CHAPTER 7: Chapter 7 is often called a
liquidation because a trustee accumulates the non-exempt assets of the estate and liquidates them to pay off as many debts according to priorities, but most people filing Chapter 7 bankruptcies have no non-exempt assets.
Certain assets are exempt per state or federal laws. Chapter 7s can be filed by individuals, sole proprietors, partnerships, and corporations, but not insurance companies or banking institutions.
To be eligible for Chapter 7, an individual must pass a means test in which six months of household income (not including unemployment, social security but includes income paid by a person other than the debtor on a regular basis for household expenses) is compared to the state median income. If your income is below the state median, you are not subject to the means test. If your income is higher than the state median income, a second part of the test is required to compare expenses and deductions under national standards. A means test calculator is available at: Means Test . In Iowa the median income for Chapter 7 under the Means Test for bankruptcies filed after November 1, 2010 is: $39,803 for a single wage earner, $55,132 for a family of 2, $62,485 for a family of 3, $74,349 for a family of 4, and add $7500 for each individual in excess of 4. (Note: dollar amounts in bankruptcy are adjusted periodically based on the CPI Index and all figures on this web page are subject to change.) Even if only one spouse files, the income of both spouses is included to determine the household income for the Means Test. However, only the actual contribution of non-spouse roommates or significant others are considered for the Means Test.
If the debtor has more than 50% non-consumer debts (that is debt incurred for your personal family needs, daily living expenses, and personal debts, then the Means Test may not apply. Businesses can also file for Chapter 7 and the Means test is for individuals with primarily consumer debts.
Most people are still eligible to file for Chapter 7 bankruptcy regardless of the means test. If an individual is not eligible for Chapter 7 bankruptcy, however, he may still be eligible for Chapter 13 bankruptcy.
Chapter 7 debts are discharged usually after about 3-4 months.
About 20-40 days after filing for bankruptcy, there is a section 341 meeting (creditor meeting).
Reaffirmation:
Within 45 days after the section 341 meeting you have to reaffirm car loans or redeem the car by buying it with a single payment for the car's present value, otherwise you may not retain the vehicle. Debtors can redeem secured claims in Chapter 7. They must pay in full in a lump sum and redeem for value of asset or loan whichever is less. This could be useful when a car is not worth much and the debtor couldn't find another car for similar value.
The debtor can also reaffirm if the creditor agrees, thus keeping the debt. This is not advised for credit cards no matter what the creditor promises, but might be worth it for a car with some equity that the debtor wants to keep. The creditor can require fees and require full value of loan- different from redemption. The debtor's attorney must review the reaffirmation and sign off on the reaffirmation. If the debtor does not have an attorney, the court will hold a hearing on the reaffirmation to determine that the debtor can afford to reaffirm the loan.
Assets of the Estate:
Before discharge, the trustee collects property and pays priority claims before other claims. Chapter 7 trustees are paid $60 per case plus a commission from distributions to creditors from the liquidated assets recovered (25% of the first $5000, 10% of the next $45,000, 5% of the next $950,000, and 3% of the balance). So trustees are basically paid to locate assets, as $60 is not really worth their time, and trustees usually lose money on the no assets case. If the trustee locates cash (which is already liquid) the trustee is very happy. This is also important if you have a nonexempt asset that you might want to keep but would have to be sold by the trustee. The trustee might accept a cash payment of lower value since the cash is already liquid, and the asset would have to be sold for an unknown value, storage fees, sale fees, etc. Thus, not only is timing of the bankruptcy essential in your planning, but exemption planning is also crucial.
Personal Financial Management Class
No later than 60 days after the meeting of the creditors, the debtor must have completed a personal financial management class and filed a certificate with the court. Failure to attend the class can lead to denial of the discharge.
Discharge:
Sixty days after the section 341 meeting, the bankruptcy is usually discharged. Some debts are not dischargeable due to exceptions, but all dischargeable debts have an injunction against collection action after discharge. Creditors cannot require a new contract, but if there is new consideration, repayment can be required. If there is no new consideration, collection is prohibited, but the debtor can voluntarily repay.
Failure to list a creditor in the petition may not be important if there are no assets to pay creditors, as the debt is still discharged. However, if there are assets available to pay creditors, failure to list a creditor preserves the creditor’s rights and the debt is not discharged.
Fraudulent concealment or false statements is punishable under law. The federal government investigates bankruptcy fraud and prosecution can lead to a $250,000 fine and/or 5 years in prison, and the discharge denied, with no chance to refile for years.
Fees:
For a typical Chapter 7 Bankruptcy for an individual, my fees are $850 (plus court costs of $299). Fees for a couple typically run $1000. Fees for businesses may be higher. Because debts are discharged during bankruptcy, fees must be paid prior to filing for bankruptcy.
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