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Do It Yourself Bankruptcy: Chapter 7

Today we’ll delve a little deeper into what Chapter 7 is.  In the last post I said that Chapter 7 is for people who need to start over and that the general theory is that you turn your non-exempt property over to the trustee who sells it (liquidates it) and uses the money he gets to pay your bills, as far as there is money.  After that, assuming you have cooperated with the trustee and the court, you will receive a discharge, which is a court order that says you no longer have to pay the discharged debts.

There are three main players in a Chapter 7:  The trustee, the debtor and creditors.  A fourth player is the bankruptcy judge, though she often has little or no direct contact in the typical Chapter 7 case.

The trustee is a person appointed to oversee or administer the case.  The trustee is not a judge but is usually a lawyer.  When a case gets filed, the office of the United States Trustee, which is a federal official, appoints an interim trustee.  In any case creditors can hold an election for a permanent trustee.  In most cases creditors do not exercise this right and the interim trustee becomes the permanent trustee.  An election, if one is to be held, takes place at the meeting of creditors.  The trustee reviews the documents filed by the debtor.  The trustee also questions the debtor and generally investigates to determine whether any assets exist that can be liquidated.  If any exist, the trustee liquidates them and gives notice to creditors to file claims.  The trustee, along with the debtor, can object to any claims.  If an objection is raised regarding a claim the bankruptcy judge determines whether to allow the claim in whole or in part.  When a claim is allowed it becomes entitled to receive a distribution.  A distribution is made from the proceeds of the property that was liquidated, minus any administrative expenses such as brokerage fees or other costs incurred by the trustee, and minus the trustee’s fee, which is a percentage of what is liquidated.  Here’s how a distribution works.  Assume there are three creditors whose claims total $60,000.  One creditor is owed $30,000, one is owed $20,000 and one is owed $10,000.  Assume that after all expenses are paid there remains $15,000 for the trustee to distribute.  The first creditor will receive $7,500 (1/2 of the $15,000) because his claim of $30,000 is 1/2 of the total of $60,000.  The second creditor receives $5,000 (1/3 of $15,000) because his claim is 1/3 of the total claims.  The third creditor receives $2,500 (1/6 of $15,000) because his claim is 1/6 of the total.  All $15,000 is thus distributed, $7,500+$5,000+$2,500 = $15,000.  The remainder of each creditor’s claim is discharged.

The debtor is the person who files bankruptcy.  This can be an individual, a husband and wife filing jointly, only the husband or the wife, a corporation, a partnership or some other business entity.  However, only individuals are entitled to receive a discharge.  So if a corporation files Chapter 7, it will be liquidated but the debts will remain as claims against the shell of the corporation.

The creditors are those people or businesses to whom the debtor owes money.  They fall into several categories in bankruptcy such as unsecured, secured and priority.  We’ll discuss these categories in later posts.

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