Chapter 7 Bankruptcy

What is Chapter 7

Chapter 7 bankruptcy eliminates most debts without repaying for those who pass the means test. It involves liquidation of assets and scrutinizes fraudulent transfers.

Who qualifies: the bankruptcy means test

Firstly, liquidation bankruptcy for those who can’t repay their debts. However, the trade-off is that the bankruptcy trustee can take unexempted assets, and sell them to repay some or all of the debts. To determine eligibility, Congress designed a means test. The bankruptcy means test is a two-part form that first compares the debtor’s household size to the state median. If under, the presumption is it’s not abuse. If over, the second and longer part must be complete. This latter part of the bankruptcy means test compares against U.S. Census data, takes IRS averages, and allows for some actual deductions. The result determines if there’s a presumption of abuse.

What can I keep with bankruptcy exemptions

Secondly, the logic in Chapter 7 bankruptcy is that if you’re not paying your debt with income, maybe you can with your things. Consequently, even if you are eligible for Chapter 7 bankruptcy, that doesn’t mean should file it. This option is liquidation bankruptcy; the Chapter 7 trustee can and really does take things, even those which you argue you need. Now, you may think you don’t have anything. Perhaps you’re right. Also, maybe you’re forgetting about that lawsuit you’ve been intending to file. Alternatively, it’s possible that you’ve overlooked that tax refund, or child support money your ex-spouse owes you.

Each state has its own way of applying bankruptcy exemptions. Some states have passed their own exemptions. Meanwhile, others have adopted federal exemptions. Complicating things further, if the debtor is new to the state in which he’s filing bankruptcy, he probably cannot use that state’s protections.

 

THE CHAPTER 7 TRUSTEE REALLY CAN AND DOES TAKE THINGS, EVEN THOSE WHICH YOU ARGUE YOU NEED.
Hale Andrew Antico, bankruptcy attorney

Drawbacks of Chapter 7 bankruptcy

Thirdly, Chapter 7 isn’t perfect; it has failings and drawbacks.

  • Not everyone qualifies for Chapter 7
  • It is listed on your credit report as a derogatory for ten years
  • It involves liquidation of homes, cash, cars, businesses, accounts receivables, and many other assets.
  • The Chapter 7 trustee can file lawsuits against your friends and family to whom you’ve transferred money or things
  • The Office of the United States Trustee can review your case for bad faith and seek to deny your bankruptcy discharge
  • Not all types of debts are discharged, including recent debts.
  • Others

In sum, just because someone can file Chapter 7 bankruptcy doesn’t mean that they should.