With all the uncertainty facing employees and businesses, many have a heightened fear that their bills and debts may begin to dwarf their income or lack of income. As we all move through difficult economic times, it is good to know that there are certain bankruptcy provisions allowed to protect both individuals and businesses. The three main bankruptcy filings are Chapter 7, Chapter 11, and Chapter 13. This blog will discuss the basics of Chapter 7.
Chapter 7 bankruptcy provides for the liquidation of the assets of the debtor and the distribution of the proceeds to creditors. It is available to individuals and businesses, with certain limitations.
When a debtor files for Chapter 7 bankruptcy, there is an automatic stay that arises which will stop any litigation or collection efforts against the debtor or the property, subject to certain limitations. The bankruptcy court will appoint a bankruptcy trustee to handle the liquidation of assets and the distribution of the proceeds to creditors.
A debtor in a Chapter 7 bankruptcy is entitled to retain certain assets (exempt assets) to provide for their fresh start. Following the discharge of bankruptcy, the debtor is released from any further liability for most unsecured debts at the time of the filing. However, debts such as taxes, domestic support obligations, fines/penalties, and debts arising out of fraud are considered non-dischargeable debts.
Further, upon the filing of a Chapter 7 petition, a “means test” is calculated. This test involves an examination of the debtor’s income and whether the primary amount of debt within the petition is consumer debt. Consumer debt is debt incurred for the benefit of an individual, family, or household. Business or non-consumer debt is debt incurred with an eye toward profit. The means test’s purpose is to stop abusive bankruptcy filing. If a debtor’s current monthly income (CMI) is below the state median income for a household of the same size, then any presumption of abuse ends. Further, if business debt exceeds consumer debt then the presumption of abuse also fails.
Further, a debtor may be required to complete a credit counseling course. In many circumstances this course must be completed at least 180 days prior to the petition filing. A certificate of completion from the accredited course must be provided to the court. This requirement was enacted so that debtors would make an informed choice about bankruptcy, its alternatives, and consequences.
Property of the Bankruptcy Estate is very important. If property is considered property of the bankruptcy estate it is excluded from liquidation and distribution to creditors. Property of the estate for individuals typically includes a house, furniture, other household goods, clothing, a vehicle, and bank accounts. Property of the estate is protected by the automatic stay that occurs upon the filing of a bankruptcy petition. Property of the estate does not include qualified retirement contributions, tax-deferred annuities, health insurance premiums, and funds placed in a qualified college savings account.
Information about Chapter 13 and Chapter 11 bankruptcy options will be blogged shortly
Contact Lake Shore Legal to discuss your current financial situation, and whether bankruptcy protection is right for you and your family. 508-943-7800
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