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Chapter 7, otherwise known as "liquidation" or "straight bankruptcy" is generally the simplest and quickest and is available to individuals, married couples, corporations and partnerships. A trustee appointed by the court gathers and sells your nonexempt property. The proceeds from the sale pay your creditors. You're able to keep any "exempt" property.

Exempt Property

When determining what is considered exempt, many states allow you to use the state's definition of exempt or the federal list of exempt property. Some states require to use the state's list. Be sure to check your state's laws to find out what applies to your state.

Exempt property could consist of the following (see the list and code for your state for details):

• Real estate such as a residence
• Trade or professional tools, books,
• Unmatured life insurance contract
• Prescription health aids
• Social security, veteran's benefit, disability, illness or unemployment benefit
• Proceeds from a judgment

Beginning October 17, 2005, under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), you now also have more time to decide whether to use the state of federal exempt property lists. This was to prevent someone from moving to a different state with more generous exemptions.

Most chapter 7 cases are "no-asset" cases, which means that you don't have nonexempt property for the trustee to sell. When you file your petition for bankruptcy, you declare whether your case is "asset" or "no-asset." The burden is on the trustee to change the designation.

Eligibility for Chapter 7

If you file, under BAPCPA, you must undergo a "means test" to qualify for Chapter 7 bankruptcy. This is how the IRS determines who can or can't file. Your income and expenses are examined to see how they compare to the standard for your area as set by the IRS.

For example, if you earn less than the median income for a family of your size in your state, you can file for Chapter 7 bankruptcy. However, if your income from the last six months is greater than the median income, and you can pay at least $6,000 over five years or $100 a month, toward your debt you can't file for Chapter 7. You must file for Chapter 13 instead.

The means testing requires you pay any overdue tax returns withing weeks of filing bankruptcy.

Now, you must also pay for credit counseling and budget analysis at your own expense. This will address the means testing caluculations for you. These calculators can also be found on the Internet.

Filing Chapter 7

Bankrupty starts with filing an official petition, schedules and Statement of Financial Affairs in bankruptcy court. You must provide:

• A full list of creditors
• The amount and type of their claim, the source, amount and frequency of your income
• A list of all your property
• A detailed list of monthly living expenses

As soon as you file for bankruptcy,  creditors are prevented from trying to collect on your debts through an "automatic stay." The stay preserves your property and gives you a break from being sued.

Creditors must show the bankruptcy judge there is cause to continue with collection action. For instance, by showing  the property might deteriorate in value during the bankruptcy period.

If there is nonexempt property, the trustee will control of it. That person will sell the property and pay administration fees and then pay any remaining money to creditors with active and approved claim. These will be paid in a level of priority. Any wages earned after filing, you keep and are beyond the reach of creditors prior to the filing date.
 

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Related Web Links

- US Trustee Program
- Glossary of Bankruptcy Terms