The Bankruptcy Process
A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts. In a 1934 decision, the Supreme Court made the point that the bankruptcy process gives an honest but unfortunate debtor a new opportunity in life, unhampered by the pressure and discouragement of preexisting debt. This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
The bankruptcy code imposes severe sanctions and penalties for any creditor attempting to collect a debt after being notified of a bankruptcy filing. Chapter 7, in theory, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors. In reality, most personal bankruptcy estates are “no asset” cases which have nothing for the trustee to distribute. A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge 3 months after the petition is filed.
Amendments to the Bankruptcy Code enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under Chapter 7. The test determines whether a debtor has “the means” to pay their creditors. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7 relief.
Chapter 7 Eligibility
Are you Eligible for Chapter 7? To qualify for relief under Chapter 7 Bankruptcy, the debtor may be an individual, a partnership, or a corporation or other business entity. If the debtor’s income is below the median family income or the debtor passes the means test (described above), relief is available under Chapter 7 irrespective of the debtor’s debts or whether the debtor is solvent or insolvent.
An individual cannot file under Chapter 7 or any other Chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
In addition, an individual is not eligible to file under Chapter 7 or any Chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, completed a credit counseling course from an approved credit counseling agency. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling.
One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” An individual debtor has no liability for discharged debts. In a Chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. Partnerships or corporations seeking Chapter 7 relief are limited to liquidation and cannot receive a discharge. If a partnership or corporations desire a discharge, they must proceed under Chapter 11. Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.