Chapter 7 Bankruptcy

The Chapter 7 Bankruptcy liquidation approach converts a debtor’s non-exempt assets to cash distributed in conformity with the Code. An honest debtor is discharged from most of the remaining debts and given a fresh start.

Eligible debtors include individuals, partnerships, and corporations. Among others, the following entities are generally not eligible to file under Chapter 7 Bankruptcy:

  • Municipalities
  • Railroads
  • Insurers
  • Banks, savings & loan associations, and credit unions

Abuse by an Individual Debtor

  • The availability of bankruptcy protection is limited by means testing to avoid abuse. Abuse by an individual debtor with primarily consumer debts will result in dismissal or conversion to a Chapter 13 case. Abuse is found when:
    • The debtor does not pass the financial means test
    • General grounds exist for the finding (i.e. bad faith)
  • If the debtor’s income exceeds the local median income, the interested party may seek dismissal for abuse. Otherwise, only the Judge and certain Administrators may move to dismiss.
  • If the means test determines the debtor’s ability to repay general unsecured claims.
  • If the presumption of abuse may be overcome by proof of special circumstances.

Debtor’s Estate

The estate consists of all the debtor’s non-exempt interests in property at the beginning of the case.

The estate includes the following:

  • All non-exempt property currently held (worldwide)
  • Interests in property to which the debtor becomes entitled within 180 days after filing. This includes:
    • Life insurance payments
    • Divorce settlements
    • Inheritances
    • Any proceeds, products, offspring, rents, or profits received from property in the estate
    • Property acquired by the estate after the commencement of the case
    • Property recovered by the trustee under the avoidance powers

The estate excludes the following:

  • Earnings of the debtor for services after the beginning of a Chapter 7 case
  • Contributions to employee retirement plans
  • Contributions made more than 365 days prior to filling for educational retirement accounts and State/municipal tuition programs
  • Most property acquired after the filing of the petition, including:
    • Gifts
    • Social Security payments
    • Welfare benefits
    • Disability payments
    • Alimony and support awards
    • Most pension proceeds

Exempt Assets

Exempt Assets are necessities for a fresh start. Only individual debtors, not corporations, are eligible for exemptions.

States are permitted to require their citizens to accept the exemptions of property defined by State Bankruptcy law. If a State has not rejected the Federal exemptions, the debtor has a choice as to whether or not they choose to recognize & accept the exemptions of property.

Federal exemptions:

  • Up to $23,675 in equity in the debtors residence and burial plot
  • An interest in a motor vehicle up to a value of $3,775
  • An interest up to a value of $600 in any item of household goods and furnishings, clothing, appliances, books, animals, crops, or musical instruments, with a total limited to $12,265.
  • An interest in jewelry up to a value of $1,600.
  • Any other property worth up to $1,250, plus any unused part of the $23,675 exemption in item 1 above, up to an amount of $11,850.
  • An interest in tools of the debtor’s trade up to a total value of $2,375.
  • Any non-matured life insurance contract owned by the debtor
  • Certain interests from accrued dividends, or interest under life insurance contracts owned by the debtor not exceeding $12,265.
  • Professionally prescribed health aids
  • The right to receive Social Security, certain welfare benefits, veterans benefits, disability benefits, alimony and support, and certain pension benefits
  • The right to receive certain personal injury and other awards up to $23,675.
  • Unemployment compensation
  • The ability to void certain judicial liens

Originally posted 2018-07-31 17:31:28.

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