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Bankruptcy - Chapter 7 Liquidation (Individuals)

A chapter 7 bankruptcy is a liquidation where an individual or married couple receives a discharge of certain debts in exchange for giving up all nonexempt assets.  Both individuals and corporations are eligible to file for chapter 7.  In this booklet we will limit ourselves to individual liquidations under chapter 7. 

Means Testing in Ch 7 Cases – After October 17, 2005

A “means test” will determine if you can file a Chapter 7 case. If you have more income than the test allows, or if the Court finds that you are abusing the system based on the totality of the circumstances of your financial situation or because you filed a petition in “bad faith”, then your case will be DISMISSED, unless you agree to pay back a portion of your debts under a Chapter 13 reorganization plan.

There are two objective tests applied to income and expense to determine if your can file Chapter 7.

Median Income Test - The First test is to see if your Current Monthly Income is MORE than the State Median Income. “Median” income means that there are an equal number of people in your state with incomes that are higher and an equal number that are lower than the median income. Basically this test looks to see if your family is better off than half of all the other families around you (keep in mind your case may be ordered to be dismissed or converted even if your income is LESS than the state median income and there is NO presumption of abuse).

Means Test – The Second test checks to see if your Current Monthly Income reduced by allowed expenses exceeds an amount allowed for a family of the same size. The Means Test is essentially an excess income test that determines if what is left over out of your monthly income after deducting reasonable expenses leaves enough money to be able to give a meaningful dividend to your unsecured creditors.

If your Current Monthly Income is LESS than the State Median Income, NO dismissal can be filed based on a presumption of abuse.

If your Current Monthly Income is MORE than the State Median Income, but your excess income is LESS than the amount allowed under the Means Test, there is NO presumption of abuse.

If your Current Monthly Income is MORE than the State Median Income, AND your excess income is MORE than the amount allowed under the Means Test, A PRESUMPTION OF ABUSE EXISTS AND YOU DO NOT QUALIFY FOR CHAPTER 7.

The actual test is so complex that we strongly suggest that if your family income is more than the Median Income for your state, you go to a bankruptcy attorney to find out if you can or cannot file a Chapter 7 case.

Filing a chapter 7 as with any filings under the bankruptcy code an automatic stay under 11 U.S.C. 362 applies to creditors to keep them from repossessing, foreclosing, or taking collection efforts against the debtor(s) (during the period from filing to discharge) without court permission.

In general, a lien (such as mortgages or security interests in cars) survives the chapter 7 even though the obligation to pay is voided.  This means that after the bankruptcy is complete the debtor must keep current on the mortgage in order to keep the house.  If the debtor does not pay the mortgage, the lien holder can foreclose but can not sue the debtor for money damages.  One exception to this rule is if the debtor sign a reaffirmation agreement and has it approved by the court the debtor is still personally liable for the debt.

A chapter 7 makes no provision for restructuring any debts.  If an individual debtors needing to reorganize secured debts such as arrears on secured debts they should consider a chapter 13 plan.

The following are types of obligations that are not discharged from the filing of a chapter 7 bankruptcy:

Tax claims which are non-dischargeable includes the trust fund portion (employees share) of payroll taxes withheld and not paid within the last 10 years.  For all other debts, if the due date of the tax return (including any requested extensions) is less that 3 years old, it has been less than 240 days since the assessment, and the return was actually filed 2 years prior the tax is considered non-dischargeable.  If tax debt are secured by valid tax liens the debt can be considered secured.

A non-dischargeable debt is one that will survive the bankruptcy proceeding. The debtor still has the obligation to pay this debt; the creditor has every right to collect.

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