The following information was published by the North Carolina Bar Association as a public service

Chapter 7 – Straight Bankruptcy

In a Chapter 7, or “straight” bankruptcy, the debtor is
unable to repay their debts and seeks an immediate discharge
of their debts in exchange for the surrender of any non-exempt
property. Once the bankruptcy petition is filed commencing
the case, the clerk of court schedules the meeting of creditors
and a trustee is appointed by the court to administer the case.
The trustee is charged with the responsibility of selling the
debtor’s non-exempt property in order to pay creditors. Most,
or all, debts remaining unpaid are canceled or “discharged” at
or before the conclusion of the case.
The trustee’s main job is to conduct the meeting of creditors
and to gather all non-exempt property and sell it to pay
creditors. However, for most individuals, much or all of their
property may be exempt from sale by the trustee. Certain dollar
amounts of the value of a car, a home, household furnishings,
clothing, tools of the trade, and certain other property are
exempt and cannot be used to pay creditors. Exempt property,
therefore, is protected from the debtor’s creditors. Not only do
trustees have the power to take possession of nonexempt property,
they may also, in certain situations, recover money or
property transferred to creditors, relatives or friends before the
debtor filed the bankruptcy petition. The trustee also may
oppose the discharge of the debtor if the debtor has been dishonest
or has failed to comply with certain bankruptcy laws.
Most Chapter 7 bankruptcies are determined to be “no-asset”
cases because there is no non-exempt property to sell to generate
funds for creditors.

Most individuals who file bankruptcy find it most beneficial
to file a Chapter 7 or a Chapter 13 bankruptcy. There are
certain things that virtually all Chapter 7 and 13 bankruptcies
have in common.
A bankruptcy case is begun by the debtor filing an official
bankruptcy “petition” with the Bankruptcy Court. The court
will require the payment of a filing fee when the petition is
filed. Once the petition is filed, a trustee is appointed by the
court to administer the case. The individual filing bankruptcy,
called the “debtor,” has the responsibility to give a full
and complete disclosure of all assets, liabilities, income,
expenses, and other financial affairs of the debtor by signing
under penalty of perjury, and filing with the court, official
court-approved schedules and a statement of financial affairs.
After the petition is filed, the debtor must attend required
hearings, cooperate with the trustee in administering the
estate, and provide copies of the debtor’s tax returns and
other financial documentation to the trustee. In addition,
before an individual files a bankruptcy petition they must
obtain a briefing from an approved nonprofit budget and
credit counseling agency. Also, after an individual files a
bankruptcy petition they must complete an approved instructional
course concerning personal financial management.
A creditor in a bankruptcy case is designated a “secured
creditor” if the debtor has pledged property as collateral for a
debt. For example, if the debtor purchases furniture, a vehicle
or a home through monthly installments, the item being
purchased may be security or collateral for the installments
yet to be paid. The lien held by the secured creditor on the
property usually remains intact throughout the proceeding
and continues even after the debtor receives a discharge and
the case is closed. If a valid secured claim is not paid or
arrangements are not made to pay the debt, the secured creditor
may bring an action to repossess the collateral once the
case is closed, or during the case if relief from the automatic
stay is granted by the court. In certain limited situations, the
lien of a secured creditor may be avoided in its entirety by the
An “unsecured creditor” is a creditor whose claim is not
secured by any property. Examples include an open account
with a store, a credit card account or medical bills.
A federal bankruptcy judge presides over the bankruptcy
case, and resolves any disputed issues which may arise while
the case is pending. For example, the judge may determine
whether a claim is secured or unsecured, whether a creditor
is entitled to repossess property pledged as collateral for a
If the trustee is able to collect money to pay creditors,
the creditors will be notified and instructed by the clerk of
court to file a “proof of claim,” which is an official form
used by creditors to present their claims to the court for
payment. Generally, creditors must file a proof of claim by
the deadline set by the court in order to participate in any
distribution of funds from the trustee.
In most cases, the debtor’s bankruptcy discharge is
granted within several months after the filing of the case.
The discharge is the court order that cancels most, if not all,
debts owed by the debtor. Normally, most unsecured claims
are discharged in Chapter 7 bankruptcies. However, exceptions
to the discharge include money owed for certain
taxes, most student loans, fraudulent debts, child support,
alimony, obligations arising out of the equitable distribution
of marital property, and governmental fines.
After the meeting of creditors, the trustee may arrange
for the sale of any non-exempt property. Once the trustee
has completed such sales and other administrative duties,
the trustee prepares a report to the court, and with the
court’s approval, distributes funds, if any, to the creditors.
The Chapter 7 case is over when any and all funds have
been distributed by the trustee and when the bankruptcy
court enters an order officially closing the case. If the
trustee determines that the case is a no-asset case because
there is no money for the trustee to distribute to creditors,
the case may be closed shortly after the debtor is granted a
The debtor cannot receive a discharge in Chapter 7 if the
debtor has received a Chapter 7 or Chapter 11 discharge in
a case filed within the preceding eight years.
An individual may be ineligible for Chapter 7 bankruptcy
if their annual income is more than the annual median
income in North Carolina and they are able to pay back a
certain amount to unsecured creditors out of their disposable

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DAVID R. HUFFMAN   Attorney and Counselor at Law