What is chapter 7 bankruptcy and who is eligible?
Most bankruptcy cases are filed under Chapter 7. It is often called "straight" bankruptcy or "liquidation." In most Chapter 7 consumer bankruptcy cases, the debtor (individual filing for bankruptcy) is able to retain of property and is not required to pay anything following the close of the bankruptcy case. This type of Chapter 7 case is called a "no asset" bankruptcy. Chapter 7, for consumers, if often contrasted with Chapter 13. In Chapter 13 cases, the debtor is required to create a bankruptcy plan wherein regular monthly payments are required to be made to a trustee for distribution to creditors at a set amount.
Most consumer prefer Chapter 7 bankruptcy because of the lack of payment following the case. However, some prefer Chapter 13 if they are delinquent on house or car payments and would like to retain possession and title to them.
To be eligible to file for Chapter 7, a person must follow certain residency requirements (reside/domiciled in the United States). In contradiction to what many believe, Chapter 7 does not require a minimum amount of debt. This Chapter does have a test for a presumption of fraud or abuse. This test is called the Chapter 7 "means test." This test was implemented in the 2005 Bankruptcy Code revision. The test evaluates the potential ability of debtors to pay off creditors. If a person has too much monthly income, a presumption of abuse occurs and the debtor is required to go through a process of reviewing expenses to see if they can overcome the presumption.
If the debtor is not able to overcome the presumption, the debtor is not allowed to proceed under Chapter 7. The debtor is able to either file or convert the case to Chapter 13.
Chapter 7 bankruptcy is also known as straight bankruptcy. The proceedings involve taking all the borrower’s non-exempt property and selling it off. The money that is collected via liquidation of assets is then distributed among the creditors to clear off debts. Once all the bankruptcy proceedings have been completed, the court discharges the borrower from the debts. He is no longer liable for the debts and can start over with a clean slate. However, the record of the bankruptcy can remain a part of his credit history for 10 years so it does have long-lasting effects. Chapter 7 bankruptcy is generally filed by individuals. Businesses may file for Chapter 11 bankruptcy. The following conditions make an individual eligible for a Chapter 7 bankruptcy.
