Chapter 7 Bankruptcy is the one of the most common types of bankruptcy because it can be filed by individuals, partnerships, corporations, and other business entities to wipe out all debts.
Chapter 7 Qualification Requirements – The Means Test
To determine who qualifies for a Chapter 7 petition, bankruptcy courts have implemented the “means test,” which limits the ability to file Chapter 7 bankruptcy to low-income earners. Debtors with monthly disposable income less than the state’s median income qualify for Chapter 7 bankruptcy; however, if there is enough monthly income to pay back creditors, the court may convert the case to a Chapter 13 proceeding.
Initiating a Chapter 7 case
To initiate a Chapter 7 case, debtors must file a petition with the applicable bankruptcy court. Immediately after a Chapter 7 case is filed, collection actions are automatically halted, meaning creditors can no longer act to recover unpaid balances. All property will be placed in an “estate,” which will temporarily own all of the assets. Next, an impartial trustee will be assigned to the case to liquidate the debtor’s non-exempt assets.
State laws typically govern which debts are deemed non-exempt or exempt. The nonexempted property will be liquidated and distributed, while the exempted property will remain in the debtor’s possession.
Examples of nonexempt property include:
Examples of exempted property include:
Distributions are the Debtor’s eligible property and assets that are taken to pay back creditors. Most Chapter 7 petitions are “no asset” cases, which occurs when all the debtor’s assets are exempt and there are no distributions to be made. Typically, creditors need to file proofs of claim to be able to receive distributions; however, most creditors in Chapter 7 filings will not need to file proofs of claim because distributions are unlikely.
Dischargeability of debt is determined by the court. A discharged debt voids the debtor’s personal liability and acts as a permanent injunction to cease all creditor actions to collect the debts. In Chapter 7 Bankruptcy proceedings, more than 99% of debts are discharged.
Non-dischargeable debts include tax obligations and other debts incurred by behavior that goes against public policy, such as fraud or recklessness. Section 523 of the United States Bankruptcy Code sets forth a list of all non-dischargeable debts.
Overall, Chapter 7 bankruptcy can benefit debtors by wiping out their debt and allowing them a fresh start; however, the likelihood of debt discharge means creditors are not likely to recover debts listed in a Chapter 7 petition.
Whether you are the debtor or the creditor, you should always seek competent legal advice to help you navigate the various bankruptcy options and proceedings.
This Blog was written by Hunter Business Law Legal Assistant Kayla Crider.
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