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Chapter 7

Posted by Kevin on September 21, 2009 under Bankruptcy Blog | Be the First to Comment

Chapter 7 is known as a straight bankruptcy or liquidation. It is the most common consumer bankruptcy. The person who files a Chapter 7 petition is called a debtor. When the petition is filed, the case is assigned to a trustee. The trustee’s job is to collect all of the debtor’s non-exempt assets, turn them into cash, and distribute the proceeds to the debtor’s creditors according to the priority set up in the Bankruptcy Code.

In the vast majority of consumer Chapter 7 cases, however, all of a debtor’s assets are exempt so the debtor keeps them. Moreover, if the debtor complies with the requirements of the Bankruptcy Code, most, if not all, of his debts are discharged. This means that they are wiped out. This is called a no-asset case.

To commence for a Chapter 7 bankruptcy, a New Jersey consumer debtor must have resided or been domiciled in the State for 180 days prior to filing (or for a longer portion of that 180 day period than any other State). With limited exception, he or she must take a credit counseling course. Finally, the consumer debtor must pass the means test. The means test is a complicated 3 part test which attempts to calculate whether a prospective debtor earns enough income to pay back his creditors. The means test is adapted from the IRS test to determine how much a taxpayer can pay in a tax installment plan. In its simplest application, a consumer passes the means test and qualifies for Chapter 7 if his or her income is below the median income for the State based on household size.

As with any bankruptcy, the filing of a Chapter 7 petition acts as an automatic stay against any collection efforts of creditors. This allows the debtor to have some breathing room. Shortly after the bankruptcy petition is file, a notice is sent out to the debtor and all creditors listed within the petition advising of the filing of the bankruptcy, the docket number and the Judge assigned to the case, the name and the address of the trustee assigned to the case, the time and place of the first meeting of creditors or 341(a) meeting, the date for which a proof a claim must be filed in an asset case, and the date for which an objection to discharge must be filed.

Creditors are divided into three classes: secured, priority unsecured, and general unsecured. Secured creditors are creditors who have collateral (house, car). Even if the Chapter 7 case is a no asset case, a secured creditor can look to its collateral if not paid. However, because the automatic stay applies, a secured creditor must get permission from the bankruptcy court (relief from stay) to foreclose or repossess the collateral or wait until the case is over or the Trustee abandons any right to the property.

Priority creditors include 10 specific types of creditors that get paid before general unsecured creditors in a case where assets are available. For most consumers, priority claims include domestic support obligations, taxes and claims for death or physical injury resulting from a DUI. General unsecured creditors, which are paid last on a pro rata basis, include credit cards and medical bills.

Creditors or the trustee may file an action with the court requesting that a discharge not be granted. This can happen where the debtor is untruthful about income or assets. In addition, creditors may file an action requesting that their specific claim not be discharged. Reasons for denying the discharge of a claim include debt incurred shortly before the bankruptcy filing involving cash advances or purchases of luxury items; domestic support obligations, claims based on willful injury to another; fines; student loans and certain taxes.

If the debtor receives a discharge in a Chapter 7 case, he or she cannot file another Chapter 7 case for 8 years or Chapter 13 case for 4 years.

For further information, please refer to the following videos

The Different Types of Bankruptcy
What Debts Cannot be Discharged in a Bankruptcy

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