Of the 6 types of bankruptcy, Chapter 7 bankruptcy is the most common type of filing by debtors. A Chapter 7 bankruptcy is commonly referred to as a “liquidation bankruptcy.” In a Chapter 7 bankruptcy, all of the debtor’s assets (aside from those which are exempt), are collected by a bankruptcy trustee and sold. The proceeds from that liquidation process are then used to compensate creditors. At its core, Chapter 7 bankruptcies can be the quickest and most efficient, but they are still subject to limitations.
As with any bankruptcy, the debtor must comply with filing requirements if they have a prior bankruptcy. For a Chapter 7 Bankruptcy, this means that 8 years must have elapsed from a prior Chapter 7 filing and 4 years must have passed from a previous Chapter 13 filing. Additionally, only consumer debts can be discharged in a Chapter 7 bankruptcy. This means that, generally, medical debt, student loans, alimony, child support, fraudulent debt, taxes, and business debt cannot be discharged in a Chapter 7 bankruptcy. A Chapter 7 petitioner must also satisfy the means test for a Chapter 7 filing.
The Means Test
If a petitioner’s income is higher than the Indiana median income for their respective family size, then they must pass the means test. The median household income is determined by the Census Bureau. The Means Test determines whether petitioners can pay back amounts of their unsecured debts in a Chapter 13 bankruptcy. If the petitioner is able to pay back a portion of those unsecured debts, then they must file a Chapter 13 petition. The Means Test does come with some exemptions as well. For instance, if the debtor’s debts are not primarily consumer debts, then they are exempt from the Means Test. Disabled veterans are also exempt from the means test if they have incurred debt from active duty. There are several types of income that are required to be disclosed on the Means Test: gross wages, bonuses, commission, retirement income, et cetera.
Property of Estate and Trustee Evaluation
For a Chapter 7 petition, all assets owned by the debtor are included in what is known as the “bankruptcy estate.” The bankruptcy estate can include property acquired after the petition is filed and even some property that was transferred before the petition filing. Property acquired up to 180 days after the bankruptcy filing can be included. This also includes property acquired via inheritance, property settlement, or a life insurance policy, after a filing. For prior-transferred property, it may be included if it was fraudulently transferred to avoid distribution through the bankruptcy proceeding. This extends to property fraudulently transferred 2 years before the filing under Bankruptcy law and 4 years prior to filing under Indiana law.
Although Chapter 7 bankruptcies come with some benefits, such as bankruptcy exemptions, they are not advised for all qualified debtors. Typically, petitioners should not file for a Chapter 7 bankruptcy if there are certain assets (e.g. a home, a car, etc.) the petitioner wishes to protect. Someone considering a Chapter 7 filing should consult a bankruptcy attorney for this determination.
This McNeely Law LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.