How does Chapter 7 work?

In a chapter 7 bankruptcy, debtors may have to give up certain property that they own at the time they file the bankruptcy case. This property is sold by a trustee, who uses the proceeds to pay creditors. The debtors receive their discharge shortly after the case is filed. In this way, chapter 7 debtors are allowed to keep the money that they earn after filing the bankruptcy case, as well as most other property that they obtain after the filing. You can file a chapter 7 only if you are not required to file a chapter 13 owing to the "Means Test". In general, you can file a chapter 7 if you make less than $42,000 or your family of four makes less than $75,000. Even if you make more than that, you still might be eligible to file a chapter 7 case if you are unable to pay at least 10% of your debt or $10,000 over a period of 5 years in a chapter 13 case. It's more complex than this but this explanation covers enough cases to give you an idea

What property do debtors have to give up in chapter 7? What about tax refunds and lawsuits?

Debtors in chapter 7 are required to give up “nonexempt” property that they own at the time of the filing; they are allowed to keep both “exempt” property that they own at the time of filing and any property that they receive a right to own after the bankruptcy filing. Exempt property is property that, according to the law, is necessary for the debtors’ support and the support of their dependents. The law that determines what property is exempt varies from state to state. If all of a debtor’s property is exempt, then the debtor does not have to give up any property in chapter 7, but may still obtain a discharge.

As long as a debtor has a right to payment at the time of the bankruptcy filing—from a tax refund, a lawsuit, or some other source—that right to payment is property that must be given to the chapter 7 trustee unless it is exempt, even though the debtor has not yet received any money. Thus, a debtor may have to turn over a tax refund to the trustee that is received after the bankruptcy is filed, and a debtor may not be entitled to the settlement of a personal injury action that is entered into after the bankruptcy is filed.

If a debtor is behind in house or car payments, can chapter 7 stop a foreclosure or repossession from taking place?

Whenever any bankruptcy case is filed, the creditors are stopped from taking action to collect the debts that were owed at the time of the bankruptcy. This feature of bankruptcy is called the “automatic stay.” The automatic stay stops a foreclosure or repossession from going forward. However, no bankruptcy filing allows a debtor to keep property that is security for a loan without making payments on the loan. For example, debtors with home mortgages and car loans, cannot keep their homes and cars without making payments. As soon as the bankruptcy case is closed, the automatic stay terminates, and the creditor can proceed with foreclosure or repossession. Moreover, if the debtor is not current on payments, creditors may ask the court to terminate the automatic stay while the bankruptcy is still pending, and, in chapter 7, creditors are usually able to terminate the automatic stay. In order to keep property that is security for a loan, a debtor often must enter into a “reaffirmation agreement” with the creditor who holds the lien on that property.

What is a reaffirmation agreement, and how does it work?

A reaffirmation agreement is an agreement by a debtor and a creditor about how to treat a particular debt that would otherwise be discharged in the debtor’s bankruptcy. Usually, the debt is secured by collateral that the creditor could repossess or foreclose on. In the reaffirmation agreement, the debtor agrees to pay some or all of the debt, usually, according to schedule. In exchange, the creditor agrees not to repossess or foreclose on collateral that secures the debt, as long as the debtor makes the agreed-upon payments. A valid reaffirmation agreement puts the debtor under a legal obligation to pay back the entire amount agreed upon, even if this is more than the value of the collateral that the debtor is keeping. So if the debtor defaults on the payments required under the reaffirmation agreement, the creditor can repossess or foreclose, and then seek a personal judgment against the debtor if the sale of the collateral does not satisfy the debt.

However, in order for a reaffirmation agreement to be valid, several requirements must be met, including the following:

1. the agreement has to be entered into before the debtor receives a discharge;
2. the agreement has to be filed with the court;
3. if the debtor is represented by an attorney, the attorney has to certify that it will not create a serious problem for the debtor; and
4. if the debtor is not represented by an attorney, the bankruptcy court has to make a finding that the reaffirmation agreement does not create a serious problem for the debtor.

The agreement must be voluntary; no one can force either the debtor or a creditor to enter into a reaffirmation.

Finally, debtors are given the right to change their minds: a debtor may cancel any reaffirmation agreement within 60 days after the agreement is filed with the court, or any time before discharge, whichever is later.

If any of the requirements for a reaffirmation have not been complied with, the agreement may not be binding. In that event, the debtor would have no personal obligation to make payments under the agreement.

Can a chapter 7 debtor make payments on a discharged debt without a
reaffirmation agreement?

Yes. Even though a debt has been discharged, the debtor can still make a voluntary payment of the debt. This often happens, for example, with debts that are owed to family members or friends. But the key to this kind of payment is that it must be entirely voluntary; the debtor has no legal obligation to pay a discharged debt, and the creditors can take no action to pressure or persuade the debtor into making payments.

What can be done if a debtor falls behind in payments after obtaining a chapter 7 discharge? Can another bankruptcy case be filed?

The discharge in a chapter 7 case only covers the debts that were incurred before the case was filed. The bills that a debtor incurs after the case is filed are not discharged. The hope is that, after their old debts are canceled by the discharge, debtors will be able to pay their new obligations as they become due. But unexpected circumstances, such as illness or loss of employment, may again put debtors in a situation where they cannot pay their bills. In this situation, a debtor could file another chapter 7 case, but there might not be a right to discharge. After a debtor receives a discharge in a chapter 7 case, the debtor only has the right to receive a discharge in a later chapter 7 case if the later case is filed at least six years after the first case was filed. However, even during this six-year “waiting” period, debtors may still be able to obtain relief in chapter 13.

Are all debts that were incurred before the bankruptcy discharged in chapter 7?

No. There are a number of types of debts that are excepted from the discharge given in chapter 7. Among the most common are debts for certain taxes, fraudulently incurred credit card debt, family support obligations (including child support and alimony), and most student loans. A debtor with debts of these kinds can still receive a discharge of other debts, but after the bankruptcy the “excepted” debts will still be owing (less any payments made through the bankruptcy itself). Additionally, chapter 7 debtors who engage in certain misconduct connected with the bankruptcy (like failing to disclose assets) may be denied a discharge entirely. However, many of the debts that are excepted from discharge in chapter 7 (fraudulent credit card debt, for example) may be discharged through chapter 13. Other types of debt (family support and student loans, for example) are excepted from discharge in chapter 13 as well as chapter 7.

Can I do anything about debts I owe to my former spouse?

Domestic Support Obligations are not dischargeable in bankruptcy. They may be paid in full as part of a Chapter 13 plan of reorganization, but again, they are not dischargeable.