Chapter 7

Chapter 7 Bankruptcy

Chapter 7, otherwise known as "liquidation" or "straight bankruptcy" is generally the simplest and quickest and is available to individuals, married couples, corporations and partnerships. A trustee appointed by the court gathers and sells your nonexempt property. The proceeds from the sale pay your creditors. You're able to keep any "exempt" property.

In rare instances is any property taken and the attorney can review what if any property might be in danger.

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You Are Not Alone

Over 1,412,838 people file bankruptcy each year in the United States.

You probably know several individuals who have filed for bankruptcy, they just didn't tell you. A bankruptcy filing can be a fairly well-kept secret, notwithstanding that it is a matter of public record. It is unlike a divorce filing, where one party usually moves out of the marital house. A household in bankruptcy can look pretty much the same before bankruptcy as it does after bankruptcy.

Oilfields
65%
General Labor
32%
Medical Field
23%
Retail
19%

Individuals

Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation).[3] Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances.

In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7.[citation needed] Common exceptions to discharge include child support, income taxes less than 3 years old and property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor. Spousal support is likewise not covered by a bankruptcy filing nor are property settlements through divorce. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.

A Chapter 7 bankruptcy stays on an individual's credit report for 10 years from the date of filing the Chapter 7 petition. This contrasts with a chapter 13 bankruptcy, which stays on an individual's credit report for 7 years from the date of filing the chapter 13 petition. This may make credit less available and/or terms less favorable, although high debt can have the same effect. That must be balanced against the removal of actual debt from the filer's record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.

Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor's Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.

It is widely held amongst bankruptcy practitioners[who?] that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings.[citation needed] Through these activities the U.S. Trustee has achieved a regulatory system that Congress and most creditor-friendly commentors have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.

Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized[by whom?] because by the time most debtors are ready to file for bankruptcy their credit score is already ruined. Also, new credit extended post-petition is not covered by the discharge, so creditors may offer new credit to the newly-bankrupt.

Businesses

When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 trustee is appointed almost immediately, with broad powers to examine the business's financial affairs. The Trustee generally liquidates all the assets and distributes the proceeds to the creditors.[citation needed] This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.

The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy. Fully secured creditors, such as collateralized bondholders or mortgage lenders, have a legally enforceable right to the collateral securing their loans or to the equivalent value, a right which cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge-instead, the entity is dissolved. Only an individual can receive a Chapter 7 discharge (see 11 U.S.C. $ 727(a)(1)). Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.

Means Test

The most noteworthy change brought by the 2005 BAPCPA amendments occurred within. The amendments effectively subject most debtors who have an income, as calculated by the Code, above the debtor's state census median income to a 60 month disposable income based test. This test is referred to as the "means test". The means test provides for a finding of abuse if the debtor's disposable monthly income is higher than a specified floor amount or portion of their debts. If a presumption of abuse is found under the means test, it may only be rebutted in the case of "special circumstances." Debtors whose income is below the state's median income are not subject to the means test. Under this test, any debtor with more than $182.50 in monthly disposable income, under the formula, would face a presumption of abuse.

ably, the Code calculated income is based on the prior six months and may be higher or lower than the debtor's actual current income at the time of filing for bankruptcy. This has led some commentators to refer to the bankruptcy code's "current monthly income" as "presumed income." If the debtor's debt is not primarily consumer debt, then the means test is inapplicable. The inapplicability to non-consumer debt allows business debtors to "abuse" credit without repercussion unless the court finds "cause."

ecial circumstances" does not confer judicial discretion; rather, it gives a debtor an opportunity to adjust income by documenting additional expenses or loss of income in situations caused by a medical condition or being called or order to active military service. However, the assumption of abuse is only rebutted where the additional expenses or adjustments for loss of income are significant enough to change the outcome of the means test. Otherwise, abuse is still presumed despite the "special circumstances."

Credit Counseling

Another major change to the law enacted by BAPCPA deals with eligibility. $109(h) provides that a debtor will no longer be eligible to file under either chapter 7 or chapter 13 unless within 180 days prior to filing the debtor received an "individual or group briefing" from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator

The new legislation also requires that all individual debtors in either chapter 7 or chapter 13 complete an "instructional course concerning personal financial management." If a chapter 7 debtor does not complete the course, this constitutes grounds for denial of discharge pursuant to new $727(a)(11). The financial management program is experimental and the effectiveness of the program is to be studied for 18 months. Theoretically, if the educational courses prove to be ineffective, the requirement may disappear.

2015 Law Revision

On October 17, 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect. This legislation was the biggest reform to the bankruptcy laws since 1978. The legislation was enacted after years of lobbying efforts by banks and lending institutions and was intended to prevent abuses of the bankruptcy laws.

The changes to Chapter 7 were extensive.

Other Changes

Decreased the number and type of debts that could be discharged in bankruptcy. Decreased limits for discharge of debts incurred discharging luxury goods. Expanded the scope of student loans not dischargeable without undue hardship.

Increase the time in which a debtor may have multiple discharges from 6 to 8 years.

Limited the duration of the automatic stay, particularly for debtors who had filed within one year of a previous bankruptcy. Automatic stay may be extended at the discretion of the court.

BAPCPA limited the applicability of the automatic stay in eviction proceedings. If the landlord has already obtained a judgment of possession prior to the bankruptcy case being filed, a Debtor must deposit an escrow for rent with the Bankruptcy Court, and the stay may be lifted if the Debtor does not pay the Landlord in full within 30 days thereafter, $362(b)(22). The stay also would not apply in a situation where the eviction is based on "endangerment" of the rented property or "illegal use of controlled substances" on the property, $362(b)(23).

BAPCPA enacts a provision that protects creditors from monetary penalties for violating the stay if the debtor did not give "effective" notice pursuant to [$342(g)]. The new notice provisions require the debtor to give notice of the bankruptcy to the creditor at an "address filed by the creditor with the court," or "at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case.

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