Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy proceeding, the debtor must surrender any non-exempt assets to a trustee appointed by the court. The trustee will then sell all the non-exempt property for cash and distribute the cash to the debtor’s creditors. This process is called “liquidation.” Any debts not satisfied through the liquidation process are usually discharged within a few months, meaning the debtor is no longer responsible for paying those debts.

Filing for Chapter 7 Bankruptcy

Who can file Chapter 7 Bankruptcy?

Any individual can file a Chapter 7 bankruptcy case. However, Chapter 7 bankruptcy was created for individuals who truly cannot pay their debts. Therefore, to receive relief under Chapter 7, an individual must qualify under the “means test.” The means test is a method to determine if an individual’s income is too high for Chapter 7 bankruptcy. An individual can qualify under the means test if his or her current monthly income is less than the median monthly income for a household of his or her size in Idaho. If an individual’s current monthly income is higher than the median monthly income, that individual may still qualify under the means test if his or her disposable income is less than a certain amount. Disposable income is the amount of money a person has remaining after he or she pays all allowed monthly expenses—such as housing, utilities, and food. The means test calculator may assist an individual in determining if he or she qualifies under the means test for Chapter 7 bankruptcy.

An individual must complete Form 22A in order to determine if he or she qualifies for Chapter 7 bankruptcy under the means test. If an individual does not qualify for Chapter 7 bankruptcy under the means tests, the court will either dismiss the Chapter 7 bankruptcy petition or permit the debtor to change the petition to Chapter 13 bankruptcy. Chapter 13 bankruptcy is available for those who do not qualify under Chapter 7 bankruptcy.

Filing a bankruptcy case without using an attorney, known as filing “pro se,” is extremely difficult. It is very important that a bankruptcy case be filed and handled correctly. Bankruptcy has long-term financial and legal consequences. Hiring an attorney is strongly recommended.

Corporations and partnership must have an attorney to file a bankruptcy case.

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How do I file for bankruptcy?

First, individual debtors are generally required to obtain credit counseling from an approved provider within 180 days before filing a case, and to file a statement of compliance and a certificate of credit counseling furnished by the provider. Failure to do so may result in dismissal of the case. To assist bankruptcy filers, the U.S. Trustee Program has created a list of approved credit counseling providers, located at http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved .htm.

After completing credit counseling, a bankruptcy case begins with a debtor obtaining and filling out the Official Bankruptcy Forms. The official bankruptcy forms contain a petition and several forms known as “schedules.” The petition informs the court of the debtors desire to file for bankruptcy. The schedules contain information about the debtor’s assets, liabilities, income, expenditures, and other necessary financial information. The debtor must fill out these forms and file them with the court. The forms should be filed with the bankruptcy court serving the area where the individual resides or where the business debtor has its principal place of business.

In order to complete the Official Bankruptcy Forms, a debtor will need the following information:

1. A list of all creditors and the amount and nature of their claims;
2. The source, amount, and frequency of the debtor’s income;
3. A list of all of the debtor’s property; and
4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

In addition to completing the Official Bankruptcy Forms, the debtor will also need to pay a filing fee. The amount of the filing fee can be found at http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyResources/BankruptcyFilingFees.aspx. The fee should be paid to the clerk of the court upon filing or may, with the court’s permission, be paid by individual debtors in installments.

Once the petition is filed, a trustee is appointed to administer the case. The trustee receives all of the debtor’s non-exempt property from the debtor. The trustee then sells the non-exempt property and distributes the funds to the debtor’s creditors.

Generally, the debtor will receive a discharge from most debts within three months after the Chapter 7 petition has been filed.

*Please visit the U.S. Courts website at http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx, as bankruptcy information changes on a regular basis.

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Exempt Property

Certain categories of property are exempt from creditors when a debtor files for Chapter 7 bankruptcy. Exempt property does not need to be surrendered to the trustee, but instead the debtor is able to keep possession of exempt property. In order to claim these exemptions, the debtor must list all his or her protected assets on Bankruptcy Schedule C. Failure to list exempt properties on this schedule could result in the properties being liquidated. The following categories are exempt:

For items with an asterisk, an individual can only claim these exemptions to the extent reasonably necessary for support of family and if not commingled with other funds.

