Chapter 7 is a “liquidation bankruptcy.” In a Chapter 7 case, a trustee is appointed to liquidate all nonexempt assets. In cases where there are assets, the bankruptcy trustee may liquidate nonexempt assets and distribute the proceeds to creditors.

In most cases, any “person” who resides in, or has a place of business or property in the United States, may file a bankruptcy petition. “Person” includes individuals, partnerships, and corporations, but not most governmental units. Any individual, partnership, or corporation, except railroads, domestic banks, insurance companies, and a few other exceptions, may qualify to file under Chapter 7 of the Bankruptcy Code.

Chapter 11 is a “reorganization bankruptcy.” In a Chapter 11 case, the debtor generally is allowed to remain in possession of his property and continue to operate a business. A plan of reorganization is proposed, generally by the “debtor-in-possession.” Actions of the debtor-in-possession may be subject to oversight by a creditor’s committee, the U.S. Trustee, and the approval of the Bankruptcy Court.

In most cases, any “person” who qualifies to file under Chapter 7, except for stockbrokers and commodity brokers, may file for relief under Chapter 11 of the Bankruptcy Code.

Chapter 12 is a “farm bankruptcy.” Only a family farmer with regular annual income may be a Chapter 12 debtor.

A Chapter 13 bankruptcy can be filed only by an “individual,” with regular income, whose aggregate unsecured debts are less than $250,000, and secured debts are less than $750,000, on the date of the bankruptcy filing.

In a “joint filing” by an individual and that individual’s spouse, the aggregate unsecured debt owed by them jointly, on the date of the filing of the petition, must be $250,000 or less and secured debts must be $750,000 or less.

An “automatic stay” applies to all chapters. It is a statutory “order,” effective immediately when the bankruptcy is filed. It protects the debtor and prohibits actions by creditors. The automatic stay is automatic and does not require any specific order by a judge. In most cases, all acts against the debtor or the property of the debtor must cease upon the filing of a bankruptcy.

A “voluntary bankruptcy” case begins with the debtor filing a petition in the Bankruptcy Court. Bankruptcy Courts are a part of the Federal Court system and are established in every state. The proper location for the filing of the bankruptcy is generally determined by where a business debtor has its principal place of business or principal assets, or where an individual lives. The debtor is required to file schedules of assets and liabilities, current income and expenditures, statement of financial affairs, a schedule of executory contracts, and others, upon the filing of a voluntary petition.

In an “involuntary bankruptcy,” creditors holding claims against a debtor may, under certain circumstances, initiate a Chapter 7 or Chapter 11 case by filing an involuntary petition against the debtor. Creditors, as a group, may sometimes gain by causing an involuntary filing. Where the debtor is dissipating assets, an involuntary bankruptcy may prevent further losses. In some situations, it may be possible for the trustee to recover “avoidable transfers” that occurred within 90 days prior to the filing of an involuntary petition. For “insiders” who receive preferential transfers, and for fraudulent conveyances, this period may be extended to one year. See Section 303.

If a debtor has 12 or more creditors, an involuntary petition requires the participation of at least 3 creditors who hold unsecured claims that aggregate at least $10,000 and that are not subject to a “bona fide dispute.” In a case where the debtor has fewer than 12 creditors, one (1) creditor may initiate an involuntary petition, but the creditor must have an unsecured claim of at least $10,000 that is not subject to a “bona fide dispute.” A “bona fide dispute” may involve a reasonable issue of whether the debtor is liable on the debt, probably more than a subjective belief by the debtor. See Section 303(b).

After a hearing, the court will enter an order that the debtor is subject to the rules and requirements of bankruptcy, provided that the number of petitioning creditors and amount of claims are satisfied, and if the court is also satisfied that the debtor is not generally paying its debts as they become due. In this determination, courts may consider factors such as the number of creditors and total debt, the amount and age of any delinquencies, and the way in which the debtor conducts its financial affairs.

