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Chapter 7

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Chapter 13

Bankruptcy: Chapter 7

Chapter 7 is known as the liquidation section of the Bankruptcy Code.  Chapter 7 cases can be commenced either voluntarily by a debtor or involuntarily by a debtor’s creditors (so long as certain other facts are present).  In a Chapter 7 case, the debtor’s goal is to obtain a “discharge.”  Known as the “fresh start,” the discharge, with certain exceptions, relieves the debtor of all personal liability on pre-Bankruptcy debts.

Creditors in Chapter 7 cases are entitled to receive a pro-rata distribution of a debtor’s “non-exempt” assets in accordance with priorities established under the Bankruptcy Code.  “Exempt” assets are not included in distributions to creditors and are comprised of basic necessities like clothing and other personal belongings essential to start over.  There are a number of federal exemptions however; the amounts and types of exemptions vary from state to state. 

Every chapter 7 debtor must satisfy the “means test,” which considers your income and certain state-defined guidelines among things.  The means test is a sophisticated formula for determining whether or not the filing of the Bankruptcy petition is presumed to be an abuse of the Bankruptcy process.  If the means test results suggest that the Bankruptcy filing is to be an abuse of the Bankruptcy process, then unless the debtor can demonstrate special circumstances, the debtor must file a Chapter 13 in order to obtain Bankruptcy relief.