INTRODUCTION
Chapter 7 of the Bankruptcy Code is available to individuals, partnerships and corporations. 11 U.S.C. § 109(b). The purpose of chapter 7 is to provide the honest individual debtor with a “fresh start” by discharging most, if not all, of the debtor’s debts. A chapter 7 discharge is available only to individuals and not to partnerships or corporations. 11 U.S.C. § 727(a)(1). Although most individual chapter 7 cases result in a discharge of all debts, some types of debts are not discharged (i.e. student loans and certain taxes). Moreover, some individual chapter 7 bankruptcy cases run the risk of dismissal if the Office of the United State’s Trustee believes the debtor’s net disposable income is sufficient to fund a chapter 13 plan.
THE CHAPTER 7 PROCESS
A chapter 7 bankruptcy case begins with the filing of a petition for relief pursuant to the United States Bankruptcy Code (the “bankruptcy petition”). 11 U.S.C. § 301(a). The bankruptcy petition is filed with the Bankruptcy Court in the district where the individual lives or where the business debtor has its principal place of business or its principal assets. The debtor, in addition to the bankruptcy petition, must also file schedules listing all assets and all debts, an income and expense report, and a statement of financial affairs. Federal Rules of Bankruptcy Procedure 1007(b). Married persons may file a joint bankruptcy petition or one or both spouses may file individual bankruptcy petitions. 11 U.S.C. § 302(a). Joint petitioners pay only one filing fee.
Once a bankruptcy case is filed, most creditor actions against the debtor and the debtor’s property are enjoined pursuant to the “automatic stay” provisions of the Bankruptcy Code. 11 U.S.C. § 362(a). This stay arises by operation of law and requires no additional judicial action. While the stay is in effect, creditors cannot initiate or continue lawsuits, repossessions, or wage garnishments.
While Chapter 7 of the Bankruptcy Code is often referred to as a liquidation or a “straight bankruptcy,” Chapter 7 debtors will rarely lose any assets. Most, if not all of a Chapter 7 debtor’s assets are exempt under federal bankruptcy exemption laws and/or the laws of the state where the debtor resides (In your case, the Texas exemption laws). Married persons may only claim one set of exemptions
Shortly after the filing of a chapter 7 bankruptcy case a bankruptcy trustee is appointed. 11 U.S.C. §§ 701, 702. The trustee’s duties are to examine and verify the accuracy of the debtor’s bankruptcy papers and to identify assets which are not exempt. 11 U.S.C. § 704. The trustee sells the non-exempt assets which have value and distributes the net proceeds to the debtor’s creditors. To the extent an asset has a lien against it (i.e. a car or a house) such asset has value only to the extent the debt against the asset when combined with the amount of any exemption is less than the fair market value of the asset. 11 U.S.C. §§ 506, 522.
A “meeting of creditors” (the “341(a) hearing“) is held about 30 days after the bankruptcy petition is filed. 11 U.S.C. § 341(a). The debtor must attend this meeting, and if a husband and wife filed jointly, both must attend. Creditors may appear and ask questions regarding the debtor’s financial affairs and property, but creditors rarely attend. The meeting is conducted by the chapter 7 trustee and not the bankruptcy judge. The debtor testifies under penalty of perjury and must cooperate with the chapter 7 trustee. Any debtor that fails to cooperate with the chapter 7 trustee or to testify truthfully could be denied a discharge. 11 U.S.C. §§ 502, 727; Federal Rules of Bankruptcy Procedure 4004.
The Bankruptcy Court Clerk issues the discharge, approximately 75 days after the first date set for the 341 hearing. See generally, Federal Rules of Bankruptcy Procedure 4004. A copy of the discharge is mailed to the debtor and all the creditors listed in the debtor’s schedules.