The debtor may resist an involuntary petition by filing an opposition, and demonstrating that it is generally paying its debts as they become due. In a case where the court dismisses an involuntary petition, it may grant a judgment against the petitioning creditors for the costs and attorneys’ fees incurred by the debtor, and for compensatory damages caused by the filing. If an involuntary bankruptcy was brought in bad faith, the court may also assess punitive damages.

The duties of a debtor include the timely filing of a list of creditors, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs. See Section 521(1).

In a Chapter 7 case, if an individual debtor’s schedule of assets and liabilities includes consumer debts that are secured by property of the estate, such as a consumer automobile loan, he or she must file a “Statement of Intention” to retain or surrender the collateral. The debtor may elect to redeem or return the property, or reaffirm debts secured by the collateral. This Statement of Intention must be filed by the date of the 341 Meeting, or within 30 days after filing the petition, whichever is earlier. The debtor must perform this intention within 45 days after filing the Statement of Intention.

In a Chapter 11, 12, or 13 case, the debtor must file a plan of repayment. If a trustee is serving in the case, the debtor must cooperate with the trustee as necessary to enable the trustee to perform the trustee’s duties, and surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate, whether or not immunity is granted. See Section 521(3) and also 341 Meeting.

The debtor must appear at court hearings as required. Section 343 also requires that the debtor appear at the 341 Meeting of creditors and permit examination under oath. See Section 521(5).

The Bankruptcy Courts are a part of the United States District Court system. Title 28 of the United States Code, Section 1334(a) provides that “the district courts shall have original and exclusive jurisdiction of all cases under Title 11” of the United States Code (Bankruptcy Code). The district courts also have original but not exclusive jurisdiction of all civil proceedings arising under Title 11, or arising in or related to cases under Title 11. The district courts also have original and exclusive jurisdiction of all property, wherever located, of a debtor who files a bankruptcy in the United States. See Section 1334 of Title 28.

The proper location for the filing of a bankruptcy may be determined by a debtor’s domicile, residence or principal place of business, or the location of principal assets in the United States, within a period of 180 days immediately preceding the commencement of the bankruptcy action. See Section 1408 of the Bankruptcy Code. District courts are located in every state. Some states have multiple districts. Each of these districts may also have multiple branches.

A United States Trustee is generally appointed by the Attorney General for each designated region or district. See Title 28 of the United States Code, Section 581.

A United States Trustee may be required to establish, maintain, and supervise a panel of private trustees eligible to serve as trustees in cases under Chapter 7 of the Bankruptcy Code, serve as and perform the duties of a trustee in a case as required under the Bankruptcy Code, and supervise the administration of cases and trustees in cases under the Bankruptcy Code.

A “case” trustee is the representative of the estate. See Section 323. The trustee in a case under this title has the capacity to sue and be sued. Only a “disinterested” person may serve as trustee in a case, and only if such person is competent to perform the duties of trustee and, in a case under Chapter 7, 12, or 13 of this title, resides or has an office in the judicial district within which the case is pending, or adjacent to such district.

A person selected under Chapter 7, 11, 12, or 13 to serve as case trustee must, before beginning official duties, file with the court a bond conditioned on the faithful performance of such duties. The United States Trustee determines the amount and sufficiency of such bond and is qualified to serve as a case trustee without bond requirements. A trustee is not liable personally or on such trustee’s bond in favor of the United States for any penalty or forfeiture incurred by the debtor. A proceeding on a trustee’s bond may not be commenced after two years after the date on which such trustee was discharged. See Section 322.

If the court has not ordered the appointment of a trustee in a Chapter 11 case, then at any time before the confirmation of a plan, on the properly noticed request of a party in interest, or the United States Trustee, after a hearing, the court may order the appointment of a disinterested person as an “examiner.” The examiner will conduct an investigation of the debtor, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor. See Section 1104.

The appointment of an examiner must be in the interests of creditors and other interests of the estate; or if the debtor’s fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000. The debtor would usually remain as “debtor in possession” during such investigation by an examiner.

After notice and a hearing, the court may remove a trustee, other than the United States Trustee, or an examiner, for cause. See Section 324.

