The chapter of the Bankruptcy Code providing for
"liquidation," ( i.e., the sale of a debtor's nonexempt property and
the distribution of the proceeds to creditors.)
In a Chapter 7 case the bankruptcy trustee gathers and sells the debtor's
nonexempt assets and uses the proceeds of such assets to pay holders of
claims (creditors) in accordance with the provisions of the Bankruptcy
Code. Part of the debtor's property may be subject to liens and
mortgages that pledge the property to other creditors. In addition, the
Bankruptcy Code will allow the debtor to keep certain "exempt"
property; but a trustee will liquidate the debtor's remaining assets.
Accordingly, potential debtors should realize that the filing of a
petition under chapter 7 may result in the loss of property.
"Means Test"
If the debtor's "current monthly income" is more than the state median, the Bankruptcy Code
requires application of a "means test" to determine whether the chapter
7 filing is presumptively abusive. Abuse is presumed if the debtor's
aggregate current monthly income over 5 years, net of certain
statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of
the debtor's nonpriority unsecured debt, as long as that amount is at
least $6,000. The debtor may rebut a presumption of abuse only by a
showing of special circumstances that justify additional expenses or
adjustments of current monthly income. Unless the debtor overcomes the
presumption of abuse, the case will generally be converted to chapter
13 (with the debtor's consent) or will be dismissed.
Eligibility
To qualify for relief under chapter 7 of the Bankruptcy
Code, the debtor may be an individual, a partnership, or a corporation
or other business entity. Subject to the
means test described above for individual debtors, relief is available
under chapter 7 irrespective of the amount of the debtor's debts or
whether the debtor is solvent or insolvent.
One of the primary purposes of bankruptcy is to
discharge certain debts to give an honest individual debtor a "fresh
start." The debtor has no liability for discharged debts in a chapter
7 case. Although an individual chapter 7 case usually results in
a discharge of debts, the right to a discharge is not absolute, and
some types of debts are not discharged. Moreover, a bankruptcy
discharge does not extinguish a lien on property.
Exempt Property
The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is
exempt under federal bankruptcy law or under the laws of the debtor's
home state. Many states have taken advantage of a
provision in the Bankruptcy Code that permits each state to adopt its
own exemption law in place of the federal exemptions. In other
jurisdictions, the individual debtor has the option of choosing between
a federal package of exemptions or the exemptions available under state
law. Thus, whether certain property is exempt and may be kept by the
debtor is often a question of state law. The debtor should consult an
attorney to determine the exemptions available in the state where the
debtor lives.
Automatic Stay
Filing a petition under chapter 7 "automatically stays"
(stops) most collection actions against the debtor or the debtor's
property. The stay
arises by operation of law and requires no judicial action. As long as
the stay is in effect, creditors generally may not initiate or continue
lawsuits, wage garnishments, or even telephone calls demanding
payments. The bankruptcy clerk gives notice of the bankruptcy case to
all creditors whose names and addresses are provided by the debtor.
§341 Creditor's Meeting
Between 20 and 40 days after the petition is filed, the case trustee (described below) will hold a meeting of creditors. During this meeting, the trustee puts the debtor under
oath, and both the trustee and creditors may ask questions. The debtor
must attend the meeting and answer questions regarding the debtor's
financial affairs and property. If a husband and wife
have filed a joint petition, they both must attend the creditors'
meeting and answer questions. Within 10 days of the creditors' meeting,
the U.S. trustee will report to the court whether the case should be
presumed to be an abuse under the means test described in.
Discharge
The discharge releases individual debtors from personal
liability for most debts and prevents the creditors owed those debts
from taking any collection actions against the debtor. Because a
chapter 7 discharge is subject to many exceptions, though, debtors
should consult competent legal counsel before filing to discuss the
scope of the discharge. Generally, excluding cases that are dismissed
or converted, individual debtors receive a discharge in more than 99
percent of chapter 7 cases. In most cases, unless a party in interest
files a complaint objecting to the discharge or a motion to extend the
time to object, the bankruptcy court will issue a discharge order
relatively early in the case – generally, 60 to 90 days after the date
first set for the meeting of creditors.
We are a debt relief agency. We help people file for Bankruptcy under the Bankruptcy Code.
This web site is designed for general
information only. The information presented at this site should not be
construed to be formal legal advice nor the formation of a lawyer/client
relationship.
