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In a nutshell, Chapter 7 Bankruptcy is fairly straight forward. You may never see a judge or even enter a courtroom. Each case is assigned to an attorney, a bankruptcy trustee, with whom you will attend an “interview”. The purpose of the “interview” is to verify that you have made a truthful representation of regarding your assets, income and debts. Upon completion of the “interview”, the trustee will advise the Court and recommend the discharge all of your eligible debts and the retention of your property. A final order from the Court – the Discharge – is normally issued within 60-90 days thereafter.
Chapter 7 bankruptcy is that section of the U.S. Bankruptcy Code that deals with asset liquidation, which means the selling of all non-exempt assets by a court appointed trustee, who applies the proceeds of the sale to pay your creditors. In return, a debtor receives a discharge, which releases a debtor from all dischargeable debts, and orders creditors to forever stop their attempts at collection of the discharged debts.
Once a debt is discharged, a debtor is forever relieved of the obligation to pay a debt. Some debts cannot be discharged. A few examples include certain taxes, alimony, child support, student loans, debts not listed in the Chapter 7 petition, and debts incurred as a result of defrauding or misleading a creditor.
Eligibility Requirements for Chapter 7 Bankruptcy
In its simplest form, there are two distinct criteria which determine your eligibility to file for Chapter 7 bankruptcy – assets and income.
With respect to assets, under New York State law (including Queens, Nassau and Suffolk Counties), an individual is allowed to protect certain basic assets from their creditors. This is called exempt property, or exemptions. So long as the value of your assets do not exceed the statutory limitations, you have met this criteria.
Special Note: On January 22, 2011, the statutory limits on exemptions in New York State increased, and have continued to increase every three years since 2011. In particular: (a) a homeowner is now allowed to protect $170,000.00 of their share of the equity in their primary residence; and (b) a renter can protect approximately $13,500.00 in liquid assets, including the rights to a tax refund. See our FAQ page for more information.
With respect to income, under the Bankruptcy law, most individuals or couples filing for protection under Chapter 7 must now meet certain eligibility requirements under a “Means Test.”
Under the Means Test, you must first determine if your average monthly income, from all sources, for the six month period prior to filing is below the median income for your state, based upon the size of your household. If your average monthly income for the six month period prior to filing is below the median income for your state, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 bankruptcy.
If your average monthly income for the past six months is above the median income for your state, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?
The second hurdle is the determination of your ability to repay a portion of your debt. Under the Means Test, you are required to complete an analysis of your income and expenses (based upon the Internal Revenue Service guidelines for your state as well as certain actual monthly expenses that your may incur – such as mortgage or automobile loan payments). If, after completing the Means Test analysis, it is determined that your net disposable income is less than $125.00 per month, you have passed the second hurdle and you can proceed with your Chapter 7 filing so long as you meet the other requirements.
If you can afford to repay at least $200.00 per month, or $12,000.00 over a five year period), you are NOT eligible to file a petition for protection under Chapter 7 and, you shall be required to file a petition under Chapter 13, in which you shall be required to repay a portion of your debt over a period of up to five years.
If your net disposable income falls between $145.00 and $200.00 per month, in most cases, if this amount can enable you to repay at least 25% of your unsecured, non-priority debt (such and credit cards, medical bills, etc.) over a five year period, you are NOT eligible to file a petition for protection under Chapter 7 and you shall be required to file a petition under Chapter 13 in which you shall be required to repay a portion of your debt over a period of up to five years.
Please note that although there are now a number of websites that may permit you to perform your own Means Test, we recommend that you should seek assistance from an experienced professional before proceeding with your filing.
The Chapter 7 Bankruptcy Process
Section 341 Meeting of Creditors
In most Chapter 7 bankruptcy proceedings, an individual will never actually be required to appear before a Judge or even in a Courtroom. Each Chapter 7 bankruptcy proceeding is assigned to an Interim Trustee, an attorney designated by the Office of the United States Trustee (an arm of the U.S. Department of Justice responsible for overseeing the administration of bankruptcy cases) , who will administer the case and conduct an examination pursuant to Section 341 of the Bankruptcy Code. This is called the Meeting of Creditors. This examination, conducted under oath, serves two purposes. First, it is the process under which the Court shall verify that the representations that an individual has made concerning their financial affairs are true and correct. Second, it is the method utilized by the Court to determine whether an individual has any non-exempt assets (those with values in excess of the limitations allowed under State law) which could be liquidated to repay a portion of the debt sought to be discharged.
A typical examination takes approximately ten minutes. Please be reminded, though, that each case is unique as well as each individual’s facts and circumstances and only an experienced bankruptcy attorney can determine, in advance, the issues that may arise during the examination.
In addition, an individual or couple filing for protection Chapter 7 bankruptcy must complete an approved Credit Counseling Course BEFORE a petition can be filed. The Office of the United States Trustee (an arm of the U.S. Department of Justice responsible for overseeing the administration of bankruptcy cases) has established a list of approved providers. In most cases, the course can be completed at home either over the internet or by telephone. For more information about these providers, please contact our offices. Upon completion of the course, you will receive a certificate of completion which must be filed with your petition.
Prior to the filing of any petition in bankruptcy, you are now required to provide the Court with a copy of your proof of income for the sixty day period prior to filing and a copy of your latest filed tax return with proof of filing. Proof of filing can be generally be confirmed by providing a tax transcript from the Internal Revenue Service. Our offices can assist you in this regard. If you cannot provide these documents, it may still be possible to file if your can substantiate the reason that you are unable to provide these documents (such as extended periods of unemployment or disability).
SPECIAL NOTE: Please be reminded that the outline above highlights only some of the major procedural requirements under the present law. There are still a number of basic eligibility requirements that have been carried over from the pre-2005 law – in particular – the determination of exempt and non-exempt assets. Even if you do not “pass” the Means Test, if you wish to retain assets with values above those that may be deemed to be protected, or exempt, under applicable law, you may still be able to file for protection under Chapter 13 bankruptcy in order to protect those assets from liquidation. For more information, please contact our offices.