Bankruptcy – What is Chapter 7?

 

Chapter 7 Bankruptcy – also known as liquidation bankruptcy – is the simplest, most common form of consumer bankruptcy.  In a typical Chapter 7 case, you (the debtor) can keep most, if not all, of your possessions (including a house and car).  Normally you receive a discharge of all qualifying debt within 90-120 days of the date the Chapter 7 case is filed.

Eligibility to file a Chapter 7 bankruptcy is based on your monthly income and expenses.  If your income is equal to or less than the average income, then you will be eligible to file a Chapter 7 bankruptcy.  If your income is more than the average income, then a “means test calculation” is performed to determine whether you are eligible to file a Chapter 7 bankruptcy.  In many cases, even if your income exceeds the average income level by a good deal, you can still qualify for a Chapter 7 bankruptcy.

The means test calculation takes into account your income and IRS allowable expenses to determine whether you can file Chapter 7 even though your income exceeds the median income.  The calculation uses IRS standards but also allows for some, if not all, of your own actual expenses.

We have special tools to help determine whether our clients qualify for a Chapter 7.

The Chapter 7 Process

Once eligibility for Chapter 7 is determined, we work with our clients to prepare and file a Bankruptcy Petition.  The petition consists of many lists, called “schedules,” that list your property and debt, as well as your income and expenses.  The petition also provides information about your financial affairs.  Approximately 30 days after the date the petitions is filed, you will attend a hearing called the Section 341(a) Meeting of Creditors, where a Chapter 7 trustee asks you about the information contained in the petition.  You are required to attend this meeting, however it is less formal than most court hearings.  At the conclusion of the meeting, or shortly thereafter, the Chapter 7 trustee will declare whether your case is an ‘asset’ or ‘no asset’ case.  In most ‘no asset’ cases, you will receive a discharge of your eligible debts in about 60 days.

A ‘no asset’ case means that your assets are exempt and therefore there is nothing the Chapter 7 trustee can sell to pay creditors.  Each state in the U.S. allows debtors to keep certain property up to a specified value and prohibits creditors or the bankruptcy trustee from taking that property.  For instance, in Oregon, an individual debtor can keep a home with $40,000 in equity ($50,000 for married debtors).  There are specific exemptions for clothing, household goods, firearms, cars, and many more.  We help our clients determine the reasonable value of their property and let them know before the 341(a) meeting whether the trustee will want to take anything.  In most cases, you can keep everything.

An ‘asset case’ results when the Chapter 7 trustee determines there are non-exempt assets or assets with a value that exceeds the allowable exemption amount that could be sold to partially pay creditors.  For example, if you own a car outright that is currently worth $5,000.  The exemption for a car in Oregon is $3,000.  In this situation you would have $2,000 non-exempt equity in your car.  So, the trustee could sell the car for $5,000, give you $3,000, and then give the remaining $2,000 to your creditors.  However, in most cases the trustee will accept payment from you for the non-exempt $2,000 in equity, which will allow you to keep your car.  Typically, these payments can be made over time and sometimes the level of non-exempt equity is negotiable.  We help our clients determine the best way to handle assets that exceed the exemption limit.

For informational purposes only and not to be relied upon as legal advice.

by John A. Pinzelik

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