been assumed by a purchaser, the debt should be listed along with a brief explanation of the liability. Disputed debts and liabilities should also be listed. Also, if the debtor has ever had a home mortgage that was insured by a governmental agency (such as the VA), the Petition must list that agency as a contingent creditor. This should be done even when someone purchased the property and assumed the mortgage since they might default, and the VA could decide to pursue a claim against the debtor.
The first step in the Chapter 7 bankruptcy is the filing of the petition. The filing of a Chapter 7 bankruptcy creates a bankruptcy estate. The bankruptcy estate refers to all of the debtor’s non-exempt property that subject to administration by a bankruptcy trustee. A trustee is randomly appointed by the Court immediately upon the filing of a Chapter 7 Petition. The Chapter 7 trustee is usually a private attorney or CPA. The trustee’s job in Chapter 7 bankruptcy is to gather all of the debtor’s non-exempt assets, sell those assets (to either the debtor or an outside party), and distribute the proceeds among the debtor’s scheduled unsecured creditors.
Exempt assets, such as the debtor’s homestead and IRA, are not part of the bankruptcy estate, and the trustee cannot interfere with exempt assets.
An automatic stay is imposed immediately upon the filing of a Chapter 7 bankruptcy. The stay prohibits creditor harassment and the pursuing legal action against the debtor and stops all creditor legal collection efforts. The bankruptcy attorney can file a Suggestion of Bankruptcy in ongoing civil lawsuits involving the debtor. The Suggestion of Bankruptcy suspends all such litigation. It is important for debtors to provide their attorney with a copy of any lawsuits filed against them so that the attorney may prepare a Suggestion of Bankruptcy.
In Chapter 7 bankruptcy cases, mortgage creditors typically file a Motion for Relief from the Automatic Stay so that they may foreclose on secured property if the debtor does not pay payments in a timely manner. The bankruptcy court will usually grant this motion. The creditor can take the bankruptcy debtor’s property only if the debtor does not pay secured loans in a timely manner, and only after the creditor forecloses its lien in state court.