Chapter 7 bankruptcy involves the liquidation of a debtor’s assets in order to pay a portion of their debts. Any remaining debts are then fully discharged, leaving the debtor free and clear of any liabilities. If a debtor has limited means in order to continue paying their creditors, this may be the best option for them.
There have been some recent changes to bankruptcy law that have placed limits on those who are eligible to file Chapter 7 versus filing a Chapter 13 bankruptcy. In 2005, The Bankruptcy Abuse Prevention and Consumer Protection Act added new rules in order for a debtor to meet Chapter 7 eligibility filing requirements. If a debtor’s current monthly income is greater than their state’s median income, they must meet a means test in order to determine if they qualify for a Chapter 7 filing. If the debtor’s current monthly income over the past five years has been on average greater than $11,725, or 25% of their non-priority unsecured debt. If the debtor does not meet the means test, they may be required to convert their bankruptcy to a Chapter 13 filing.
In order to file the bankruptcy and determine debtor eligibility, the debtor must submit a substantial amount of financial information. They must disclose all assets and liabilities, all sources of income and expenses, and disclose all contracts and leases that they are currently under. In addition, any debtor holding consumer debt must attend a consumer credit counseling session and must submit the payment plan developed during the counseling session to the court.
Just as with a Chapter 13 filing, once a debtor fulfills the filing requirements, a bankruptcy trustee is assigned to the debtor, acting as an impartial third party administrator of the case. They will oversee the meeting of creditors, the liquidation of any of the debtor’s non-exempt assets, and finally distribute any proceeds from the liquidation to any eligible debtors. If there are no eligible assets to liquidate, the trustee will file a “no asset” report with the court.
After this step, the final action within the Chapter 7 bankruptcy filing is the discharge of any remaining debt. When a debt is discharged, the creditor can no longer take any action to collect on the debt. Prior to the discharge of debt, the debtor has the opportunity to re-validate, or affirm, certain debt. This is usually applied to any debt that is secured by personal property owned by the debtor.
Any debtor considering filing a Chapter 7 bankruptcy should be aware that there are several different types of debt that cannot be discharged through the bankruptcy filing process. Alimony and child support, certain taxes, debts created by obtaining government-backed school loans, and debts created due to financial liability because of certain criminal act all remain valid debts after the discharge of any other remaining debts.
The nature of a Chapter 7 bankruptcy may require the assistance of an attorney who specializes in bankruptcy law. If you a facing a decision about filing bankruptcy, consulting with an attorney may be a cost-effective way to make sure that your filing is professional and complete. Contact or call RJS LAW at (619) 595-1655 to schedule your consultation today.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.