Chapter 7 bankruptcy means liquidation of all the assets of the debtor by a court appointed trustee. All the assets of the debtor’s estate will be sold to pay off his creditors. The debtor has the rights to retain certain exempt property and the rights of the secured creditors. In most of the chapter 7 bankruptcy cases, there is usually little or no nonexempt property. If there is, then that property of the debtor cannot be liquidated. But it rarely happens because the debtor already has no assets to show when the liquidation process is on. These cases are called “no asset” cases.

A creditor who is holding an unsecured claim will try to recover his money from the debtor through the attorney only if he is holding an asset case. The creditor will file proof of the claim with the bankruptcy court. A debtor can easily receive a discharge from the court that releases him or her from any personal liability for certain dischargeable debts. This discharge is acquired in few months after the petition is filed. A person filing for bankruptcy has to qualify in the “means test” as per the amendments to the bankruptcy code. This rule is implemented to prevent any bankruptcy abuse in the year 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act. Through the means test, it will be determined whether an individual qualifies for bankruptcy relief if his income is already below the margin. If the income is in excess of certain allowed expenses, he may not be eligible for chapter 7 relief.

• Alternatives to chapter 7

As per an individual situation, while chapter 7 will be the only available option, there are several alternatives to it. For example, those who are engaged in business, including corporations, partnerships, and sole proprietorships, may prefer to continue their business and avoid the liquidation process. For this, one has to file a petition under chapter 11 of the Bankruptcy Code. According to the laws of chapter 11, the debtor might get his dues adjusted through court orders. Either the debt can be reduced or the repayment plan can be extended so that there is no need to liquidate assets.

People having regular income can also seek adjustment of debts under chapter 13 of the bankruptcy code. The advantage in Chapter 13 bankruptcy is that you get an opportunity to save your home from foreclosure if you have a repayment plan set and have every intention to “catch up” the past due payments.

If a debtor’s income is more than the state median, one has to go through the means test to determine whether he is using chapter 7 bankruptcy for abusing it or as a relief. Conditions to qualify in the means test are as follows:

1. Aggregate current monthly income of the debtor over 5 years, net of certain statutorily allowed expenses should not be more than $10,000. If it is, you are disqualified in the means test.
2. 25% of the total debts have to be non priority unsecured debts if it is over $6000. Another alternative of chapter 7 Bankruptcy is out-of-court agreements with the creditors or debt counseling services. This may also be a considerable option to avoid filing chapter 7.

This entry was posted on Friday, December 28th, 2007 at 6:57 am and is filed under Bankruptcy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.