Bankruptcy Chapter 7

Chapter 7 filing is the most common form of filing for bankruptcy protection. In Chapter 7 a trustee is appointed who collects all the non-exempt property, sells the assets of the person filing for bankruptcy and distributes the proceeds from such sale to its creditors. As per this chapter the debtor receives complete discharge on all debts which are dis-chargeable.

This chapter provides for liquidation in other words the sale of the debtor's/borrowers nonexempt property and the distribution of the proceeds to creditors. In Bankruptcy Chapter 7, a trustee is appointed and the trustee gathers and sells the debtor’s non – exempt assets. The money so obtained from such sale is used to pay off the creditors in order of priority. The debtor would be allowed to keep only the exempt property, rest of the debtor’s property will be used to pay off the creditors.

For business entities

With regard to entities which opt for filing for Bankruptcy Chapter 7, filing under Chapter 7 would result into complete closure of the business operations, unless the trustee so appointed for the proceedings continues the functioning of the business. As soon as a business entity files for a Chapter 7 bankruptcy a trustee is appointed to determine the financial affairs of the company. All the assets of the business entity are sold off in order to pay off the debts. The business entity be it a corporation or partnerships does not receive a complete discharge of debt but instead the business entity itself is dissolved. Once the assets which belong to the entity are completely administered and the debtors are paid off, the case is then said to be closed.

For Individuals

Individuals can file for bankruptcy under this chapter. An individual is allowed to keep the exempt property and rest of his assets is utilized towards making repayments to the creditors. The rule as to what falls within exempt property varies from state to state. The trustee sells off the other non exempt assets of the debtor to repay the creditors. There are a few debts which are not discharged under the chapter, which include the debts like child support payments, student loans etc. One of the major drawbacks of filing a bankruptcy petition under Chapter 7 is that this stays on an individual’s credit reporting for 10 years from the date of filing. It has an impact on your creditworthiness.

Prior to administration of the debts, the trustee needs to determine whether the petitioner is entitled to relief under this Chapter or not. If the Petitioner has a stable monthly income and can afford to repay his debts out of the income in five years time frame then he will not be entitled to a complete discharge of debts. The test used to determine this is the means test. If the petitioner’s current monthly income is more than the state median, then the court will look into whether the debtor is trying to abuse the law or not. If it is found that the petitioner has the ability to repay the debts then his bankruptcy petition under chapter 7 would be dismissed and he will not be entitled to complete discharge of debts. The petitioner / debtor are also to undergo credit counseling service six months prior to filing for relief under Chapter 7.

Documents to be filed

Along with the Bankruptcy petition the petitioner is required to file the following:

Schedules of assets and liabilities,

Schedule of current income and expenditures,

Schedule of “exempt” property,

Statement of your financial affairs,

Credit counseling certificate,

Copy of debt repayment plan,

Schedule of unexpired leases,

Copy of the recent tax returns and tax returns filed during the case,

List of exempt property etc.

Procedure & Discharge

After the Bankruptcy petition is filed, a trustee is appointed to deal with the case. The trustee would call a creditor’s meeting, the petitioner would be required to attend the meeting and answer the questions so put forth during the meeting. After the meeting the trustee would determine whether the case has been appropriately filed under Chapter 7 or is it an abuse of law. After the approval of the case as a Chapter 7 case the trustee would liquidate the non exempt assets of the Petitioner and pay off the creditors. After this the petitioner is discharged.

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