In Chapter 7 or 11 cases, the court may allow reasonable compensation for the trustee’s services, based upon a percentage of all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims. See Section 326.

In Chapter 12 or 13 cases, the court may allow reasonable compensation of a trustee appointed under Section 1202(a) or 1302(a) not to exceed 5 percent upon all payments under the plan. See Section 326.

A case trustee is required in a Chapter 7 case, because the property must be gathered and liquidated. In a Chapter 11 case, the debtor generally remains in possession of the assets, and a trustee is normally not required. In Chapter 12 and Chapter 13 repayment plans, the duties of the trustee may involve primarily the administration of payments, while the debtors retain assets.

The commencement of a voluntary, joint, or involuntary bankruptcy petition automatically creates an “estate.” Such estate is comprised of all the property wherever located and by whomever held. This includes all legal or equitable interests of the debtor in the property at the commencement of the case. See Section 541(b).

The Bankruptcy Estate also includes all interests of the debtor and spouse in community property that is under the sole, equal, or joint management and control of the debtor, and is liable for an allowable claim against the debtor as of the commencement of the case. See Section 541(a)(2).

The Bankruptcy Estate also may include any interest in property that the debtor acquires or becomes entitled to acquire within 180 days after such date by inheritance, or as a result of a divorce, or as a beneficiary of a life insurance policy. See Section 541(a)(5).

The Bankruptcy Estate includes any interest in property that the trustee recovers. This may include a recovery where the trustee has avoided a fraudulent or preferential transfer of property of the debtor. Also included are any interests in property preserved for the benefit of or ordered transferred to the estate by the court. See Section 541(a)(3).

Proceeds, product, offspring, rents, or profits of or from property of the estate are also included in the Bankruptcy Estate. However, earnings from services performed by an individual debtor after the commencement of the case are generally not included in the Bankruptcy Estate. See Section 541(a )(6). Note that under Chapters 12 and 13, certain future earnings may be included in the estate as part of a plan in those chapters.

An interest of the debtor becomes property of the estate under the rules in this section, regardless of any provision in an agreement, transfer instrument, or applicable non-bankruptcy law that restricts or conditions transfer of such interest by the debtor. Clauses in contracts that cause a forfeiture, modification, or termination of the debtor’s interest in property, conditioned on the insolvency or financial condition of the debtor, on the filing of a bankruptcy by the debtor, or on the appointment of or taking possession by a trustee in a bankruptcy case or a custodian before the filing, generally do not affect property of the Bankruptcy Estate. See Section 541(c)(1)(A).

A restriction of the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable under Section 541(c)(2). Certain “spendthrift trusts” under state law may be excluded from the Bankruptcy Estate. See Section 541(c)(2).

The Bankruptcy Code does not offer a definition for “executory contract.” Courts have interpreted “executory contract” to be a contract where there remains substantial performance yet to be completed by both the debtor and the nondebtor party at the time the bankruptcy is filed. However, it may also be interpreted to include a situation where there remains substantial performance yet to be completed by only one of the parties, or as a contract which may benefit the estate of the debtor “from performance or breach.” See Section 365 of the Bankruptcy Code.

An executory contract may have a significant impact on the rights of a creditor in a bankruptcy. Bankruptcy law may permit a debtor or trustee to take advantage of the benefit of a contract by performance, or to avoid liability by rejecting it. See Assumption or Rejection below.

With approval of the court, a trustee or debtor-in-possession may assume or reject any unexpired lease of the debtor. See Assumption or Rejection below. The lease must be a “true lease.” A true lease may be a lease that reserves title to the property to the lessor, and the property does not become the property of the lessee at the end of its term for little or no value. A transaction involving a lease that permits the leased property to become the property of the lessee at the end of a lease term for little or no value may be treated as a “security agreement” instead of as a true lease.

An example of a true lease may be a lease to commercial real property. An example of a lease which may be determined to be a security transaction might be an equipment lease that requires no or nominal payment at the end of the lease term to acquire title and ownership of the equipment. See Section 365 of the Bankruptcy Code.

