Archive for July, 2015

The Two Roads of Bankruptcy

A Chapter 7 Bankruptcy is kind of like a road trip. It’s a trip on which all the players (the debtor, the debtor’s creditors, the case trustee, and the United States Trustee) get to embark. There are two roads to this trip: the debtor’s road, which pertains to the discharge, and the creditors’ road, which pertains to trustee’s administration of assets. The filing of a bankruptcy petition commences the beginning of the road trip. The trip is over, only after the parties have traveled all the way down both roads.

The Debtor’s Road: Obtaining a Discharge
This road is typically no longer than 105 days. It starts with the moment the petition is filed and usually concludes once the court enters a discharge order. Barring an objection, the court will automatically enter the discharge order about 67 days after the debtor’s 341 Meeting of Creditors. The 341 Meeting, is typically scheduled 4-5 weeks after the petition is filed. Hence the projection of 105 days.

In many cases, to earn the discharge, the debtor really only has to do a few things after the petition is filed: 1. submit certain documents to the Trustee (tax returns, bank statements, paystubs, etc.), 2. attend the 341 Meeting of Creditors, 3. and take a post-petition financial management course.

The 341 Meeting of Creditors is an important event in a chapter 7 bankruptcy case. Not only is it an opportunity for the trustee and any creditors to ask the debtor questions about its financial affairs, but it is also the point in the road trip where the two roads diverge. Starting with the first date set for the 341 Meeting of Creditors, the trustee, creditors, or the US Trustee will have 60 days to bring an action either objecting to the debtor receiving a discharge (known as a §727 action), or objecting to a creditor’s claim from being discharged (known as a §523 action). If no objection is raised in that 60 day period, the court will then go through its internal process of entering the discharge order (which takes about 7 days).

Now, with regards to §727 and §523 actions, a party in interest can request for an extension of time in which to bring its objection; and the court freely grants those requests. So the 60 day period CAN be extended if warranted. Further if a §727 action is filed, the court will naturally delay the entry of the discharge order until the outcome of the action is determined. If the objection is later overruled (which can be several, like 12-18, months later), the discharge will be entered. But if the objection is sustained, then the court will enter an order denying the debtor a discharge.

The Debtor’s Road will conclude when the Court either enters the discharge order or enters an order denying the debtor a discharge.

The Creditors’ Road: The Administration of Assets
The chapter 7 trustee is the individual appointed to administer the assets of the bankruptcy estate. It is one of the trustee’s duties to analyze the non-exempt equity of the bankruptcy estate and make a determination as to whether to liquidate the non-exempt equity. If the trustee chooses not to liquidate the non-exempt equity, the trustee will file what is known as a “No Asset Report” or a “Report of No Distribution.” Essentially this report is the trustee’s declaration that there is not a sufficient amount of non-exempt equity in the bankruptcy estate to make a meaningful distribution to the creditors. The filing of such a report typically concludes the Creditors’ Road. However, so long as the case remains open, the Trustee has the right to withdraw the No Asset Report, thereby reopening the Creditors’ Road.

Now, after inquiring with the debtor at the 341 Meeting of Creditors, the trustee might easily determine to file a No Asset Report. In some cases, however, such a determination may not be easily made. The trustee may simply wait to file the No Asset Report until after it has determined the size of the debtor’s tax refund. On the other hand, the trustee may choose to object to a debtor’s claim of exemption or initiate a lawsuit to avoid a certain pre-petition transfer in which the debtor voluntarily or involuntarily engaged. If successful, the estate may now have a sufficient amount of non-exempt equity for the trustee to liquidate.

If there is a sufficient amount of non-exempt equity, the trustee will notify the creditors that there will be a distribution and invite them to file a proofs of claim. The trustee also will begin the process of liquidating the assets in which non-exempt equity sits. Once time to file a proof of claim has elapsed, and the non-exempt equity is liquidated, the trustee will file its “Trustee’s Final Report” in which the trustee proposes how it will distribute the estate’s funds. Interested parties have 30 days to object before the Court approves the proposed distribution scheme. Once approved, the trustee will begin the process of distributing the funds.

After all the funds have been disbursed (and the checks have cleared the trustee’s bank account), then the Trustee will file a Final Accounting, in which the Trustee discloses how the funds were disbursed.
The Creditors’ Road will typically conclude when the trustee has filed either its No Asset Report, or its Final Accounting.

Bankruptcy Closure
The Bankruptcy case will close once the longer of the two roads concludes. In a vast majority of cases, there are no objections to a debtor receiving a discharge and the trustee files a No Asset Report shortly after the 341 Meeting; thus allowing a case to close 105 days after the petition is filed. However, each case is different and if there is an objection to the debtor receiving a discharge, or if the trustee desires to liquidate non-exempt equity, then its not uncommon for the case to remain open for a longer period of time.

The most important take away, however is that the case does not close simply because the debtor received a discharge or because the trustee files a No Asset Report. The trip is over once the longer of the two roads of bankruptcy has concluded.

