Below we break down the roles and rights of the Debtor, the Trustee, and the Creditors involved in a Chapter 7 Bankruptcy.
Cast of Character in a Chapter 7 Bankruptcy
There are at least 2 active characters in each Chapter 7 bankruptcy case: (1) the person who filed bankruptcy (debtor/filer); and (2) the bankruptcy trustee assigned to the case.
Depending upon the facts of the case, creditors may also play an active role, however that is not common in no-asset cases.
The Debtor
This is the person filing the case to get protection from creditors and seeking permanent debt relief in the form of a discharge.
Prior to filing their Chapter 7 petition, the debtor must complete several tasks:
1. Credit Counseling Course:
Must be completed in the 180 days before their filing date;
Taken from one of the approved providers for the district;
Certificate of completion needs to be submitted to the bankruptcy court with the petition for relief.
2. Financial Management Course:
After filing the petition, the debtor must complete a financial management course before the court can enter a discharge;
Taken through a credit counseling agency approved to offer the course by the Office of the United States Trustee.
3. The Means Test:
Not everyone who wants to file for Chapter 7 bankruptcy is eligible to do so. If your income is too high, you will not be eligible for a Chapter 7 bankruptcy. The Means Test is intended to require those who have the means to pay some or all of their debts do so.
The Chapter 7 Trustee
The Chapter 7 bankruptcy trustee is assigned to a debtor's case to ensure that the creditors get what they are due under the bankruptcy laws. They do not represent the filer or any specific creditor. However, like the filer and creditors, they want the case to proceed as smoothly as possible.
The trustee's duties include:
Reviewing the pleadings and supporting documentation;
Reviewing the filer's tax returns;
Analyzing the filer's recent pay stubs;
Determining whether any property can be sold to benefit creditors.
As the trustee is looking to ensure the fair treatment of all unsecured creditors, they have wide-ranging powers to include:
The ability to undo payments to creditors; and
The ability to undo property transfers where the filer received less than market value for the property.
If a filer attempts to circumvent the bankruptcy estate by transferring a piece of property to someone else so it doesn't enter the bankruptcy estate, the trustee can and will undo that transfer and instead sell the property.
Trustee's Role in No-Asset Case
After fulfilling his or her duties - determining there are no assets to be sold for the benefit of creditors - the trustee notifies the bankruptcy court and asks to be relieved from the case. This can occur as soon as the meeting of creditors has happened.
Once a trustee files the no-asset report with the bankruptcy court, the case is essentially on auto-pilot until the court issues the discharge. Chapter 7 cases where a no-asset report has been filed will be closed after the court enters the discharge.
Trustee's Role in Asset Case
The trustee will remain involved in the case as long as there are assets available for liquidation so creditors can be paid. In some cases, this extends well past the point in time that the court has entered the discharge.
If the filer does not cooperate and allow the trustee to administer the estate (i.e. handle everything that needs to be handled), the trustee can request that the bankruptcy court revoke the filer's discharge.
Role of United States Trustee
The trustee appointed for a Chapter 7 bankruptcy is an independent contractor for the Department of Justice. The Office of the United States Trustee monitors all case trustees, including all Chapter 7 trustees, except for in North Carolina and Alabama. In those states, a bankruptcy administrator fills the trustee role.
The United States Trustee Office receives notice of all bankruptcy filings and conducts random audits to ensure compliance with all applicable laws and procedures.
The Creditors
The final set of characters in a typical consumer Chapter 7 bankruptcy case are creditors. They can be further defined as secured creditors and unsecured creditors. The category a creditor falls within determines how they may impact your case.
Secured Creditors
Secured creditors have an interest in the property you financed (ie, a car loan or a mortgage on a home) - and if you stop making payments on the debt the creditor secures - they have the right to repossess the property or foreclose on it. Although filing for bankruptcy temporarily stops all collection actions, it will not allow the filer to keep the property without paying for it.
Creditors Secured by Real Property
When you take out a mortgage to purchase a home, that mortgage creditor is secured by the real estate, specifically, the purchased property. If you are behind on mortgage payments when you file your Chapter 7 bankruptcy, the mortgage creditor will request the court's permission to foreclose on the home under applicable state law; this is known as a motion for relief from the automatic stay.
Once the court grants the motion, a foreclosure sale can be completed by the bank. If there is a balance remaining due to the creditor after the sale, the filer is NOT responsible for the deficiency balance. The discharge issued by the court eliminates the filer's personal liability on any balance left owing on the mortgage, or any lines of credit that were secured by the house.
Please note: if your goal is to use bankruptcy to get current on your mortgage payments after a temporary inability to pay, Chapter 7 is NOT the type of bankruptcy you want. A Chapter 13 bankruptcy may allow you to catch up on payments to a secured creditor over a period of time.
Creditors Secured by Personal Property
Car loan lenders are the most common type of creditor secured by personal property. Similar to the mortgage analogy above, if you don't pay your car payments, the lender can repossess your car.
If a filer is NOT current on his or her car payments when filing a Chapter 7 bankruptcy case, and is unable to catch up by paying the past due payments, including any fees, penalties, and interest that has accrued, he or she will be unable to keep their car.
Although the bank cannot repossess the automobile once the automatic stay goes into effect, it does have two options:
File a motion for relief from the automatic stay and get an order granting the motion; or
Wait until the automatic stay has expired. Once expired, it can move forward with repossession of the vehicle.
Unsecured Creditors
Debts that are NOT connected to a specific piece of property are debts owed to unsecured creditors. If an unsecured creditor wants to take something from you - i.e. through a wage garnishment - the creditor must file a lawsuit and obtain a judgment first.
Examples of unsecured debts include:
Credit card debt;
Personal loans;
Student Loans; and
Medical Bills.
Typically, Chapter 7 cases have little or no participation by unsecured creditors. The unsecured creditors may file a proof of claim with the court if the trustee notifies the court and creditors of any assets that will be sold and money distributed to the creditors. However, since the creditors are NOT allowed to contact you directly once the case has been filed, you are not likely to hear from them at all.
There is one exception: If an unsecured creditor thinks that the filer should not be granted a discharge because of certain bad acts (i.e. opening and using a line of credit with no intention to pay on it), they can object to having the balance owed discharged.
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