A Chapter 7 Bankruptcy, often called a “liquidation” bankruptcy, is for people who will never be able to pay back their debts and need an entirely fresh start. A Chapter 7 discharge eliminates most unsecured debts entirely and is often the best option for people without the disposable income to make a Chapter 13 work.
Debts discharged in Chapter 7
- Credit Cards
- Most lawsuits
- Deficiency balances on homes, cars, boats, etc. following foreclosure or repossession
- Medical bills
- Car loans (creditor will retain lien)
- Mortgages (creditor will retain lien)
Debts not discharged by Chapter 7
- Most taxes (some older income taxes may be discharged)
- Debts incurred to pay nondischargeable taxes
- Domestic support obligations such as spousal maintenance or child support
- Most student loans
- Fines, penalties, forfeitures, or criminal restitution obligations
- Debts for personal injuries cause by the debtor operating a vehicle while intoxicated
- Debts not properly listed in the schedules
- Reaffirmed debts
The Chapter 7 Process
When a Chapter 7 case is filed, an automatic stay is imposed immediately preventing creditors from taking any action with respect to the Debtor or against the Debtor’s property. This automatic stay stops all lawsuits against the Debtor, all foreclosures and trustee sales with respect to the Debtor’s property, and prevents garnishment of the Debtor’s bank accounts and wages.
Soon after the Chapter 7 case is filed, the Court appoints a Trustee to examine the Debtor’s petition and schedules and determine whether there are any non-exempt assets that can be liquidated to pay the creditors. The Debtor must attend a short meeting with the Trustee where the Trustee will verify the Debtor’s identity and social security number and ask a series of required questions. This meeting is formally called the “Meeting of Creditors” or “341 Meeting.”
In most cases, the Trustee determines that there is no non-exempt property to liquidate. In such “no asset” cases the creditors receive no distribution and the Debtor does not have to turn over any property to the Trustee. If the Trustee determines that there are non-exempt assets, the Debtor can either turn them over to the Trustee or buy them back if they wish to retain them. When the Trustee has liquidated any non-exempt assets and paid the creditors their pro-rata distribution, the Trustee will be relieved from the case.
Sixty-one (61) days after the Meeting of Creditors, the Debtor will be eligible to receive a discharge of their debts. The discharge order is the final order of the Court that prohibits creditors from attempting to collect from the debtor.
Qualifying for Chapter 7
Qualifying Based on Income. The simplest way for individuals with primarily consumer debts to qualify for Chapter 7, is by demonstrating that they have income below the median income for their household size. Married couples typically qualify as a 2 person household with each child adding an additional person and increased limits.
As of November 1, 2011, the Arizona Census Median Income levels are as follows: 1 Person Household: $41,385/year; $20,693/six months; $3,449/month 2 Person Household: $53,781/year; $26,891/six months; $4,482/month 3 Person Household: $56,508/year; $28,254/six months; $4,709/month 4 Person Household: $61,267/year; $30,634/six months; $5,106/month 5 Person Household: $68,767/year; $34,384/six months; $5,731/month 6 Person Household: $76,267/year; $38,134/six months; $6,356/month 7 Person Household: $83,767/year; $41,884/six months; $6,981/month 8 Person Household: $91,267/year; $45,634/six months; $7,606/month Additional Members: $7,500/year; $3,750/six months; $625/month As of March 15, 2011, the California Census Median Income levels are as follows:
1 Person Household: $48,009/year; $24,005/six months; $4,001/month 2 Person Household: $62,970/year; $31,485/six months; $5,248/month 3 Person Household: $68,670/year; $34,335/six months; $5,723/month 4 Person Household: $78,869/year; $39,435/six months; $6,572/month 5 Person Household: $86,369/year; $43,185/six months; $7,197/month 6 Person Household: $93,869/year; $46,935/six months; $7,822/month 7 Person Household: $101,369/year; $50,685/six months; $8,447/month 8 Person Household: $108,869/year; $54,435/six months; $9,072/month Additional Members: $7,500/year; $3,750/six months; $625/month
The Bankruptcy Code requires that this income be measured over the 6 months prior to when a bankruptcy case is filed. For instance, if you were filing a bankruptcy in July, you would be required to demonstrate income satisfying the qualification requirements from the prior January through June.
Qualifying Under the Means Test. If an individual makes more than the median income they may still qualify for Chapter 7 if their monthly expenses leave them with little to no disposable income. The means test requires a complex analysis that should be trusted only to a competent bankruptcy lawyer. In general, the means test favors high involuntary expenses such as medical expenses and taxes, although most everyday expenses such as car payments and home mortgages are also factored into the equation.
Qualifying Based on Primarily Non-Consumer Debts. The median income and means test qualifications generally only apply to debtors whose debts are primarily consumer debts. Debtors with primarily business debts may be exempted from these requirements. Many individuals are forced into bankruptcy because of failed or struggling business ventures. In many cases, these debtors will qualify without the need for complex means testing.
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