Bankruptcy Chapter 7 Exemptions

Chapter 7 of the Title 11 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of the United States. (In contrast, Chapters 11 and 13 govern the process of reorganization of a debtor in bankruptcy). Chapter 7 is the most common form of bankruptcy in the United States

For businesses

When a concerned business is badly in debit and not capable to service that debit or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed almost instantly, with broad powers to examine the business's monetary relationships. The Trustee usually sells all the assets and distributes the proceeds to the creditors. This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, whole divisions of the company may be sold integral to other companies during the liquidation.

Fully secured creditors, such as collateralized bondholders or mortgage lenders, have a legally enforceable right to the collateral securing their loans or to the corresponding value, a right which cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Only an individual can receive a Chapter 7 discharge. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership hypothetically continue to exist until applicable statutory periods of limitations expire.

For individuals

Individuals who reside, have a place of business, or own possessions in the United States may file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation). Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances.

In a Chapter 7 bankruptcy, the person is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, income taxes less than 3 years old and property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to decide the dischargeability of the student loan), and fines and restitution compulsory by a court for any crimes committed by the debtor. Spousal support is likewise not covered by a bankruptcy filing nor are property settlements during divorce. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.

A chapter 7 bankruptcy stays on an individual's credit report for 10 years from the date of filing the chapter 7 petition. This contrasts with a chapter 13 bankruptcy, which stays on an individual's credit report for 7 years from the date of filing the chapter 13 petition. This may make credit less available and/or terms less favorable, although high debt can have the same effect. That must be balanced against the exclusion of actual debt from the filer's record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.

Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor's Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.

It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings.[citation needed] Through these activities the U.S. Trustee has achieved a regulatory system that Congress and most creditor-friendly commentors have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.

Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized because by the time most debtors are ready to file for bankruptcy their credit score is already ruined. Also, new credit extended post-petition is not covered by the discharge, so creditors may offer new credit to the newly-bankrupt.

Methods of filing for bankruptcy

Federal bankruptcy forms

Functionally, templates are more or less the computer based equivalent of paper bankruptcy forms. The official Federal bankruptcy forms prescribed in the Federal Bankruptcy Rules come as Microsoft Word and Adobe Acrobat formatted templates where each bankruptcy form is represented by a Word or Acrobat file. While these forms are electronic in nature and reside on a computer, they do not contain intelligence that would guide the debtor. The debtor still has to fill in each bankruptcy form discretely as they would with paper forms and the debtor still has to grapple with the complexity of bankruptcy law.

Bankruptcy software

In bankruptcy software, the debtor interacts with the software through a web page and is shielded from the actual bankruptcy forms and from the intricacies of bankruptcy law. The debtor responds to questions in an interview setting, much like with tax programs such as TurboTax or programmed documents made through HotDocs. The debtor enters names and addresses, a list of their creditors and assets and other financial information and the software generates all the court-ready forms and delivers them to the debtor via email or a download link. The accuracy of the forms is nevertheless imperfect, as it is difficult for software to ensure that the debtor understands what has to be disclosed, what the exemptions for their state are, whether they qualify for said exemptions, and whether fixed cost included on the means test are allowable.

Bankruptcy preparer

An alternative to do-it-yourself is the online full-service chapter 7 or chapter 13 bankruptcy preparer or online paralegal. This method appeals to those who cannot afford the high cost of bankruptcy attorneys and at the same time do not want the hassle and uncertainty of paper templates and software. Bankruptcy preparers fill this need. The bankruptcy forms are prepared by trained persons rather than by debtor themselves. However, having a preparer or paralegal prepare the petition does not guarantee compliance with all applicable laws, or assure that greatest benefit will be taken of exemptions. As with online bankruptcy software, debtors in some cases submit their bankruptcy information through a simple web page interface. Rather than having some software automatically produce the forms, trained paralegals use the information to prepare the document and then deliver them to the debtor. Bankruptcy trustees will check the bankruptcy petition to ensure that the petition was prepared correctly, much like the trustee would do if a lawyer had prepared the forms. The BAPCPA provides guidelines for petition preparers to follow to protect the consumer.

Bankruptcy attorney

A bankruptcy attorney can advise the consumer on when the best time to file is, whether they qualify for a chapter 7 or need to file a chapter 13, ensure that all requirements are fulfilled so that the bankruptcy will go smoothly, and whether the debtor's assets will be safe if they file. With expanded supplies of the BAPCPA bankruptcy act of 2005, filing a personal chapter 7 bankruptcy is complicated. Many attorneys that used to practice bankruptcy in addition to their other fields, have stopped doing so due to the additional requirements, liability and work involved. After the petition is filed, the attorney can provide other services.

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Courtesy - Wikipedia

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