Chapter 7 bankruptcy is a “straight bankruptcy” or “liquidation bankruptcy.” It is the most common chapter; approximately two-thirds of all the bankruptcies filed around the country each year are Chapter 7s. In a Chapter 7 bankruptcy proceeding, the debtor is seeking a discharge, which is a document mailed to the debtor by the Clerk of the Bankruptcy Court toward the end of the case. The discharge is the document which essentially states that the debtor is no longer legally responsible for repaying his or her creditors. There are a few “prices” one pays for the privilege of receiving a Chapter 7 discharge. There are three primary components to every Chapter 7 bankruptcy proceeding: assets, liabilities, and income.
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Determination Of Assets In A Chapter 7 Bankruptcy.
In every Chapter 7 bankruptcy proceeding, a judge and a trustee are assigned. In the majority of Chapter 7 cases, the debtor never sees his or her judge, but does meet his or her trustee. It is helpful to look at the Chapter 7 trustee as an independent contractor for the federal government; the government wants experienced professionals to help it do its job, but does not want to pay in-house salaries, so it contracts with local attorneys and accountants to provide the needed services. The trustee’s primary responsibility is to review the bankruptcy petition, schedules, and statement of financial affairs, examine the debtor by asking some questions at a meeting of creditors approximately five weeks into the case, and determine whether the debtor owns any assets that ought to be liquidated or sold in order to generate money to pay creditors on their claims, at least in part. Accordingly, one of the prices a debtor pays for the privilege of receiving a Chapter 7 discharge is that his or her assets are subjected to scrutiny by the bankruptcy trustee and potentially liquidated for the benefit of his or her creditors.
Debtor Assets Not Worthy Of Liquidation.
In approximately ninety-five percent of the Chapter 7 cases filed around the United States each year, the trustee comes to the conclusion that the debtor has no assets worthy of liquidation, because most debtors’ assets fall into four basic categories that make those assets relatively unattractive.
Administration Of Assets – To Liquidate, Or Not To Liquidate?
The bankruptcy trustee must determine whether administration of assets is necessary. If the debtor owns real estate, the trustee might send an agent to the property to evaluate it. If the trustee believes the property has sufficient equity, the trustee will put the property on the market. If the debtor is operating a business, whether it is a sole proprietorship, corporation, limited liability company, or partnership, the trustee may want to review the company’s books and records, bank statements, canceled checks, and/or tax returns. If the debtor is in the process of suing someone, the trustee might want to review the litigation pleadings in order to assure himself or herself that the suit has or does not have value to creditors. If the debtor has too much money in the wrong type of pension plan, the trustee may want to review the pension instruments.
Liquidation Of Assets.
In approximately five percent of the Chapter 7 cases filed in the United States each year, the trustee does in fact liquidate one or more of the debtor’s assets. The trustee’s job in such cases is to take possession of the asset, market it for sale, locate a buyer, negotiate terms, seek bankruptcy court authority to sell the asset in the form of a Court order, close the transaction and bring in dollars.
Chapter 7 Bankruptcy Trustee Compensation.
Where the Chapter 7 bankruptcy trustee liquidates one or more of the debtor’s assets, the trustee earns compensation of approximately five percent of the proceeds generated by his or her liquidation efforts. In addition to the trustee’s approximately five percent fee, the trustee often employs attorneys, accountants, real estate agents, consultants, appraisers, auctioneers, and other professionals to help him or her carry out his or her duties, and such professionals are paid in full before any funds are made available to creditors of the bankruptcy estate. As one might expect, the Chapter 7 trustee has an economic incentive to generate as much money as possible from liquidation of the bankruptcy estate’s assets. But keep in mind, in the vast majority of Chapter 7 bankruptcy cases, it is obvious to the bankruptcy trustee that the estate is devoid of administrable assets; it is only in approximately five percent of the cases that assets are taken from the debtor by the trustee and liquidated.
Discharge Of Liability.
That is of course the reason why one files Chapter 7–to receive the piece of paper from the bankruptcy court that states that the debtor is no longer legally obligated to repay his or her creditors. But there are exceptions. Accordingly, one of the prices a debtor pays for the privilege of receiving a Chapter 7 discharge is that certain types of obligations cannot or might not be discharged.
Income And Expenses.
One of the primary changes made by Congress and the President when they enacted the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 is the implementation of a “means test.” The means test focuses on the combined gross income of all members of the marital community, regardless of whether only one or both members of the marital community file bankruptcy. Income is determined based on an average over the past six months, regardless of whether the average income over the past six months reflects future earning ability. Subtracted from income are various household expenses, some based on objective standards created by the Internal Revenue Service, and some based on the debtor’s actual spending history. If the net disposable income is greater than the state’s median level of income for a family of the debtor’s size living within the debtor’s geographic region, the presumption exists that the debtor is ineligible for Chapter 7 relief.
If the debtor’s net disposable income is below the state’s median level of income for a family of the debtor’s size living within the debtor’s geographic region, but there is still sufficient income to repay a portion of the debtor’s debt if forced to do so in a Chapter 13 proceeding, the debtor may nonetheless be ineligible for Chapter 7 relief. Under ten percent of the debtors that previously could have filed Chapter 7 successfully are being forced to either file Chapter 13 instead, or not file bankruptcy at all
The scrutinization of the debtor’s income and expenses in order to determine whether giving the debtor a Chapter 7 discharge constitutes a “substantial abuse” of the bankruptcy laws is another price one pays for the privilege of receiving a Chapter 7 discharge.
If you would like more information, or would like to discuss your situation with a Pennsylvania Chapter 7 bankruptcy attorney, please contact Richard Lipow today. You can call us at 610-251-2500