All about Chapter 7 Bankruptcy

Chapter 7 is available to both individuals and businesses. It enables individuals to, among other things, assume or reject contracts and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans. Moreover, while Chapter 7 is considered a liquidation form of bankruptcy, broad exemption laws oftentimes allow debtors to keep all of their assets.

For businesses, a Chapter 7 bankruptcy puts a clean end to the business through a transparent and orderly liquidation. Upon filing, the business entity is terminated, and the trustee acquires control over all property of the estate, and liquidates same.

Chapter 7 does not have any income eligibility limitations for businesses. For individuals, on the other hand, there are eligibiltiy limitations based upon income. Specifically, if, a person’s income is such that their Chapter 7 filing constitutes an abuse, then the bankruptcy court may dismiss or convert the case to a repayment plan under Chapter 13 or Chapter 11 of the Bankruptcy Code.

To determine an individual’s eligibility for Chapter 7, they must first pass a threshold test in which one’s current monthly income, as defined by the Bankruptcy Code, is compared to the average median income of a household of the same size, residng in the same state. If below-median, then the individual is automatically eligible to file for Chapter 7 bankruptcy. If above-median, however, the individual most complete the means test in order to determine eligibility. The means test consists of an intricate formula of income minus expenses. If, after completing this formula, a person has too much monthly net disposable income left over, abuse is presumed; and, unless the person can rebut this presumption, they will be ineligible to file for Chapter 7. Notably though, some individuals are not subject to the Chapter 7 means test (e.g. individuals with primarily non-consumer debts, certain disabled veterans).

In Chapter 7, a discharge is only available to individual debtors, not to business debtors. And, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will generally issue a discharge after the expiration of 60 days from the date first set for the meeting of creditors. For businesses, whatever debt remains after the trustee’s liquidation theoretically remain in existence until applicable statutory periods of limitations expire. Nonetheless, the trustee’s liquidation of the business renders the debts uncollectible.