The trustee, subject to the approval of the court, may assume or reject any executory contract or unexpired lease of the debtor. This is done by filing a motion with the court and giving notice of a hearing, and may be included in a confirmed plan under Chapter 11, 12, or 13.

If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee cures the default, compensates the other party for actual pecuniary loss, and provides adequate assurance of future performance under such contract or lease. See Section 365(b).

In Chapter 7 cases, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected. See Section 365(d).

In a case under Chapter 11, 12, or 13, the trustee may assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor at any time before the confirmation of a plan. However, the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease. See Section 365(d).

The trustee may not assume or assign a personal service contract, a contract to loan money or issue securities, or a nonresidential lease that was terminated before the filing of a bankruptcy. See Section 365(c).

The term “claim” includes a right to payment, “whether or not such right is reduced to judgment, liquidated, fixed, contingent, unmatured, disputed, legal, equitable, or secured.” A claim may also consist of a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, “whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.” A claim against the debtor includes claims against property of the debtor. See Section 101(5).

A Proof of Claim is deemed allowed unless a party in interest objects. If there is an objection, a court hearing is held, and the court determines the amount of claim as of the date of bankruptcy filing. A claim is not allowed if it is unenforceable because the debtor has a valid defense to the claim, or if the claim is for post-petition interest on an unsecured claim, or other exceptions. Claims in a bankruptcy action may be either “secured” or “unsecured.” An allowed “setoff” is treated as a secured claim. See Section 502.

Secured debt usually includes the right of the creditor to seize identifiable property if there is a default, in addition to the promise or ability of the debtor to pay.

A secured claim is an allowed claim, secured by a lien on property of the debtor, or subject to a setoff.

The secured claim is generally considered secured only to the extent of the value of the particular collateral. If the allowed claim of the creditor is greater than the value of the collateral, the claim may be divided into a secured claim, up to the value of the collateral, and an unsecured claim for the balance. Section 506 of Title 11 of the United States Code defines a “secured claim” as:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under Section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.

If the value of the collateral exceeds the amount of the claim, the creditor may not be entitled to the excess amount, except as provided in this portion of Section 506:

(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.

In a Chapter 7 case, a secured creditor generally receives cash equivalent to the allowed claim, or a return of the secured property. See Section 725.

An example of a secured claim is a note secured by a deed of trust or mortgage on real property. A secured creditor has a right to “adequate protection” of its interest in the collateral if it is subject to the automatic stay, and relief from stay has not been ordered. This may protect the secured creditor from decreases in the value of security during the bankruptcy case.

A creditor’s right to setoff is subject to the automatic stay, and is treated as a secured claim under the Bankruptcy Code. An illustration of a setoff is a banking institution holding funds in an account of the debtor, who also owes money to the bank for loans. State law may allow the bank to use funds in the account to offset loans owed by the debtor on the bankruptcy filing date. The creditor with a right of setoff under state law, may be entitled to offset a mutual debt owing by the creditor to the debtor, that arose before the commencement of the case, against a claim of the creditor against the debtor that arose before the commencement of the claim, except to the extent that:

For the purposes of Section 553 of the Bankruptcy Code, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition. The trustee may in certain circumstances recover from a creditor all or a portion of the amount offset, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition. See Section 553(b)(1).

Automatic stay provisions of Section 362(a)(7) apply to “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor....” Therefore, a creditor must obtain relief from stay before using any right to setoff after the filing of a bankruptcy. A secured creditor generally has a right to “adequate protection” of its interest in the collateral if it is subject to the automatic stay, and relief from stay has not been ordered. See Section 553.

Unsecured debt may be generally described as a debt where credit was granted based solely upon the promise or ability of the debtor to pay. Claims that are not secured by any collateral or subject to set off are generally unsecured claims. For purposes of bankruptcy, unsecured claims are classified and paid based on a priority list described in Section 507 of the Bankruptcy Code.

In most Chapter 7 cases, the proceeds from liquidation of the estate by the case trustee will probably be less than required to pay all creditors in full. However, there are rules pertaining to the distribution of property of the estate.