The Discharge


It’s the reason one files for bankruptcy relief….to obtain a discharge.  A discharge is a Federal injunction prohibiting the debtor’s creditors from ever attempting to collect from the debtor on account of a claim it had against the debtor at the moment the debtor filed its bankruptcy petition.  Essentially, it absolves a debtor of its legal obligation to repay debt the debtor had before it filed for bankruptcy relief.


A debtor’s discharge is effective when the bankruptcy court enters an order granting the debtor a discharge.”  In a chapter 7 case this typically occurs approximately 100 days after the the bankruptcy petition is filed.  In reorganization cases, that order is entered after the completion of the reorganization plan.


The discharge is very broad and affects credit card debt, medical debt, business loans/guarantees, and other various debts.  There are, however, some exceptions; not every debt is subject to the discharge:

  • Debts such as child support, alimony or spousal support are non-dischargeable (this may include childcare, school-related expenses, health insurance, and out-of-pocket medical costs).
  • Some taxes are non-dischargeable, while others may be discharged (depending on the age of the tax obligation, and whether the returns were timely filed).
  • Debts incurred due to fraud, or misrepresentations on financial statements/loan applications are non-dischargeable.
  • Debts incurred due to theft, breach of fiduciary duty, or embezzlement are non-dischargeable.
  • Debts incurred due to malicious and willful injury to another person or property are non-dischargeable.
  • Court fines are non-dischargeable.
  • Debts incurred due to the operation of motor vehicle while intoxicated are non-dischargeable.
  • Student loans are typically non-dischargeable.

These are just the more common exceptions; there are other exceptions that might apply, and if you are considering bankruptcy, you’ll want to discuss your circumstances with an attorney to see if any exceptions apply in your case.

Also, the scope of the discharge depends on the chapter the debtor files.  For instance if a debtor file a chapter 7, it may not discharge a debt incurred in a divorce decree (if such debt is not child-support, alimony or spousal support), but the debtor may discharge that obligation if the discharge is entered pursuant to chapter 13.  A debtor who is not an individual (but a corporation, or an LLC) may not receive a discharge in a chapter 7, but may receive a discharge entered pursuant to chapter 11.

Just because a debtor receives a discharge does not mean it cannot voluntarily repay the debt if it is so inclined.  While the debtor may not be under a legal obligation to repay it, it may desire to do so and the bankruptcy code allows it to.  A discharged debt cannot be revived, so one need to worry about only repaying a portion of the discharged obligation; simply paying a fraction toward the discharged debt does not revive the debt.

Now, the discharge simply discharges the debtor from having to repay the debt.  It does not affect any security interests a creditor may have in any collateral (such as a home or a car).  To alter the creditor’s security interest, the debtor must reorganize through one of the reorganization chapters (9, 11, 12, or 13) and have a reorganization plan confirmed by the bankruptcy court.  Therefore if a chapter 7 debtor discharges his home or car loan, the lender can still foreclose on the home or repossess the vehicle.  Hence the common inquiry from potential debtors: “Can I file bankruptcy and still keep my home? or car? ”  And typically the answer is: “Yes, you can.  If you are able.”

A discharge is automatically granted during the process of a bankruptcy proceeding.  And unless the court orders otherwise, all debts but those by code definition to be non-dischargeable will be subject to the discharge order….including car and home loans.  Thus, with regards to those debts, if a debtor takes no action after filing the bankruptcy petition, the debts will be discharged and car or home lenders will likely proceed with repossession or foreclosure.  However, a debtor can take affirmative action to except certain debts from discharge through a process called “reaffirming a debt.”  In a nut shell, this process involves the debtor and creditor signing a “reaffirmation agreement” in which the debtor agrees to remain liable for the balance owed on the car or home loan and the the lender agrees not to repossess the car or foreclose on the home so long as the debtor is not in default of the underlying loan agreement.  Essentially this allows the car or home loan to pass through bankruptcy.  The positive of this is that the debtor gets to retain the car or home.  Also reaffirmed debts will be disclosed on the debtor’s credit report, thus timely payments help improve a debtor’s credit post-bankruptcy.  The drawback is that should something happen to the debtor that prevents the debtor from paying the debt, the debtor cannot go back and use the discharge and a defense to having to pay the debt.  Additionally, a court will only allow a debtor to reaffirm a debt if the debtor can afford to do so; thus the debtor will need to show that even after reaffirming a debt it has still has positive income (at least $0.01) each month.

It is often espoused from the court that bankruptcy is for the honest, but unfortunate debtor.  Thus if a debtor fails to be forthcoming with information, or misleads the bankruptcy court, the trustee, or its creditors a debtor may be denied a discharge, or have his discharged revoked.  This is not something that any debtor wishes to have happen to him or her.  In such an event, the debtor can likely lose what non-exempt equity it may have and still be obligated on the debts it attempted to discharge in bankruptcy.  Further the debtor cannot go back to the court later in life and attempt to discharge the same debts.  Thus it is vital for a debtor to be honest and forthcoming with information about its financial affairs so to not risk the denial or revocation of a discharge (not to mention its a Federal felony to commit bankruptcy fraud!).

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