The timing of your Chapter 7 “straight bankruptcy” case can make a huge difference in dealing with your debts.
Chapter 7 Timing
So much in bankruptcy is related to timing, especially the timing of the filing of your case. Let’s start today with Chapter 7, the most common type of bankruptcy.
You start a Chapter 7 case by filing a “petition” at the Bankruptcy Court. Everything that happens before you file your case is called “pre-petition.” Everything that happens after that is “post-petition.”
Specifically, the timing of your Chapter 7 case affects how your debts are treated.
Debts that you owe as of the time you file that petition are pre-petition debts. Your bankruptcy case deals with those debts.
Your bankruptcy does not deal with debts that become due after you file your case—post-petition debts.
In a Chapter 7 case there are two main practical consequences arising from a debt being pre-petition vs. post-petition: 1) whether the debt is discharged (legally written-off), and 2) whether the debt is possibly paid by the Chapter 7 trustee.
1) Potential Discharge
Simply put, among those types of debts that can be discharged, pre-petition debts are discharged in bankruptcy while post-petition ones are not. The debt has to exist at the time of your bankruptcy filing in order for it to be discharged.
2) Potential Trustee Payment
Chapter 7 is a liquidation procedure, although one which, in the vast majority of consumer debtors, does NOT involve the liquidation of anything. That’s because everything that most people own are covered and protected by property exemptions. Only those assets that aren’t are subject to liquidation by the trustee.
So, in relatively rare Chapter 7 cases, the trustee liquates some of your assets and pays creditors from the proceeds. Only creditors with pre-petition debts are eligible to share in these proceeds.
Distinguishing between Pre- and Post-Petition Debts
In bankruptcy law a debt is a “liability on a claim.” A “claim” is a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed… .” See U.S. Bankruptcy Code Sections 101(5) and 101(12). So a debt exists even if you don’t know how much you owe, or even if you dispute that you owe it.
Usually it’s easy to know exactly when a debt legally becomes a debt. It’s when you sign a contract, buy something on a credit card, have a medical appointment, and such. The triggering event is usually pretty obvious. But it’s not always so easy to know whether a debt is pre-petition and therefore included in your bankruptcy case.
1) Mortgages, Vehicle Loans, Other Secured Installment-Payment Debts
You usually owe monthly payments on this kind of debt, some due before your bankruptcy filing date, some after. But it’s not the payment due date that counts here, rather it’s when the entire debt was incurred. If you signed the mortgage or loan before filing the Chapter 7 case, it’s a pre-petition debt.
2) Medical Bills
If you have a doctor appointment one day and file bankruptcy the next day, the fee for the doctor’s services is a pre-petition debt even though you may not receive a bill until weeks later. The doctor provided the services pre-petition, and you became liable for paying for those services at that time.
But what if the lab performed a skin biopsy that day, with a pathologist analyzing the results a week later? The cost of the biopsy itself would be pre-petition but the pathologist’s fee would be post-petition. Doesn’t matter that you didn’t know the cost of doing the biopsy, or even that you owe something for it. What counts is that you became liable to pay for the biopsy when the service was provided.
The situation can get more confusing. Imagine if you negligently caused a vehicle accident, injuring the other driver, requiring 6 months of physical therapy. Putting aside any insurance coverage, if you file your Chapter 7 case halfway through those 6 months of physical therapy, how much of that is pre-petition and dischargeable? Arguably, you became legally liable for all the resulting injuries at the moment of your negligence, at the time of the accident. So, all of the physical therapy costs would be pre-petition and dischargeable. It doesn’t matter that you don’t know what services will be required and what they will cost. You became liable for paying for whatever services would be required and however much they would cost at the time of the accident.
Leases are also pre-petition obligations as long as you signed the lease agreement before you filed for bankruptcy.
So if you return a leased vehicle or surrender the premises of a residential lease, you can discharge the entire debt. It doesn’t matter that the lease term extends for months or years after you filed your bankruptcy case.
4) Homeowner and Condominium Association Fees
You generally owe ongoing homeowner/condo association dues and assessments as long as you are the title owner of the property. Chapter 7 will discharge your personal liability for any amounts that become due to your homeowners or condominium association pre-petition. But bankruptcy does not discharge any amount which becomes due after the date you filed your case.
Again, this is true even if you intend to surrender the home/condo in your bankruptcy case, and give notice of that intent. You are responsible for post-petition dues and assessments that come due while the property is titled in your name. The lender must complete a foreclosure, accept your deed in lieu of foreclosure, or you must transfer title out of your name in some other way to avoid being liable on the post-petition dues and assessments.