Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a “liquidation bankruptcy ” or “straight bankruptcy.” It is the most common type of bankruptcy; well over half of all the bankruptcies filed in the United States each year are Chapter 7s. In a Chapter 7 bankruptcy proceeding, the debtor is seeking a discharge, which is a document mailed to the debtor by the Clerk of the Bankruptcy Court toward the end of the case. The discharge is the document which essentially states that the debtor is no longer legally responsible for repaying his or her creditors. There are a few trade offs for the benefit received in a Chapter 7 discharge. There are three primary components to every Chapter 7 bankruptcy proceeding: assets, liabilities, and income.

Chapter 7 bankruptcy can be very helpful for anyone who, after losing a job or some other unexpected financial circumstance, finds themselves drowning in debt.  After filing and supplying financial records that show all your current income, assets, debts and other liabilities, the court will issue an automatic “stay” which stops all of your creditors or collection agencies from contacting you any further.  We understand the intense pressure and constant stress falling behind on your bills can cause.  Ending all of the collection calls is just the first big relief that Chapter 7 bankruptcy protection will bring you.

Determination Of Assets In A Chapter 7 Bankruptcy.

In every Chapter 7 bankruptcy proceeding, a judge and a trustee are assigned. In the majority of Chapter 7 cases, the debtor never sees his or her judge, but does meet his or her trustee. It is helpful to look at the Chapter 7 trustee as an independent contractor for the federal government; the government wants experienced professionals to help it do its job, but does not want to pay in-house salaries, so it contracts with local attorneys and accountants to provide the needed services. The trustee’s primary responsibility is to review the bankruptcy petition, schedules, and statement of financial affairs, examine the debtor by asking some questions at a meeting of creditors approximately five weeks into the case, and determine whether the debtor owns any assets that ought to be liquidated or sold in order to generate money to pay creditors on their claims, at least in part. Accordingly, one of the prices a debtor pays for the privilege of receiving a Chapter 7 discharge is that his or her assets are subjected to scrutiny by the bankruptcy trustee and potentially liquidated for the benefit of his or her creditors.

Debtor Assets Not Worthy Of Liquidation.

In approximately ninety-five percent of the Chapter 7 cases filed around the United States each year, the trustee comes to the conclusion that the debtor has no assets worthy of liquidation, because most debtors’ assets fall into four basic categories that make those assets relatively unattractive.

Administration Of Assets – To Liquidate, Or Not To Liquidate?

The bankruptcy trustee must determine whether administration of assets is necessary. If the debtor owns real estate, the trustee might send an agent to the property to evaluate it. If the trustee believes the property has sufficient equity, the trustee may attempt to sell the property. If the debtor is operating a business, whether it is a sole proprietorship, corporation, limited liability company, or partnership, the trustee may want perform an audit to determine the actual value of the business. If the debtor is in the process of suing someone, the trustee might want to review the litigation pleadings in order to be sure that the suit has or does not have value to creditors. If the debtor has too much money in the wrong type of pension plan, the trustee may want to review the pension instruments.

Liquidation Of Assets.

In a small percent of the Chapter 7 cases filed in the United States each year, the trustee does in fact liquidate one or more of the debtor’s assets. The trustee’s job in such cases is to take possession of the asset, market it for sale, locate a buyer, negotiate terms, seek Bankruptcy Court authority to sell the asset in the form of a Court order, close the transaction and receive money for the asset.

Chapter 7 Bankruptcy Trustee Compensation.

The trustee is actually compensated by a Chapter 7 bankruptcy liquidation.  They will earn five percent of the liquidated assets. In addition to the trustee’s approximately five percent fee, the trustee often employs attorneys, accountants, real estate agents, consultants, appraisers, auctioneers, and other professionals to help him or her carry out his or her duties, and such professionals are paid in full before any funds are made available to creditors of the bankruptcy estate. As one might expect, the Chapter 7 trustee has an economic incentive to generate as much money as possible from liquidation of the bankruptcy estate’s assets. But keep in mind, in the vast majority of Chapter 7 bankruptcy cases, it is obvious to the bankruptcy trustee that the estate does not have any value; it is only in approximately five percent of the cases that assets are taken from the debtor by the trustee and liquidated.

Discharge Of Liability.

That is of course the reason why one files Chapter 7–to receive the piece of paper from the Bankruptcy Court that states that the debtor is no longer legally obligated to repay his or her creditors. But there are exceptions. Accordingly, one of the prices a debtor pays for the privilege of receiving a Chapter 7 discharge is that certain types of obligations cannot or might not be discharged.

Income And Expenses.

One of the primary changes made by Congress and the President when they enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is the implementation of a “means test.” The means test focuses on the combined gross income of both members of the marital community, regardless of whether only one or both members of the marital community file bankruptcy. Income is determined based on an average over the past six months, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor’s actual spending history. If the net disposable income is greater than the state’s median level of income for a family of the debtor’s size living within the debtor’s geographic region, the presumption exists that the debtor is ineligible for Chapter 7 relief.

If the debtor’s net disposable income is below the state’s median level of income for a family of the debtor’s size living within the debtor’s geographic region, but there is still sufficient income to repay a portion of the debtor’s debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief.  This has had a relatively small impact. Less than ten percent of the debtors that previously could have filed Chapter 7 successfully are being forced to either file Chapter 13 instead, or not file bankruptcy at all.

The scrutinization of the debtor’s income and expenses in order to determine whether giving the debtor a Chapter 7 discharge constitutes a “substantial abuse” of the bankruptcy laws is another price one pays for the privilege of receiving a Chapter 7 discharge.

If you are considering filing Bankruptcy, we invite you to make an appointment to come to the office in Sacramento, California, but if you cannot, we will help you file bankruptcy by e-mail, phone and mail. For more information on the basics of filing bankruptcy, contact the Law Offices Of  Russ Wyatt at 916-572-9779 to arrange your free initial consultation with Sacramento County bankruptcy law attorney today.