Q. What is Chapter 7 Bankruptcy?
A. Chapter 7 is a bankruptcy provision most frequently used by individuals involving liquidation of one’s assets. In a liquidation proceeding, the debtor turns over all non-exempt property to the bankruptcy trustee who converts it into cash for paying off creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has little to no assets at risk of liquidation, and as such, Chapter 7 will give that person a relatively quick fresh start. Those who reside in, or own property or a business in, the United States can file for Chapter 7 bankruptcy.
Q. What are the most common reasons for a Chapter 7 Bankruptcy?
The most common reasons for filing bankruptcy are unemployment, large medical expenses, seriously overextended credit, marital problems, and other large unexpected expenses. Half the personal bankruptcies in the US are caused by illness & medical bills.
Q. Does the debtor have an absolute right to a discharge in Chapter 7 filing?
A. In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. The court can deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames before the date the petition was filed. If the issue of the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.
Q. Can a debtor receive a second discharge in a later chapter 7 case?
The court will deny a discharge in a later filed chapter 7 case if the debtor has received a discharge under chapter 7 or chapter 11 case filed within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless
1. the debtor paid all “allowed unsecured” claims in the earlier case in full, or
2. the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort.
Q. What is a means test?
The means test is the qualifying step for Chapter 7 bankruptcy. It’s a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. The test involves two steps. First step determines whether your current monthly income is more or less than the median income in your state. The median income for your family size may differ dramatically depending upon where you live. If it is less, you can file for Chapter 7. If the income exceeds the median income then you must determine whether you have enough income left over or disposable income after paying your allowed monthly expenses, to pay off at least a portion of your unsecured debts such as credit card bills. If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy. High income filers who fail the means test can use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.
Q. What is “current monthly income” in means test?
A: The “current monthly income” received by the debtor is a defined term in the Bankruptcy Code and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from non-debtors and including income from the debtor’s spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes. When you file for Chapter 7 bankruptcy, you must fill out a long form known as the “means test” or Form 22A. One of the important calculations on the means test is your current monthly income. This figure plays a large role in whether you qualify for Chapter 7 bankruptcy, or not.