Chapter 7 Bankruptcy

The Bankruptcy Code is divided into chapters. The chapters which almost always apply to consumer debtors are Chapter 7, known as a "straight bankruptcy", and chapter 13, which involves an affordable plan of repayment.

An important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for bankruptcy protection automatically stops and brings to a grinding halt most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection harassment. It offers debtors a breathing spell by giving the debtor and the trustee assigned to the case time to review the situation and develop an appropriate plan. In most circumstances, creditors cannot take any further action against the debtor or the property without permission from the bankruptcy court.

In a Chapter 7 case, the bankruptcy court appoints a trustee to examine the debtor's assets to determine if there are any assets not protected by available "exemptions". Exemptions are laws that allow a debtor to keep, and not part with, certain types and amounts of money and property. For example, exemption laws allows a debtor to protect a certain amount of equity in the debtor's residence, motor vehicle, household goods, life insurance, health aids, retirement plans, specified future earnings such as social security benefits, child support, and alimony, and certain other types of personal property. If there is any non-exempt property, it is the Trustee's job to sell it and to distribute the proceeds among the unsecured creditors. Although a liquidation case can rarely help with secured debt (the secured creditor still has the right to repossess the collateral if the debtor falls behind in the monthly payments), the debtor will be discharged from the legal obligation to pay unsecured debts such as credit card debts, medical bills and utility arrearages.

However, certain types of unsecured debt are allowed special treatment and cannot be discharged. These include student loans, alimony, child support, criminal fines, and some taxes.

This is a simple and speedy proceeding and may be more economical than cases filed under the other bankruptcy chapters. In most cases, post petition income belongs to the debtor. To a limited extent, liens may be voided or a debtor may save encumbered property by paying off the value of the collateral only and not the full amount of the unpaid debts.

A discharge may be denied because of certain acts committed before or after filing. Not all debts are dischargeable under this Chapter. Payments to creditors, over $600.00 in the last three months and any payments to relatives or friends within one year of the date of filing may be recovered by the trustee. Also, property transferred without a fair consideration may be recovered by the trustee.

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. Some of the major changes in the law were:

The Means Test
The amendments effectively subject most debtors who have an income, as calculated by the Code, above the debtor's state's median income to an 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 income is higher than a specified 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.

Credit Counseling Requirement
Another major change to the law enacted by BAPCPA deals with eligibility. 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. 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.

BUSINESS CHAPTER 7 BANKRUPTCY

When a troubled business is in financial crisses and unable to service their 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 of the Bankruptcy Code. 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. The Trustee generally sells all the assets and distributes the proceeds to the creditors.

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.

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. 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.

Disclaimer: The information contained on this page is provided for general information purposes only and is not intended to be a legal opinion, legal advice or a complete discussion of the issues related to the area of consumer bankruptcy. Every individual's factual situation is different and you should seek independent legal advice from an attorney familiar with the laws of your state or locality regarding specific information.