Chapter 7 Bankruptcy
There are numerous chapters of the Bankruptcy Code under which an individual can file a petition to initiate a bankruptcy case: Chapter 7 and Chapter 13 are the most common.
Filing under one particular chapter as opposed to another accomplishes a variety of objectives. To most, chapter 7 is the more preferable chapter under which to file because it is generally shorter in duration and less expensive than a chapter 13 filing. The attorney’s fee is usually smaller and it is a type of case where it is less likely that the debtor will have to pay funds to a trustee for distribution to creditors.
Nevertheless, a chapter 7 case, which is identified by the Bankruptcy Code as a liquidation-type bankruptcy case, is suitable for a debtor only if:
(a) the filing will not compel the debtor to lose property which he or she desires to keep;
(b) the debtor’s household income is less than the published state median income for the debtor’s household’s size or is greater than the published state median income for the debtor’s household’s size but, the debtor has significant secured debts (e.g., mortgage and car loans), priority unsecured debts (e.g., certain taxes and domestic support obligations) or unreimbursed medical expenses;
(c) the debtor’s actual current monthly income is not significantly more than the debtor’s projected monthly expenses;
(d) the debtor is current with the payment of his or her secured debt obligations; and
(e) the debtor has no debts that are non-dischargeable (e.g., employer withholding tax obligations, current income tax obligations, or domestic support arrearages).
While a chapter 7 case is a liquidation-type bankruptcy case, a debtor usually will not lose any property by filing a petition under chapter 7 if the debtor has no non-exempt equity in his or her property.
For example, if a debtor owns a residence that is completely encumbered by a mortgage whose balance is equal to, or exceeds, the fair market value of the residence, then the debtor will not be in jeopardy of losing the property by filing a chapter 7 case, unless he or she fails to maintain his or her mortgage payments.
If the same debtor’s residence were valued at $100,000.00 and was encumbered by an $80,000.00 mortgage, the debtor will still not be in jeopardy of losing the property because the Bankruptcy Code affords a debtor an exemption of $21,625.00 of the equity in his or her home. Thus, if the trustee sought to liquidate the home, the net sales proceeds would be distributed to the mortgage holder first and then the next $21,625.00 to the debtor, leaving nothing for unsecured creditors. The trustee therefore will not seek to liquidate the property, as one of the trustee’s primary duties is to protect the interests of unsecured creditors, not secured creditors of the debtor (for the most part).