Homestead:

Real property or mobile home. The exemption amount shall not exceed $100,000. Idaho Code 55-1001. Idaho Code 55-1002. Idaho Code 55-1003.

Insurance:

Annuity contract proceeds up to the amount of $1,250 per month. Idaho Code 41-1836.

Benefits received by reason of disability or illness. Idaho Code 11-604(1)(a).*

Benefits received by a Fraternal Benefit Society. Idaho Code 41-3218.

Life insurance proceeds. Idaho Code 41-1833. Idaho Code 41-1835.

Life insurance proceeds if the beneficiary is a spouse or dependent. Idaho Code 11-604(1)(d).*

An unmatured life insurance contract other than a credit life insurance contract. Idaho Code 11-605(9).

An aggregate interest, not to exceed $5,000, in any accrued dividend or interest under, or loan value of, an unmatured life insurance contract under which the insured is the individual or a person of whom the individual is a dependent. Idaho Code 11-605(10).

Medical, surgical, or hospital care benefits. Idaho Code 11-603(5).

SSI (Supplemental Security Insurance Benefits). Idaho Code 11-603(3).

Pensions:

Any money received as a pension from the government of the U.S. Idaho Code 11-604A.

Pension: stock bonus, profit sharing annuity, or similar plans. Idaho Code 11-604A.

Public Employee's Benefits including Federal Civil Service Retirement, Idaho Retirement and Disability. Idaho Code 11-604A.

Firefighters retirement. Idaho Code 72-1422.

Police Officers retirement. Idaho Code 50-1517.

Public Employees retirement. Idaho Code 59-1317.

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Personal Property:

Appliances, furnishings, books, clothing, pets, musical instruments, family portraits, and sentimental heirlooms up to the amount of $750 per item and not to exceed $7,500 total. Idaho Code 11-605(1).

Burial plots. Idaho Code 11-603(1).

Crops cultivated by debtor on maximum of 50 acres and not to exceed $1,000 value. This also includes water rights up to 160 inches. Idaho Code 11-605(7).

Food and water together with storage containers and shelves, sufficient for twelve months. Idaho Code 11-605(4).

Health aids necessary to work or sustain health. Idaho Code 11-603(2).

Jewelry up to $1,000. Idaho Code 11-605(2).

Motor vehicle up to $7,000. Idaho Code 11-605(3).

One firearm up to $750. Idaho Code 11-605(8).

Proceeds for damaged exempt property for 3 months after proceeds received. Idaho Code 11-606.

Wrongful death recoveries needed for support. Idaho Code 11-604(1)(c).*

$800 in any tangible personal property. Idaho Code 11-605(11).

Public Benefits:

Federal, state, and local public assistance. Idaho Code 11-603(4).

Public assistance. Idaho Code 56-223.

Social security. Idaho Code 11-603(3).

Unemployment compensation. Idaho Code 11-603(6).

Veteran’s benefits. Idaho Code 11-603(3).

Worker’s compensation. Idaho Code 72-802.

Tools of Trade:

Arms, uniforms and accouterments that is required for the use of an individual as a peace officer, national guard or military personnel. Idaho Code 11-605(6).

Implements, book, business equipment, and tools of the trade not exceeding a total of $2,500. Idaho Code 11-605(3).

Wages:

Minimum of 75% of earned but not paid wages and pension payments. Idaho Code 11-207. Idaho Code 11-605(12).

Miscellaneous:

Alimony. Idaho Code 11-604(1)(b).*

Child Support. Idaho Code 11-604(1)(b).*

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The Discharge Process in Chapter 7 Bankruptcy

What is a bankruptcy discharge?

