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What Exactly Is A Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is a legal solution for individuals or businesses in debt to seek relief from the court to address their debt. Bankruptcy is considered to be for the poor but honest debtor and requires full disclosure of assets, debt, and income. The debtor must provide comprehensive answers to questions that relate to disclosure of the valuation of personal property and transfer of assets during certain defined periods prior to the filing of the petition. Chapter 7 bankruptcy is considered a rehabilitative process to address a common problem that arises for insolvent businesses and entities…Read More

What Is The Chapter 7 Bankruptcy Exemption Rule?

Chapter 7 bankruptcy exemption rules differ significantly from state to state. In New Jersey, everyone takes the federal exemptions, which are more liberal than the very minimal New Jersey law exemptions. The largest exemptions are for equity, real estate, and household goods. For example, an individual debtor can exempt $25,150 in real estate equity, $4,000 in automobile equity, and $13,400 in household goods. There is also an exemption for personal injury lawsuit proceeds in the amount of $25,150. A joint filing such as between a husband and wife allows each Debtor to assert their own individual exemptions would result in a real estate equity exemption up to $50,000. Also, the cash surrender value of any whole life insurance policy up to the limit of $13,400.00…Read More

Chapter 7 of the Bankruptcy Code provides for “liquidation,” ( i.e., the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.)

A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. Accordingly, potential debtors should realize that the filing of a petition under Chapter 7 may result in the loss of property.

To qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b). Subject to the means test described above for individual debtors, relief is available under Chapter 7 irrespective of the amount of the debtor’s debts or whether the debtor is solvent or insolvent. An individual cannot file under Chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under Chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. In a Chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. 11 U.S.C. § 727(a)(1). Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

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Michael McLaughlin, Esq.

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