Considering Chapter 7 Bankruptcy? Talk to the Morris County Bankruptcy Lawyers at David Alan Ast, PC

Helping clients in Rockaway, Whippany, Budd Lake, Boonton, Denville, Morristown, Dover, Florham Park, Montville, Mount Arlington, Madison, Cedar Knolls, Flanders and the surrounding cities

Chapter 7 bankruptcy is a theoretical supervised liquidation process, through which a court-appointed bankruptcy trustee sells a debtor’s non-exempt assets in order to repay creditors in exchange for a discharge of debts owed. Chapter 7 bankruptcy is commonly referred to as straight bankruptcy or liquidation and it is the most common form of bankruptcy amongst individuals and families. Partnerships, sole proprietorships, and corporations are also eligible to file for Chapter 7 bankruptcy.

How Chapter 7 Bankruptcy Works

Credit Counseling & Debtor Education

In the 2005 revisions to the bankruptcy law, Congress added a provision that generally requires all debtors to participate in a credit counseling screening program to determine if the debtor has the ability to have a debt repayment program proposed. This screening process has to be conducted by an approved non-profit agency. It was widely believed that the introduction of this neutral nonprofit agency would result in a large number of people being diverted from filing for bankruptcy and entering into a debt repayment program. This requirement has not had its intended result because it is the exceptional case where the non-profit agency even proposes a debt repayment program.

The debtor must also complete a financial management course in order to receive a discharge.

With limited exception, if the debtor does not complete a debtor education course and file the certification of completion, the debtor will not receive a discharge. There are various ways of satisfying the credit counseling screening and financial management requirements that include internet or telephone and do not require the debtor to go anyplace.

Means Test

In the 2005 revisions to the bankruptcy law, Congress added a provision called the “Means Test” designed to determine who would be an eligible debtor under Chapter 7 without a presumption of abuse. The Means Test starts with a calculation of a debtor’s individual and household average monthly income for the six months immediately preceding the month of the filing of the petition and comparing that average income to the median family income for a household of comparable size in the state where the case is filed. If the income is under the median family income, then there is no presumption of abuse, and the individual may file a Chapter 7.

If the household income exceeds the median family income, then a complicated analysis of the expenses must be prepared. Some of the dollar amounts are set by the Internal Revenue Service average living expense figures based upon collections from delinquent taxpayers. Some of these figures are used throughout the US, while others are state or regional figures. Congress expected that this Means Test would cause many people considering filing a Chapter 7 to have to file a Chapter 13. It is the exceptional case when the Means Test may push people into filing for Chapter 13, when they really want to file for Chapter 7. In some instances, the timing for filing the case may impact upon the calculations for the Means Test and in other instances, a careful review of the allowable expenses may provide a way of not triggering the presumption of abuse.

Case Filing

To obtain bankruptcy protection under Chapter 7 of the Bankruptcy Code, you must first file a petition with the bankruptcy court in the jurisdiction where you have resided for the last 180 days, or the greater portion of the last 180 days. Your petition must contain information regarding all creditors, the amount of money you owe each creditor, and your current income, assets, and monthly living expenses.

Automatic Stay

Once you have filed the petition, the automatic stay becomes effective. The automatic stay prohibits most debt collection actions against a debtor during bankruptcy proceedings. While the automatic stay is in effect, creditors cannot initiate or continue lawsuits against you, garnish your wages, call you or otherwise take action for payments against you. Although there are exceptions to the automatic stay, the automatic stay applies to most creditors and to most debts.

Exemptions

After the petition for bankruptcy has been filed, the bankruptcy court appoints a trustee who is responsible for conducting the Meeting of Creditors and liquidating any non-exempt assets to repay the creditors. In order to protect exempt property, a debtor must file a schedule of exempt property with the court. Such exempt property depends on the interplay between federal bankruptcy laws and state laws. For bankruptcy cases filed in NJ, where the debtor resided in NJ for the two years immediately preceding the date of filing, the debtor may utilize the “federal exemptions” provided for by Bankruptcy Code §522(d), which include:

• $20,200 of equity in the debtor’s residence
• $3,225 of equity in one motor vehicle
• $10,775 of value in household furnishings, household goods wearing apparel, books, held for personal use of the debtor or the debtor’s dependents, provided each item does not exceed $525 in value
• $1,350 of value in jewelry
• $1,075 plus up to $10,125 of any unused residence exemption
• $2,025 of value of tools of the trade
• Any unmatured life insurance contract
• $10,775 of cash value life insurance

In a joint filing, the exemptions are generally doubled.

There are other exemptions that permit retaining the right to receive alimony, child support, veteran’s benefits, Social Security benefits and the protection for most retirement plans, including 401(k)’s, 403(b) and IRA’s.

The trustee has the right to sell all non-exempt property and the proceeds are distributed to the creditors by the trustee. In most individual Chapter 7 cases, the debtor’s assets are fully protected by the available exemptions and the case is treated as a “No Asset” case.

The Effect of a Chapter 7 Bankruptcy Discharge

Discharge is the technical term that forgives debts through the bankruptcy process. Once a debt has been discharged through Chapter 7 bankruptcy, the debtor is no longer personally liable for repaying that debt and the creditor is prohibited from seeking to attempt to collect the debt. While most debts are discharged through bankruptcy, certain forms of debt are not dischargeable through bankruptcy. Such nondischargeable debt generally includes:

• Student loans
• Federal, and state, income taxes from the previous three years
• Criminal restitution
• Child support payments
• Alimony payments
• Court fines
• Debts fraudulently incurred and the creditor prevails in the Bankruptcy Court in proving the fraudulent conduct

When to File for Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy is often appropriate in circumstances where the debtor:

• Owes a large amount of debt that cannot feasibly be repaid within a reasonable period of time
• Has experienced large medical debts or other unexpected debts
• Earns less than the median income in his or her state
• Income that just pays for living expenses with little or nothing left to pay debt
• Has very little, or no, non-exempt assets

If you feel that Chapter 7 Bankruptcy may be the proper solution for your financial problems, it is important that you contact a Chapter 7 bankruptcy attorney who can answer any questions you may have and assist you with filing your bankruptcy petition. If you live in north New Jersey, there is a Morris County Chapter 7 Bankruptcy attorney at Davis Alan Ast, PC that can help. The attorneys at David Alan Ast, PC are experienced in assisting residents of Morris County and the surrounding areas with their bankruptcy issues. If you need assistance with relieving your financial distress, contact a Morris County Chapter 7 bankruptcy lawyer at David Alan Ast, PC today for an initial consultation without cost or obligation.