Chapter 7 bankruptcy results in a complete liquidation of the debtor’s non-exempt assets, if any. Most chapter 7 cases are “no asset” cases, meaning there are no non-exempt assets to distribute to creditors.  In all non-cases, the Court directs creditors not to file Proofs of Claim.  The primary reason that lenders refer Chapter 7 bankruptcies to law firms is to obtain relief from the automatic bankruptcy stay so that an in rem mortgage foreclosure can either be commenced or resumed while the bankruptcy is still pending.  Lenders are prohibited from seeking money damages or a deficiency judgment in in rem foreclosures.  In rem foreclosures result in the lender obtaining title to the collateral property at the foreclosure sale or, in cases in which the collateral property is purchased by a third party at the foreclosure sale, the lender would receive the net sale proceeds.

In the Southern District, Chapter 7 Motions for Relief from Stay are filed using “negative notice” which means that if the Debtor does not file a written objection to the Motion for Relief within 14 days, the court will ordinarily grant the Motion for Relief without a hearing.  In the Middle District, the Chapter 7 negative notice time period is 21 days.  The Northern District does not employ a negative notice procedure for Chapter 7 cases, but will automatically set a hearing, and cancel the hearing if an objection is not filed. 

The Federal Rules of Bankruptcy Procedure impose a mandatory 14 day delay in the effective date of all Orders Granting Relief from Stay unless the Order expressly waives the 14 day stay.  Although it is extremely rare, Chapter 7 bankruptcies sometimes do have non-exempt assets available for unsecured creditors.   Assets which were not disclosed by the Debtor are sometimes found by the bankruptcy trustee, and in a very small number of cases the debtor may file with some non-exempt assets.  When the court becomes aware of such assets, it will enter an order establishing a claims bar date and notifying all creditors to file a Proof of Claim. In such cases the non-exempt assets are distributed by the bankruptcy trustee to all unsecured creditors who have timely filed a Proof of Claim on a pro rata basis.  A secured creditor is only entitled to file a Proof of Claim in a Chapter 7 bankruptcy to the extent that the debt owed exceeds the current fair market value of the collateral property. 

Chapter 13 debtors use their regular monthly income to make monthly payments to the bankruptcy trustee, and the bankruptcy trustee distributes those payments to creditors pursuant to the chapter 13 plan which is subject to approval of the court. Chapter 13 debtors must decide whether to pay each secured creditor through the plan, or to surrender the collateral property to the mortgagee, or to pay the mortgage directly outside the chapter 13 plan.  If the collateral property is surrendered, or if the plan provides to pay the secured creditor directly outside the plan, the secured creditor may file a Motion for Relief from Stay.  In certain cases the secured creditor is granted automatic relief from stay and this varies in each county or district. When a chapter 13 plan provides to pay the secured creditor through the plan, the secured creditor is most likely not eligible for a Motion for Relief from Stay.  It is imperative that the secured creditor whose debt is being paid through the chapter 13 plan file a timely Proof of Claim.  If the debtor’s plan provides to pay the secured creditor less than the amount it claims in its timely filed Proof of Claim, an Objection to Confirmation of the Chapter 13 Plan would be warranted and would be ruled upon by the court at the confirmation hearing.  If the debtor disagrees with the figures in the secured creditor’s Proof of Claim, the debtor can file an Objection to the Proof of Claim.