Chapter 7 Bankruptcy


Chapter 7, also known as "straight bankruptcy" or "liquidation" bankruptcy is the simplest form of bankruptcy. This form of bankruptcy is available to individuals, married couples, partnerships and corporations. In a nutshell, a trustee is appointed by the bankruptcy court to gather and sell your nonexempt assets and distribute the proceeds from those assets to your creditors. You are able to keep all exempt property.

What is exempt property? Exempt property is determined by your particular states definition of what exempt property is or the federal list of exemptions. A few states require you to use that particular state's exemption list. Therefore, you must first check your state's exemption laws.

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Typically, exempt property may consist of the following property (please refer to your state's list and the bankruptcy code for details):

Real property, such as a residence

Trade or professional tools, books

Unmatured life insurance contracts

Prescription health aids

Social Security, veteran's benefits, disability, illness or unemployment benefits

Proceeds from a judgment

On October 17, 2005, under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BACPA), individuals now have more time to decide whether to use the state or federal exempt property lists. This rule was to prevent individuals from moving to a different state with a more generous exemption.

Most of the Chapter 7 cases are "no asset" cases, meaning that there is no non-exempt property for the trustee to sell. You declare in your petition whether your case is an "asset" or "no asset" case and the burden is on the trustee to prove otherwise.

How does one become eligible for Chapter 7 bankruptcy?

One must go through a "means test" to determine if he or she is eligible to file for Chapter 7 bankruptcy. Under this test your income and expenses are reviewed and compared to the standard set by the IRS for your area.

If you earn less than the median income for a family of your size in your state, you can file for Chapter 7 bankruptcy. But, if your income from the last six months is greater than the median income, and you can pay at least $6000.00 over five years or $100.00, toward your debt you cannot file for Chapter 7 bankruptcy. Instead, you must file for Chapter 13 bankruptcy.

What Debts are Dischargeable in Chapter 7 bankruptcy? Typically, a bankruptcy debtor's unsecured debt, or debt that is unsecured by property, is discharged.

However, under the Bankruptcy Code, the debtor must repay the following unsecured debt:

* Child support

* Tax debt, unless a debtor meets certain criteria to discharge such debt

* Student loans, unless an undue hardship exists, as determined by the bankruptcy

* Debt created by fraud

Once a debtor receives a discharge, a creditor can no longer attempt to collect the discharged debt.


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