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What is a Chapter 7
bankruptcy?
 A chapter 7 bankruptcy
case does not involve the filing of a plan of repayment
as in chapter 13. Instead, the bankruptcy trustee
gathers and sells the debtor's nonexempt assets* and
uses the proceeds of such assets to pay holders of
claims (creditors) in accordance with the provisions of
the Bankruptcy Code. Part of the debtor's property may
be subject to liens and mortgages that pledge the
property to other creditors. In addition, the Bankruptcy
Code will allow the debtor to keep certain "exempt"
property*; but a trustee will liquidate the debtor's
remaining assets. Accordingly, potential debtors should
realize that the filing of a petition under chapter 7
may result in the loss of property.
Who may file
a Chapter 7 bankruptcy?
To qualify for relief
under chapter 7 of the Bankruptcy Code, the debtor may
be an individual, a partnership, or a corporation or
other business entity. Subject to the means test
described above for individual debtors, relief is
available under chapter 7 irrespective of the amount of
the debtor's debts or whether the debtor is solvent or
insolvent. An individual cannot file under chapter 7 or
any other chapter, however, if during the preceding 180
days a prior bankruptcy petition was dismissed due to
the debtor's willful failure to appear before the court
or comply with orders of the court, or the debtor
voluntarily dismissed the previous case after creditors
sought relief from the bankruptcy court to recover
property upon which they hold liens. In addition, no
individual may be a debtor under chapter 7 or any
chapter of the Bankruptcy Code unless he or she has,
within 180 days before filing, received credit
counseling from an approved credit counseling agency
either in an individual or group briefing. There are
exceptions in emergency and certain other situations. If
a debt management plan is developed during required
credit counseling, it must be filed with the court.
One of the primary
purposes of bankruptcy is to discharge certain debts to
give an honest individual debtor a "fresh start." The
debtor has no liability for discharged debts. In a
chapter 7 case, however, a discharge is only available
to individual debtors, not to partnerships or
corporations. Although an individual chapter 7 case
usually results in a discharge of debts, the right to a
discharge is not absolute, and some types of debts are
not discharged. Moreover, a bankruptcy discharge does
not extinguish a lien on property but, under proper
circumstances it is possible to take action before the
Court to have the lien discharged.
What are the
alternatives to a Chapter 7 bankruptcy?
Debtors should be
aware that there are several alternatives to chapter 7
relief. For example, debtors who are engaged in
business, including corporations, partnerships, and sole
proprietorships, may prefer to remain in business and
avoid liquidation. Such debtors should consider filing a
petition under chapter 11 of the Bankruptcy Code. Under
chapter 11, the debtor may seek an adjustment of debts,
either by reducing the debt or by extending the time for
repayment, or may seek a more comprehensive
reorganization. Sole proprietorships may also be
eligible for relief under chapter 13 of the Bankruptcy
Code.
In addition,
individual debtors who have regular income may seek an
adjustment of debts under chapter 13 of the Bankruptcy
Code. A particular advantage of chapter 13 is that it
provides individual debtors with an opportunity to save
their homes from foreclosure by allowing them to "catch
up" past due payments through a payment plan. Moreover,
the court may dismiss a chapter 7 case filed by an
individual whose debts are primarily consumer rather
than business debts if the court finds that the granting
of relief would be an abuse of chapter 7.
If the debtor's
"current monthly income" is more than the state
median**, the Bankruptcy Code requires application of a
"means test" to determine whether the chapter 7 filing
is presumptively abusive. Abuse is presumed if the
debtor's aggregate current monthly income over 5 years,
net of certain statutorily allowed expenses, is more
than (i) $10,950, or (ii) 25% of the debtor's
nonpriority unsecured debt, as long as that amount is at
least $6,575. The debtor may rebut a presumption of
abuse only by a showing of special circumstances that
justify additional expenses or adjustments of current
monthly income. Unless the debtor overcomes the
presumption of abuse, the case will generally be
converted to chapter 13 (with the debtor's consent) or
will be dismissed.
Debtors should also be
aware that out-of-court agreements with creditors or
debt counseling services may provide an alternative to a
bankruptcy filing.
* Exempt assets in a
New York bankruptcy filing are:
-
$2,500 in cash and $2,500 in wearing apparel and
household furniture, or $50,000 in equity in a home
that is located in New York and the principal
residence of the debtor; a car with up to
$2,400 in equity, qualified retirement plans, such
as 401k and 403b plans, IRA plans, up to $600 in
work tools, personal injury compensatory recoveries
to up to$7,500 (not to include pain and suffering),
and security deposits.
*
A married couple can file together and double these
amounts.
**
In new York State in 2009:
Family of one $46,523; Family of two
$57,006; Family of three $67,991; Family of four
$83,036. |
