Content Last Updated
06/26/04

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LIQUIDATION

The Title of Chapter 7 is "Liquidation." Chapter 7 is commonly referred to as "Straight Bankruptcy" or "Freash Start." Most often, when the public thinks of bankruptcy, this is the type of bankruptcy.

Here is how it works:

All assets above a level of exemptions (in Illinois State Law Prevails) are sold and the proceeds are used to repay creditors all, or a portion, of your outstanding debt. In a very high percentage of cases, there are no assests above the exemption level. Therefore, creditors receive nothing and the debtor is relieved of liability of the underlying debt.*

*NOT ALL DEBTS ARE DISCHARGEABLE

There are four steps to a chapter 7

1. File a petition with the court

2. Automatic Stay

3. 341 Meeting

4. Discharge

1. The Bankruptcy Petition

The Petition has four sections.

I. The Petition itself

II. The Schedules

III. The Statement of Financial Affairs

IV. The Statement of Intentions

I. The Petition

The first section is the petition itself. It contains the debtor's name (and aliases), address, the last four digits of the social security number, what section of the code the debtor is filing under, an estimate of the total debt, the number of creditors and total assets, whether the debtor has filed for protection within the last six years and any pending cases of the debtor or a spouse. The Petition is signed, under penalty of purjury, by the Debtor and the Debtor's Attorney (if any).

II. The Schedules

The Schedules are the heart of the petition. This is where all of the specifics are found. The schedules are labeled "A" through "J"

A. Real Estate

B. Personal Property

C. Exemptions

D. Secured Creditors (e.g. vehicle, home, etc.)

E. Priority Crediors (e.g. Taxes, Child Support, etc.)

F. Unsecured Creditors (e.g. credit cards, medical bills, etc.)

G. Executory Contracts (e.g. apartment lease, cell phone, etc.)

H. Codebtors

I. Income

J. Expenses

III. The Statement of Financial Affairs

The statement of financial affairs collects information about your financial situation. This is where you list any judgments against you, repossessions, closed bank accounts, gifts you may have given away, transfers of property, losses due to gampling and other information.

IV. The Statement of Intentions

In this section, a debtor is to state what his or her intentions are pertaining to secured claims. Debtors have three options:

a. Reaffirm the Debt

b. Surrender the Property

c. Redemption

a. Reaffirmation

Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the Court. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law. Reaffirmation agreements -

  • Must be voluntary;
  • Must not place too heavy a burden on you or your family;
  • Must be in your best interest; and
  • Can be canceled anytime before the Court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.
  • If you are an individual and you are not represented by an attorney, the Court must hold a hearing to decide whether to approve the reaffirmation agreement, The agreement will not be legally binding until the Court approves it. If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.

    b. Surrender

    A Debtor may simply surrender the property. If a Debtor returns the property the Creditor is prohibited from seeking to recover any deficiency that may result after sale of the property. In addition, the Debtor is not obligated to continue to make payments or pay back arrears (if any).

    c. Redemption

    There may be an opportunity for a Debtor to buy the property from the Creditor by paying for the value of the property as opposed to the amount actually owed. For example, a Debtor may have a loan to pay for a vehicle. The loan may have an outstanding balance of $5,000.00. However, the vehicle may have an actual value of $900.00. The Debtor may pay the creditor the actual value ($900.00) regain the title to the vehicle and be under no obligation to continue to make payments. In addition, the Creditor may not seek the balance due.

    2. Automatic Stay

    The Automatic Stay arises immediateley upon filing the bankruptcy petition with the court, no other court action is required. The Automatic Stay prevents Creditors from proceeding with any debt collection efforts against the Debtor or property of the estate.

    That means that court actions to obtain, or collect on, a judgment for debts must end. All collector activity must end, including creditor calls AND letters.

    3. 341 Meeting

    Section 341 of the Bankruptcy Code calls for a "Meeting of Creditors." It is the only time that a Debtor must meet with any person other than their attorney. The meeting is conducted by a Trustee. The Trustee "stands in the shoes" of your creditors and reviews your bankruptcy petition in order to determine the debtor's right to discharge.

    The meeting usually occurs between 20 and 45 days from the date the petition is filed with the court. The Debtor is required to answer questions, under penalty of purjury, concerning the debtor's acts, conduct, property, liabilities, financial condition and any matter that may affect administration of the estate or the debtor’s right to discharge.

    The Meeting generally last between 5 and 10 minutes and is nothing to fear. Typically, at the end of the Meeting, the Trustee will indiate his intentions to file a "No Asset Report" with the court.

    4. Discharge

    Once the Trustee files the No Asset Report, and there are no objections to the discharge of the debtor and/or the dischargeability of a specific debt, the court will issue the Discharge Order. The Debtor should obtain the Discharge Order in the mail between 60 and 90 days from the date of the 341 meeting.

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