Chapter 7 Trustee and Estate Administration

In chapter 7 cases, a trustee, who is a private individual appointed by the United States Trustee, has the responsibility to administer the bankruptcy estate, which consists of virtually all of the debtor's property as of the date of filing. However, some assets are exempt from bankruptcy under state law, and may be so designated by the debtor in the petition.

It is the duty of the trustee to identify, collect and "liquidate" (i.e., sell) the debtor's nonexempt assets. Debtors are required to fully cooperate with the trustee in that effort.

341 (a) Meeting of Creditors

At the 341 (a) meeting of creditors, the trustee will examine the debtor under oath regarding assets and liabilities. Any creditors who appear will also be given an opportunity to ask general questions of the debtor.

The debtor must attend the 341 (a) meeting of creditors. If a petition was Filed by a husband and wife, both must be present. The debtor's attorney should also attend. If the debtor fails to appear at the 341 (a) meeting, the case can be automatically dismissed.

Obtaining a Discharge

The filing of a chapter 7 petition is designed to result in a discharge of most of the debts listed on the bankruptcy schedules. A discharge is an order issued by the court that says debts do not have to be repaid, but there are a number of exceptions. Debts that cannot be discharged in a chapter 7 case include, for example, most taxes; child support or alimony; student loans; court-ordered fines and restitution; debts that were incurred through fraud or deception; and personal injury debts caused by driving while intoxicated or taking drugs. A discharge may be denied entirely if, for example, the debtor destroys or conceals property, destroys, conceals or falsifies records, or makes a false oath. Creditors cannot collect on discharged debts. A debtor can obtain a chapter 7 discharge once every six years.

Potential Effects of a Discharge

The fact that a bankruptcy has been filed can appear on an individual's credit report for as long as 10 years. Thus, filing a bankruptcy petition may impair the ability to obtain credit in the future. Also, a debtor will not be excused from paying any debts that are not listed on the bankruptcy schedules or any debts that are incurred after the bankruptcy is filed.

Effects of Reaffirming a Debt

After filing the petition, a debtor may seek to reaffirm a particular debt or a creditor may ask the debtor to reaffirm a debt. Reaffirming a debt means that the debtor signs and files with the court, a legally enforceable document, promising to pay all or a portion of the debt that may otherwise have been discharged in the bankruptcy case. Reaffirmation agreements are strictly voluntary - they are not required by the Bankruptcy Code or other state or federal law. The debtor can voluntarily repay any debt instead of signing a reaffirmation agreement, but there may be valid reasons for wanting to reaffirm a particular debt.

Reaffirmation agreements must not impose an undue burden on the debtor or the debtor's dependents and must be in the debtor's best interest. An agreement to reaffirm a debt may be canceled at any time before discharge or within sixty days from the date the reaffirmation agreement is filed with the court, whichever is later. If a debt is reaffirmed and the debtor fails to make the payments required in the reaffirmation agreement, the creditor can take action to recover any property that was given as security for the loan and the debtor may remain personally liable for any remaining unpaid portion of the debt.

Reaffirmation agents, who work for individual creditors, are sometimes present at the 341 (a) meeting and will approach debtors to urge them to reaffirm their debts. A debtor has no obligation to speak with these agents, and, if the debtor is represented by counsel, their attorney should be present at any such discussions.

Other Bankruptcy Options

Debtors have a choice when deciding what chapter of the Bankruptcy Code will best suit their needs. Even if a debtor has already filed for relief under chapter 7, it may be possible to convert the case to a different chapter.

As described above, chapter 7 is the liquidation chapter of the Bankruptcy Code. Under chapter 7, a trustee is appointed to collect and sell, if economically feasible, all of the debtor's property that is not exempt from the bankruptcy proceeding.

Chapter 11 is the reorganization chapter, which is most commonly used by businesses but is also available to individuals. Creditors vote on whether to accept or reject a proposed repayment plan, which also must be approved by the court. While the debtor normally remains in control of the assets, the court can order the appointment of a trustee to take possession and control of the estate.

Chapter 12 offers bankruptcy relief to those who qualify as family farmers. Family farmers must propose a plan to repay their creditors over a three-to-five year period, which must be approved by the court. Plan payments are made through a chapter 12 trustee, who also monitors the debtor's farming operations during the pendency of the plan.

Finally, chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. The debtor must pay the chapter 13 trustee the amounts set forth in their plan. Chapter 13 is only available to individuals with regular income whose debts do not exceed $1,000,000 ($250,000 in unsecured debts and $750,000 in secured debts).

Risk of Civil and Criminal Penalties

Debtors who obstruct the efforts of the trustee risk civil and criminal penalties, which can include Fines of up to $250,000 and prison terms of up to 5 years. Federal bankruptcy crimes include knowingly and fraudulently concealing assets, making false oaths, declarations or accounts, presenting a false claim against the estate, transferring or concealing property, and destroying or concealing books, records or documents.

Role of the United States Trustee

The United States Trustee is responsible for overseeing the administration of all bankruptcy cases. The United States Trustee appoints and supervises the chapter 7 trustees as well as monitors compliance by debtors.