A bankruptcy discharge essentially releases the debtor from personal liability of all debts included in the bankruptcy. The discharge is a permanent court order establishing that the debtor is no longer legally obligated to pay debts that have been released in bankruptcy. Once a discharge is complete, the court clerk sends copies of the order to the debtor and all creditors. The order states that no collection attempts, legal actions or communications, such as phone calls and letters, can be made to the debtor regarding the debts.

Are all of my debts discharged?

Not all debts are discharged. The Bankruptcy Code identifies 19 categories of debt that are nondischargeable. These categories can be found in section 523(a), and include debts such as debts received by false pretenses, debts for spousal support and child support, certain types of tax claims, and others. Most of these debts do not require a judicial order declaring them to be nondischargeable.  Some examples of these are most taxes, divorce related debts and restitution.  Three of the categories, however, do require a judge to determine whether or not they are dischargeable in an adversary proceeding.   Debts listed in section 523(a) will survive a discharge meaning the debtor will still be obligated to pay those obligations after the bankruptcy proceeding..

When can I get my debts discharged?

In a Chapter 7 case, a debtor receives a discharge once the time has expired for a creditor to file a complaint objecting to the discharge. A creditor must file a complaint within 60 days following the first date set for the 341 meeting. This is usually about three months after the bankruptcy petition is filed.

Do I automatically get my debts discharged?

The debtor usually receives a discharge automatically. However, there are certain instances when a discharge is not automatic. The first instance is when the debtor fails to complete an instructional course concerning financial management. The failure to compete a financial management course could lead the court to deny a debtor a discharge. If there are no adequate education programs available, the court may waive this requirement. To assist bankruptcy filers, the U.S. Trustee Program has created a list of approved financial management courses, located at http://www.justice.gov/ust/eo/bapcpa/ccde/de_approved.htm.

A discharge can also be denied if a creditor objects to a discharge by filing a complaint in bankruptcy court before the deadline. This begins a lawsuit known as an “adversary proceeding.” This lawsuit proceeds much like a civil lawsuit, with discovery, pretrial motions, and a trial. The objecting party has the burden of proving all the facts of the objection.

Other reasons why a debtor may not qualify for an automatic discharge are described in section 727(a) of the Bankruptcy Code. This includes defrauding creditors, destroying records, violating earlier court orders, and others.

How do I get my debts discharged?

The bankruptcy court will mail a copy of the order of discharge to the creditors, trustee, debtor, and the debtor’s attorney. This order informs the creditors that the debts owed to them have been discharged and that they should not seek to further collect those debts. The order also warns the creditors that any failure to comply with the order could lead to punishment for contempt.

Are my spouse’s debts discharged when I file for bankruptcy?

In a community property state, such as Idaho, debts incurred by either spouse during the marriage are generally considered community debts. If only one spouse files for bankruptcy in Idaho, the eligible community debts of both spouses may be discharged.

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Filing Chapter 7 Bankruptcy with a Spouse

Idaho follows “community property” rules. This means that generally property acquired by one spouse during the marriage is owned by both spouses. Similarly, most debts incurred by one spouse during the marriage are owed by both spouses. Therefore, if only one spouse files for bankruptcy in Idaho, all of the eligible community debts of both spouses could be discharged but all of the community property must be addressed in the bankruptcy proceeding.

Do I Owe My Spouse’s Debt?

In Idaho, generally debts acquired by one spouse in a marriage are owed by the “community” (the couple), even if only one spouse signed the paperwork for the debt.

After a legal separation or divorce, a debt is generally owed only by the spouse who incurred the debt, unless the debt was incurred for family necessities, to maintain jointly owned assets (e.g. to make repairs to a home still owned by both spouses), or if the spouses keep a joint account.

Can a creditor take my spouse’s property?

Once a bankruptcy is filed an automatic stay is entered which prevents a debtor from trying to collect the debt.

In Idaho, before the bankruptcy is filed creditors of one spouse can go after the assets and income of the married couple to recover joint debts, regardless of whose name is on the title document to the asset. For example, a business owner's name may not be on the title to her spouse's boat, but in most community property states, that would not stop a creditor from suing in court to take the boat to pay off the business owner's debts, assuming the boat was purchased with community funds.

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