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Chapter 7 Bankruptcy Filing

By Vince Commisa

A Chapter 7 Bankruptcy, sometimes called a straight bankruptcy, is a liquidation proceeding.  Theoretically, the debtor turns over all of its non-exempt property to the Chapter 7 Bankruptcy Trustee who then converts the assets to cash for distribution to the creditors.  The debtor receives a discharge of all dischargeable debts, usually within four months of the filing of the bankruptcy case.  In a great majority of the cases, the debtor has no assets, or if there are any assets, they are exempt based upon Bankruptcy Code.  In effect, a Chapter 7 bankruptcy will give the debtor a “fresh start” as described in the preamble of the Bankruptcy Code. 

In addition to the discharge of the debts, the filing of the bankruptcy petition terminates creditors harassing debtors seeking the collection of debts.  One of the major purposes of the bankruptcy filing is to afford the debtor an opportunity to erase the burden of debt and obtain a fresh financial start.  After the petition is filed, creditors cannot initiate or continue any lawsuits, wage garnishments, or even telephone calls demanding payments.  Secured creditors, such as banks holding a lien on a car or a home, proceed to vacate the automatic stay if the debtor/borrower cannot make payments.  A discharge does not, generally speaking, discharge child support, alimony, debts for personal injury or death caused by drunk driving, student loans, and some income tax debt.  There are additional debts which are non-dischargeable.  In order to deem a debt to be non-dischargeable, a creditor must seek Bankruptcy Court intervention to prove that the debt falls within one of the exceptions.

The Bankruptcy Code was amended several years ago which created some trepidation on the part of would-be debtors.  The amended law instituted a “means test”; however, for the vast majority of filers, the means test does not create any issues.  The means test is tied to the level of income for the specific number of people residing in the debtor’s household.  The debtor may solve several issues for the means test to qualify for a Chapter 7 proceeding.  The means test is a formula wherein the debtor is deemed to be a “good faith” filer versus a “bad faith” filer if their income is below a certain level.  Generally speaking, the Bankruptcy Code tries to require debtors with “higher” incomes to pay back some of their debts.

In sum, the Bankruptcy Code provides relief for debtors in financial dire straits.  The benefits of filing outweigh the burdens of associated with filing a petition.

For more information contact Vince Commisa.

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