A secured claim is a claim secured by a lien on property of the debtor or subject to a setoff. In a Chapter 7 case, a secured creditor generally receives cash equivalent to the allowed secured claim, or return of the secured property. The distribution of property to secured creditors is located in Section 725.

The secured claim is generally considered secured only to the extent of the value of the particular collateral. If the allowed claim of the creditor is greater than the value of the collateral, the claim may be divided into a secured claim, up to the value of collateral, and an unsecured claim for the balance. See Section 506.

The distribution of property to unsecured creditors is located in Section 726 of the Bankruptcy Code. Section 726 lists six classes of unsecured claims, and each class must be paid in full before the next lower class is paid anything. These classes are:

Priority Claims

FIRST: Claims in the priority as set forth in Section 507(a) of the Bankruptcy Code.

These include “administrative expenses” of the bankruptcy, fees, and charges assessed against the estate, unsecured claims in an involuntary case that arise after filing but before appointment of a trustee, or wages or commissions of employees of the debtor that are earned within 90 days before the date of a bankruptcy filing or the date of cessation of the debtor’s business, whichever occurs first, to the extent of $4,000 for each individual or corporation.

Also included in these “Priority Claims” are certain contributions to an employee benefit plan, and unsecured claims of grain farmers and United States fisherman to the extent of $4,000 for each claimant. These Priority Claims also include unsecured consumer “layaway” claims, to the extent of $1,800 for each individual, arising from the deposit, before the commencement of the bankruptcy case, of money in connection with the purchase, lease, or rental of property or services for personal, family, or household property, that were not delivered.

Other Priority Claims are certain spousal and child support, certain unsecured tax claims prior to the date of filing bankruptcy, and unsecured claims based on commitments made by a debtor to maintain the capital of an insured federal depository institution. See Section 507(a).

General Unsecured Allowed Claims

SECOND: General unsecured allowed claims.

After all of the Priority Claims are paid in full, other unsecured creditors, which have filed a Proof of Claim on an “allowed” claim are paid. This category excludes claims filed late or tardy claims, or fines, penalty or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that they are not compensation for actual pecuniary loss suffered by the claimant. See Section 726(a)(2).

THIRD: Allowed unsecured tardy or late claims.

FOURTH: Allowed secured or unsecured claims for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that such claims are not compensation for actual pecuniary loss suffered by the claimant.

FIFTH: Interest at the legal rate from the date of the filing of the petition on any allowed claims paid.

SIXTH: To the debtor.

Creditors who sell goods and services on open book accounts are often “general” unsecured creditors. If funds are available, a general unsecured creditor may be paid following payment of Priority Claims discussed above. See Section 726.

The trustee may avoid certain statutory liens, fraudulent transfers, as well as preferences. “Preferences” are transfers of a debtor’s property to a creditor, or to benefit a creditor, for payment of a prior debt, which results in the creditor receiving more than the creditor would have received in a Chapter 7 Bankruptcy if the property had not been transferred.

The transfer must occur when the debtor is insolvent and, generally, within 90 days before the bankruptcy filing. For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition. See Section 544.

Transfers to “insiders,” which includes relatives, general partners, and directors or officers of the debtor, made up to one year prior to the filing of a bankruptcy, may be avoided or undone. In addition, the trustee may be able to avoid transfers under applicable state law, which may provide longer time periods. See Section 547(b).

A trustee is permitted to “avoid” and demand the return to the estate of property that is a preferential transfer transferred under circumstances as described above. For the purposes of Section 547, the trustee has the burden of proving the avoidability of a transfer. The creditor or other party may have the burden of proving the nonavoidability of a transfer under certain “exceptions” to this preference rule. Exceptions include that the trustee generally cannot avoid a transfer if it is a substantially contemporaneous exchange for new value, it is a payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, certain purchase money security interests, and others. See Section 547(c).

In addition to avoiding preferences, the trustee may avoid certain transfers of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud creditors, or, the debtor received less than a reasonably equivalent value in exchange for such transfer or obligation, and was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation. See Section 548.

