Chapter 7 Bankruptcy is so named because it is a form of Bankruptcy that is formed under Chapter 7 of the United States Bankruptcy Code. The United States Congress gains its authority to create and change the Bankruptcy Laws through the specific grant of the United States Constitution. Any revisions to the United States Bankruptcy Code must be passed by Congress, and also, with certain exceptions, the approval of the President.
The Bankruptcy Laws in the United States, are partly a reflection of the Bankruptcy Laws adopted from Colonial England, and a formulation of Laws created and inspired by the fundamental arguments and debates that arose during the creation of the United States Constitution.
The United States Constitution specifically grants Congress the power to create and formulate Bankruptcy Laws based upon the concept that the young nation needed a standard set of Bankruptcy Laws and Principles that would apply evenly to persons in each of the numerous States. My understanding is some of the Founders felt that some States were overly protective of its Debtors. A uniform system of Bankruptcy Laws would lessen the differences experienced by persons in the different States in matters of Insolvency and Bankruptcy.
This initial struggle among some of the Founders of the United States Constitution reflects the infamous struggle between the Federalist and the Anti Federalists. The Federalists favored a strong central government, while the Anti Federalists felt that power and government should be focused and held at the local level, namely the States. The Bankruptcy Laws today are a blend of these opposing viewpoints, with a strong reliance on the federal bankruptcy system, mingled with State Laws, particularly in areas of State Exemptions.
Chapter 7 Bankruptcy is sometimes called a Straight Bankruptcy or a Straight Liquidation. The majority of the Debtors who file Chapter 7 Bankruptcy, however, are not required to Liquidate any of their Assets. When a qualified Debtor files Chapter 7 Bankruptcy, he is allowed certain Exemptions. Exemptions are created and applied in Bankruptcy, at either the Federal or State level, and establish what Assets are person can hold exempt, or protected from his creditors, either in a Bankruptcy, or outside of it.
Chapter 7 Bankruptcy is often filed by a Debtor seeking to Discharge a significant portion of Unsecured Debts. Unsecured Debts include credit cards, medical bills, signature loans, telephone, and utility bills.
Chapter 7 Bankruptcy can also discharge some tax obligations. Whether a debt owed to a taxing organization is eligible for Discharge is generally dependent upon the type of tax, the age of the tax, whether and when the appropriate tax documents were filed, and whether the tax is classified as Secured or Unsecured.
Student loans are generally not eligible for Discharge in a Chapter 7 Bankruptcy. However, student loans may be Discharged in Bankruptcy if the Debtor can prove something called “Undue Hardship”. If the student loan creates an undue hardship for the Debtor, the Student Loan may be discharged or eliminated, in Bankruptcy.
Secured Debts are generally not eligible for Discharge in Bankruptcy. Examples of Secured Debts are a Mortgage on a house, or an Automobile Loan. If a Debtor files a Chapter 7 Bankruptcy, and wishes to retain either his house or automobile, provided both are secured by a lien, the Debtor must generally continue paying for such property, subject to the terms of the Mortgage or Loan. There are exceptions to this general rule, such as in matters of Redemption. However, most Debtors are unable to perform a Redemption, on an automobile, for example, due to financial constraints.
An individual person may usually file Chapter 7 Bankruptcy. The individual may also generally file with his or her spouse. A Corporation is generally eligible to file Chapter 7 Bankruptcy. There is no limit to the amount of Debt one may have, to file Chapter 7 Bankruptcy.
An individual may not be eligible to file Chapter 7 Bankruptcy if his monthly projected income significantly exceeds the median income for the household in which he resides. For example, in 2016, the median income, as applied by the Bankruptcy Courts, for a one person household is approximately $40,000 per year. If a single Debtor who makes significantly more than $40,000 per year files a Chapter 7 Bankruptcy, his filing would likely invite an inquiry by the United States Trustee Office, as to that persons eligibility to file Chapter 7 Bankruptcy.
After a Debtor files Chapter 7 Bankruptcy, he or she is assigned a Bankruptcy Trustee. A Bankruptcy Trustee is an official working under the direction and supervision of the United States Trustee, and upwards in the hierarchy, the Department of Justice, and the President of United States. The Bankruptcy Trustee is essentially one of the arms of the Executive Branch of government.
The Bankruptcy Trustee is mandated to conduct a Creditors Hearing or 341 Hearing, whereby the Debtor in the Chapter 7 Bankruptcy appears, and is subject to questions about his or her Debts, Assets, Income, and other considerations. If the Bankruptcy Trustee in a Chapter 7 Bankruptcy encounters a Debtor who has Assets that are subject to seizure or liquidation pursuant to the Bankruptcy Laws, the Bankruptcy Trustee may sell such Assets in order to pay a significant distribution of monies to the Debtor’s various Creditors.
Chapter 7 Bankruptcy, and Bankruptcy in general, has become more complicated and difficult over the past two decades. Revisions to the Bankruptcy Act in 2005 added to the difficulty of individual Debtors who seek the protection of the Bankruptcy Laws. Any person contemplating the filing of a Chapter 7 Bankruptcy, or any other form of Bankruptcy, would be wise to gather sufficient evidence and knowledge of what will ensue if he or she files Bankruptcy. Generally, it is advisable that anyone filing Bankruptcy seek a competent and experienced Bankruptcy Attorney to represent him or her.
