Chapter 7 Bankruptcy, also known as straight bankruptcy, is a liquidation rather than reorganization case. An estate is created upon the filing of the case. The assets are divided in two categories – exempt and non-exempt property. Exempt property is that which is set aside to the debtor to retain after the bankruptcy. Non-exempt property, upon filing, belongs to the bankruptcy trustee as part of the bankruptcy estate. The trustee must dispose of this property by selling it or by abandoning (giving it back) to the debtor (in the case where there is little or no equity). Part of the Chapter 7 Bankruptcy Trustee’ s job is to liquidate non-exempt assets and use the money to pay creditors in the order and in the priority set out in the Bankruptcy Code. Generally the trustee and administrative expenses are paid first, then domestic support obligations, taxes, secured creditors and finally unsecured creditors. Most Chapter 7 Bankruptcy cases are “no asset” cases in which the creditors receive nothing.
An individual Chapter 7 debtor must complete a pre-bankruptcy financial counseling course and a second a much longer course prior to discharge. If the second course is not completed a discharge will not be granted. These courses are not required of Chapter 7 partnership or corporate debtors because they do not receive a bankruptcy discharge. The collection of debts owed by such entities is simply barred by law.
Prior to the First Meeting of Creditors (to be scheduled to occur within 40 days of bankruptcy filing) the debtor must deliver to the Chapter 7 trustee, copies of his last two years’ federal income tax returns, canceled checks and bank statements for the last year (up through and including the date of filing) and pay stubs or proof of income for the six month period prior to filing. If this is not done promptly the Trustee can ask that the Chapter 7 case be dismissed or the meeting of creditors continued to a later date until the documents are provided. The debtor must also bring his Social Security Card (or alternate proof of Social Security number) and a valid driver’s license or identity card to the meeting of creditors. Without such proof of identity the meeting must be continued and/or the case may be dismissed.
It is also the Chapter 7 Trustee’s duty to make sure that the debtor’s bankruptcy schedules are compete and accurate. He must see that all creditors and assets are listed as well as all transfers and other disclosures which must be revealed under oath in the Statement of Financial Affairs. The Trustee must review the debtor’s financial and other transactions to determine whether any can be set aside and the property recovered for the benefit of the bankruptcy estate for ultimate distribution to creditors. The Trustee must also review the debtor’s pre and post bankruptcy actions for misconduct and possible bases for filing of objections to discharge such as the failure to keep and maintain records, the failure to cooperate with the trustee, the making of false oaths, the making of transfers of estate property intended to hinder, delay or to defraud creditors, or the making of fraudulent or preferential transfers.