Reclamation is the right of a creditor to reclaim property sold to the debtor immediately before the filing of a bankruptcy. Bankruptcy Code Section 546(c) provides that a trustee’s avoiding power is subject to the statutory or common law right of a seller who sold goods to the debtor in the ordinary course of its business while the debtor is insolvent. However, a creditor who seeks to reclaim any goods must demand in writing reclamation of the goods:

If a reclamation is timely made, the Bankruptcy Court generally may deny such claim only if it grants the creditor a priority claim or secures such claim by a lien. See Section 546(c).

State and/or Federal Exemptions:

For individual debtors only, certain property exemptions are allowed which permit the debtor to retain some basic assets to facilitate a fresh start. Partnerships or corporations are not qualified for these exemptions.

Individual debtors are allowed to take exemptions under either state laws or federal laws, but not both. Some states have not specifically authorized the federal bankruptcy exemptions, as permitted by Section 522(b). In those states, individual debtors may be limited to the exemptions allowed under the laws of their state, and other non-bankruptcy federal laws. If the individual debtor fails to make the election, federal exemptions would apply, but only in those states which permit their use. A waiver of any exemption in favor of a creditor is generally unenforceable. See Section 522(b).

Federal Exemptions:

An individual debtor or dependent may claim federal exemptions pursuant to Section 522(d) in those states that permit use of these exemptions. These federal exemptions include up to $15,000 in real or personal property that is used as a residence; up to a value of $2,400 in one motor vehicle; up to $400 in value in any particular item, or $8,000 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for personal, family, or household use.

There are many other items that may be claimed as exempt under the Federal Exemptions, where their use is permitted. These include jewelry, up to $1,500 in value in any implements, professional books, or tools, used in trade; certain life insurance, certain retirement benefits, a right to receive a payment, not to exceed $15,000, on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual to whom the debtor is a dependent, and many others. See Section 522(d).

Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose, or that is determined under Section 502 of this title as if such debt had arisen, before the commencement of the case, except certain “nondischargeable” debts under Section 523, and a debt secured by a lien that is not avoided or void under certain sections of the Bankruptcy Act. The exempt property may also be liable for a tax lien, notice of which is properly filed, or certain debts specified in Section 523(a)(4) or 523(a)(6) concerning certain federal depository institution liquidating agents. See Section 522(c).

It is possible for the debtor to avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled, if such lien is a judicial lien, for other than certain alimony or support, or if such lien is a nonpossessory, nonpurchase-money security interest in household furnishings and goods, or certain tools of the trade of debtor or a dependent. See Section 522(f).

The debtor must file a list of property that the debtor claims as exempt. If the debtor does not file such a list, a dependent of the debtor may file such a list, or may claim property as exempt from property of the estate on behalf of the debtor. Unless a party in interest objects, the property claimed as exempt on such list may be exempt. See Section 522(l).

Adversary Proceedings:

Under Bankruptcy Rules Rule 7001, an adversary proceeding may be filed in a debtor’s bankruptcy action for certain specific reasons. An adversary proceeding may be filed to recover money or property of a debtor, for the sale of a debtor’s property by a co-owner, to object or revoke a discharge, to revoke the confirmation of a reorganization plan, to determine the dischargeability of a debt, to obtain an injunction or other equitable relief, and for other matters. Creditors also may initiate adversary proceedings to determine the validity or priority of a lien, to determine the validity of a debt, to obtain an injunction, or to subordinate a claim of another creditor. See Bankruptcy Rules, Rule 7001.

Non-dischargeable Debts:

A discharge generally relieves a Chapter 7 debtor from all debts incurred prior to the filing of the bankruptcy. The discharge in a Chapter 7 does not discharge an individual debtor from any debt excepted from discharge under Section 523. A creditor may file an adversary proceeding to object to the discharge of a specific debt which qualifies.

