What is Chapter 7 Bankruptcy:
Chapter 7
Bankruptcy protection allows debtors to get rid of most of their debts and
start over with a clean slat, but it also has it’s drawbacks, including the potential loss of property and a depressed credit score.
This article
contains in-depth information about Chapter 7 bankruptcy; including eligibility
under the “means” tests, types of debt that cannot be discharged and other tips
to help you with the process.
The Means Test & "Abuse"
Abuse is presumed if
the debtor's aggregate current monthly income over 5 years, net of certain
statutorily allowed expenses, is more than (i) $12,475, or (ii) 25% of the
debtor's nonpriority unsecured debt, as long as that amount is at least $7,025. 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. 11 U.S.C.§ 707(b)(1).
Debtors
should also be aware that out-of-court agreements with creditors or debt
counseling services may provide an alternative to bankruptcy.
Property
A
chapter 7 bankruptcy case does not involve the filing of a plan of repayment as
in chapter 13. Instead, 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.
Discharge
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, however, a discharge is only
available to individual debtors, not to partnerships or corporations. 11 U.S.C.§ 727(a)(1). 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.
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