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.
What Requirements Must Be Met In Order To File For Chapter 7 Bankruptcy?
There aren’t any specific requirements that must be met in order to file for Chapter 7 bankruptcy, aside from providing truthful, accurate, and complete information on a Bankruptcy petition that includes a disclosure of the best approximation of the market value of assets, income and proper addresses for notification to creditors. One administrative requirement is that all individuals seeking relief under Chapter 7 or Chapter 13 must complete a Credit Counseling Course by an approved provider to be eligible to file their case. The Certificate of Completion they obtain is valid for 180 days from the time the course is completed
What Is the “Means Test” As It Relates To Chapter 7 Bankruptcy?
The means test was added to the Bankruptcy Code in October of 2005. It was considered to be an element of bankruptcy reform, but in practice has added an unpredictable element in its application that can lead to inconsistent results. In essence, the means test is a screening process used by the courts to determine whether or not individuals are eligible to file for Chapter 7 bankruptcy.
The means test has many components, but the most significant aspect related to a family’s median income and family size based on the number of dependents. For example, the median income for a family of four is approximately $125,000. The calculation is lower for smaller families. The means test includes the income of the person filing, as well as their non-filing spouse or domestic partner. National or local standards by individual state and county limit major expenditures in areas such as housing, vehicles, and mortgages on homes also factor into the means test. These amounts change approximately every six months and are embedded in bankruptcy software that’s designed to calculate eligibility for Chapter 7 bankruptcy.
If a person does not “pass” the means test, then they will be designated as an above-median income debtor; if they were to file a Chapter 7 case, their case could be presumed “abusive” and would potentially be subject to a motion to dismiss the case or to convert to a Chapter 13 case filed by the United States Trustee Office or the Chapter 7 trustee. The means test is a very tricky test. Frankly, many practitioners struggle with it. If a Debtor is determined to be over the median income level for family size in their state but they have mandatory alimony, support or tax payments, then they may still qualify for Chapter 7 bankruptcy based on the application of certain allowable deductions in the means test calculation.
What Will I Be Able To Keep If I File Chapter 7 Bankruptcy?
The purpose of bankruptcy is to rehabilitate debtors and give them a fresh start—not take away every last piece of property that belongs to them. The Bankruptcy Code provides that a person who files for Chapter 7 bankruptcy is allowed to keep assets up to a certain exemption limit. If for some reason a debtor has property that exceeds the exemption limits, then they might consider filing for Chapter 13 bankruptcy in order to retain that property.
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