Chapter 7 - Liquidation under the Bankruptcy Code

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Alternatives to Chapter 7

There are several alternatives to chapter 7 relief. Debtors who are engaged in business may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under Chapter 11, or Chapter 13 of the Bankruptcy Code, which allow the debtor to seek an adjustment of debts, either by reducing the debt, extending the time for repayment, or seeking a more comprehensive reorganization. A Chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts can be dismissed by the court, if the court finds that the granting of relief would be a substantial abuse of the provisions of Chapter 7. 11 U.S.C. ? 707(b). Additionally, a number of courts have concluded that a Chapter 7 case may be dismissed for substantial abuse when the debtor has the ability to propose and carry out a workable and meaningful Chapter 13 plan. Out-of-court arrangements with creditors or debt counseling services may provide an alternative also.


Are You Eligible for a Chapter 7?

Under Chapter 7 there is no filing of a plan of repayment as in a Chapter 13 bankruptcy. Chapter 7 involves the bankruptcy trustee's gathering and selling of the debtor's nonexempt assets, from which creditors will receive distributions in accordance with the provisions of the Bankruptcy Code. In a Chapter 7 bankruptcy the debtor is permitted to retain certain exempt property. The remaining assets are liquidated by a trustee. Potential Chapter 7 debtors should realize that the filing of this type of petition may result in the loss of property. Chapter 7 relief is available regardless of the amount of the debts or whether or not the debtor is insolvent. An individual cannot file under any chapter 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 the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property.


The Means Test

What is median income/means testing? Again, in October 2005 the Bankruptcy Code was modified to provide that any individual seeking to file for bankruptcy protection must determine their median income based upon the last six months prior to filing bankruptcy. The Census Bureau issues reports for every district in the country. These numbers are posted on the U.S. Trustee's website and can be found at If you are median income or higher for our district, then you must complete the means test. This test takes the average of your six month's income from all sources, and then subtracts all involuntary deductions such as taxes, union dues, health insurance. Then, you can deduct your secured debt for your primary residence, vehicles, and other allowed secured debt. The IRS provides expense allowances for individuals based upon their family statistics that are also deductible.


How Chapter 7 Works

A Chapter 7 case begins when the debtor files a petition with the bankruptcy court. The petition should be filed with the bankruptcy court in the area where the individual lives or where the business debtor has its principal place of business or principal assets. 28 U.S.C. ? 1408. The debtor is also required to file with the court schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of executory contracts and unexpired leases. Bankruptcy Rule 1007(b). A husband and wife may file a joint petition or individual petitions. 11 U.S.C. ? 302(a).


Role of the Trustee

An "estate" is created by the filing of a bankruptcy petition. The estate technically becomes the temporary legal owner of all of the debtor's property. The estate contains all legal or equitable interests of the debtor in property as of the commencement of the case, including property owned or held by another person if the debtor has an interest in the property. The nonexempt property of the estate generally pays the creditors.


Your Discharge Order

An order of discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor or his property to collect the debts. The bankruptcy law regarding the scope of a Chapter 7 discharge is complex, and debtors should consult competent legal counsel in this regard prior to filing. As a general rule, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of Chapter 7 cases. In most cases, unless a complaint has been filed objecting to the discharge or the debtor has filed a written waiver, the discharge will be granted to a Chapter 7 debtor relatively early in the case, 60 to 90 days after the date first set for the meeting of creditors. Bankruptcy Rule 4004(c).

Additional Resources

Goldsmith & Guymon, P.C.

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Related Topics

Bankruptcy liquidation

Liquidation is the selling of a debtor's assets during bankruptcy proceedings, with the money from the sale of assets used to pay back creditors.

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