A Chapter 7 bankruptcy is a federal court-ordered and supervised procedure in which a trustee liquidates a debtor’s assets and distributes the proceeds to the debtor’s creditors. The court discharges all of the debtor’s dischargeable debts in approximately four months, meaning that the debtor is no longer responsible for paying these debts. An individual may only file for a Chapter 7 bankruptcy once every eight years.
This form of bankruptcy is called liquidation. Bankruptcy estates that do not have any assets to liquidate are called “no-asset cases.”
The “Means Test”
The “means test” is a computation of the debtor’s income in relation to his debt. The debtor is required to calculate the income he will have in the five years succeeding bankruptcy. If the debtor’s income will exceed the median income of individuals of his family size in the state in which he files by $10,000, the court presumes that a Chapter 7 bankruptcy is inappropriate. Additionally, if the debtor’s disposable income will exceed 25% of his debt in an amount of at least $6,000, the bankruptcy petition will be denied. For disposable income ranges of $6,000 to $10,000, additional calculations must be performed before a Chapter 7 bankruptcy will be granted.
Credit Counseling Requirement
A debtor is required to complete credit counseling from a certified counseling agency prior to filing a Chapter 7 bankruptcy petition. Failure to do so may result in court dismissal of the bankruptcy petition.
Bankruptcy Petition Fees and Requirements
The payment of filing fees, waivable with court permission, is required to initiate a bankruptcy case. The payment of filing fees can be extended over four installment payments, with court-approved extensions of time for payment available.
A bankruptcy petition must outline the debtor’s income, expenses, assets, liabilities, and executory leases and contracts. A recent income tax return and documentation of a debt repayment plan, if applicable, must also be filed. The petitioner must disclose any employment income earned in the sixty days preceding the filing date.
A debtor must also file a schedule listing any exempt property with his petition. Exempt property is property that under applicable federal or state law is not subject to being seized and sold by creditors collecting on judgments, and is not subject to being liquidated in bankruptcy. Typically this is personal property, work equipment, and limited equity in a home and vehicle. Generally, petitioners have a choice of choosing between federal or state property exemption laws.
The Automatic Stay
Once the bankruptcy petition is filed, most debt collection actions are prohibited, such as lawsuits, wage garnishments, or contacts with the debtor. This is known as the “automatic stay” since no special court order is required.
The Creditors’ Meeting
Within twenty to forty days after filing, a creditors’ meeting is held to review the debtor’s petition and financial affairs. After the creditors’ meeting, the trustee reports to the court as to the debtor’s eligibility for debt discharge. However, a creditor may contest discharge if a debt was obtained through fraud or arose from malicious or willful personal injury. Discharge is granted if the debtor meets the requirements of the “means test.”
Bankruptcy Benefits, Limitations and Consequences
A bankruptcy discharge offers a “fresh start” for debtors by eliminating debts arising from medical expenses, credit cards, negligence judgements, unsecured loans, and wage garnishments. However, some debts such as student loans, child support, and many tax debts are not dischargeable. One consequence of bankruptcy is that it may be reported on a credit report for ten years, which may make future credit difficult or expensive to obtain.