Claims Which Are Generally “Non-dischargeable”:

Certain debts of an individual debtor may be “non-dischargeable” under Section 523 of the Bankruptcy Code. Section 523 provides that a discharge generally does not discharge certain taxes or customs duties, certain spousal or child support obligations, or fines, penalties, or forfeitures to a governmental unit. In addition, certain student loans, death or personal injury caused by debtor while intoxicated, and a debt to which the debtor waived, or was denied, a discharge in a prior case may be non-dischargeable. See Section 523.

Claims Which May Be Found to Be “Non-dischargeable”:

Certain other types of claims may be found to be non-dischargeable under Section 523. Provided that the debtor has properly scheduled the debt and provided notice of the bankruptcy, these types of claims are discharged unless the claimant timely files a Proof of Claim, and timely files a complaint for a determination of dischargeability of such debt. Debts that are for fraud while the debtor was acting as a fiduciary, embezzlement, or larceny are listed in this category. Also included are willful and malicious injuries and certain property damage caused by the debtor.

Section 523(a)(2) provides that a claim may be found, by the court, to be non-dischargeable by an individual debtor, for any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent that it is obtained by use of a materially false written financial statement respecting debtor or an insider, on which the creditor reasonably relied, and that the debtor caused to be made with intent to deceive. A claim may be found, by the court, also under Section 523(a)(2), to be non-dischargeable by an individual debtor, for any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud. See Section 523(a)(2).

Where consumer debts for “luxury goods or services” owed to a single creditor or cash advances on a credit card or other open end credit plan, aggregating more than $1,000, are incurred by an individual debtor, on or within 60 days before the bankruptcy filing, these items are presumed to be non-dischargeable. “Luxury goods or services” do not include goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor; an extension of consumer credit under an open end credit plan is to be defined for purposes of this subparagraph as it is defined in the Consumer Credit Protection Act. See Section 523(a)(2)(c).

A creditor may file an adversary action to object to the discharge of a specific debt. If the creditor prevails, the debt or claim is declared to be non-dischargeable by the Bankruptcy Court, and the creditor may attempt to recover the debt under state laws which may apply. The bankruptcy law, however, provides a very short time period for the filing of an adversary action to determine the dischargeability of a debt.

Under Bankruptcy Rule 4007, a debtor or any creditor may file a complaint to obtain a determination of the dischargeability of any debt. In a Chapter 7, 11, or 12 case, a complaint to determine the dischargeability of any debt pursuant to Section 523(c) must be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to Section 341(a). The court must give all creditors not less than 30 days notice of the time. On motion of any party, after hearing on notice, the court may for cause extend the time, but the motion must be made before the time has expired. See Bankruptcy Rules Rule 4007.

(Source: The Free Legal Dictionary by Farlex)

A composition with creditors is a contract made by an insolvent or financially pressed debtor with two or more creditors in which the creditors agree to accept one specific partial payment of the total amount of their claims, which is to be divided pro rata among them in full satisfaction of their claims.

A composition with creditors is an agreement not only between the debtor and the creditors but also between the creditors themselves to accept less than what each is owed. It is a contract and such an arrangement is largely governed by contract law. There must be a meeting of the minds or mutual assent between the debtor and the creditors before a composition is created. A debtor must accept an offer by the creditors to accept partial payment of the amounts outstanding for the composition to be binding. The creditors themselves must also agree to the amount they will accept in satisfaction of their claims. They rely on mutual concessions of their rights to full payment to further the common purpose of securing their claims.

No standard form is required for a composition with creditors to be valid. A debtor can enter individual agreements with each creditor if it is clear that each follows a common purpose. All the creditors of a debtor do not have to agree to a composition. Those who do not participate are not bound by it.

Like any contract, a composition with creditors must be supported by consideration to be enforceable. Each creditor's promise to accept a pro rata share of the partial payment, as opposed to a full payment of what is due, is consideration for the other creditors and the debtor. The surrender of debtor's right to file a petition for bankruptcy is deemed consideration for the creditors.

Failure to obey the terms of a composition provides a basis for a lawsuit for breach of the agreement. The debtor is released from the duty of payment only after he or she has complied with the payment provisions. All the debts that are part of a composition are extinguished once a composition has been terminated.