Merely Receiving a Discharge Will Not Close a Chapter 7 Bankruptcy Case

The ideal Chapter 7 bankruptcy accomplishes two goals for the debtor(s). The debtor receives a discharge of his/her debts and the debtor gets to keep all the property he/she wishes.  Debtors often do not understand that these two events are mutually exclusive.

In the vast majority of Chapter 7 cases, the debtor has “no assets” to liquidate. As an aside, this underscores that it is largely a myth that a debtor cannot keep a house or car in Chapter 7 bankruptcy, but that is another discussion for another day.

After the meeting of creditors with the debtor, the trustee files a report on the possibility that there are assets to liquidate on behalf of creditors.  Usually there are not, and the trustee files a report of no distribution. In those instances, the debtor usually has not yet received a discharge. Several months later, the debtor usually receives a discharge, and on that date, the debtor gets discharge and the case closes at the same time.

However, there are some instances when the trustee might believe there are assets to recover for the bankruptcy estate of the debtor.  This could be because the debtor is in possession of an asset(s) that is worth more than the amount of equity the debtor is allowed to exempt, or because the debtor improperly transferred some asset to a third party within a certain amount of time prior to the case being filed.

In either instance, the trustee will hold the case open.  Sometimes the trustee will hold the case open to do more digging and then might later file a report of no distribution, whereas in other cases, the trustee might even need to file suit against a third party to recover assets. If the trustee recovers assets, they are distributed to creditors who file proof of claims.

So what should a debtor do when his/her case is discharged but remains open? For starters, the debtor needs to understand that the discharge order means the creditors whose debts were dischargeable can never collect from the debtor on the basis of the discharge order. Those creditors can only collect a portion of the proceeds recovered by the trustee.

The next thing debtors should understand is what asset(s) the trustee thinks could lead to a recovery. For instance, if the recovery is potentially coming from a third party, the debtor really does not need to do anything differently. If the recovery would potentially come from the debtor, the debtor needs to know which asset is at risk, since the debtor is not authorized to transfer this asset while the trustee has kept the case open. Communication between the debtor’s counsel and the trustee will often give the debtor a clear understanding of what asset is at risk.

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