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Chapter 7 Bankruptcy

Chapter 7, also known as Liquidation, is an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual/real liquidation of the debtor’s assets. These cases are often called “no-asset cases.”

Chapter 7 bankruptcy gives an opportunity for a debtor to emerge out of a financial crisis and start afresh. Under Chapter 7 of the Bankruptcy Code all non-exempt property of the debtor is sold and the proceeds of the sale are distributed to the creditors. Most Chapter 7 cases are brought where the debtor has no assets to lose; therefore the fresh start takes place relatively faster.

A trustee will be appointed upon the filing of the bankruptcy petition. The trustee collects all non-exempt property, sells the assets and distributes proceeds from this sale to appropriate creditors. Chapter 7 is different from other bankruptcy filings because no payment to the trustee is required.

Under Chapter 7 Bankruptcy, the debtor receives a discharge on all dischargeable debts. There are 19 general classes of debt, such as child support, most taxes and student loans that are not discharged under Chapter 7 Bankruptcy.

An added advantage with Chapter 7 bankruptcy is that by signing a reaffirmation agreement a debtor can continue to pay for a car loan or a mortgage on their home. This agreement is in place because as per the US Government Bankruptcy Code a debtor could be allowed to retain some or all of his property.

Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.

Means Test

The means test provides three benchmarks, the passing of any one of which is satisfactory. In other words, you need to meet only one of three criteria.

The first criterion compares your income to the median income for your area. If you meet this criterion, you pass the test and need not complete the rest.

If you do not meet the median income criterion, your income is adjusted to reflect allowable deductions in various categories of expense. These expense deductions are taken from published data compiled by the IRS, the Census Bureau and from various Federal agencies. They are quite detailed and are broken down by county, metropolitan areas, census regions, family size, income, number of vehicles and various other metrics.

After applying these allowable deductions, your disposable income cannot exceed $100 per month. If your disposable income does not exceeds this amount, you pass the test as per the adjusted income criterion. If your disposable income exceeds $160 per month, you fail the means test and the road ends there for you. If your disposable income falls between $100 and $160 per month, you continue to the third and final determination.

The third and final criterion makes a determination as to your ability to pay your unsecured debts in a five year period. If you meet this criterion, you pass the means test but if you do not, you fail the test and your bankruptcy can be presumed abusive.

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