Chapter 7 of Title 11 U.S. Code is the bankruptcy code that governs the process of liquidation under the bankruptcy laws of the United States. This is in contrast to bankruptcy under Chapter 11 and Chapter 13, which govern the process of reorganization of a debtor. Chapter 7 bankruptcy is the most common form of bankruptcy in the US.

For businesses

When a financially troubled business is unable to pay creditors, the business may file (or be compelled by creditors to file) for bankruptcy in a federal court under Chapter 7, which means that the business ceases operations unless those operations are continued by the Chapter 7 trustee. In a Chapter 7 bankruptcy, the trustee is appointed almost immediately, with broad powers to examine the finances of the business in bankruptcy; generally, the trustee sells the assets and distributes the money to the creditors.

The investors who took the least amount of risk prior to the bankruptcy are generally paid first. For example, secured creditors will have taken less risk, because the credit that they will have extended is usually backed by collateral, such as assets of the debtor company. Fully secured creditors—that is, creditors,

such as collateralized bondholders and mortgage lenders, for whom the value of collateral equals or exceeds the amount of debt outstanding—have a legally enforceable right to the collateral securing their loans or to the equivalent value, a right that generally cannot be defeated by bankruptcy.

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge, whereas an individual may (see ). Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.

For individuals

Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation). Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances. The amendments effectively subject most debtors who have an income, as calculated by the Code, above the debtor's state census median income to a 60-month disposable income based test. This test is referred to as the "means test". The means test provides for a finding of abuse if the debtor's disposable monthly income is higher than a specified floor amount or portion of their debts. If a presumption of abuse is found under the means test, it may only be rebutted in the case of "special circumstances." Debtors whose income is below the state's median income are not subject to the means test.

Notably, the Code-calculated income is based on the prior six months and may be higher or lower than the debtor's actual current income at the time of filing for bankruptcy. This has led some commentators to refer to the bankruptcy code's "current monthly income" as "presumed income". If the debtor's debt is not primarily consumer debt, then the means test is inapplicable. The inapplicability to non-consumer debt allows business debtors to "abuse" credit without repercussion unless the court finds "cause."

"Special circumstances" does not confer judicial discretion; rather, it gives a debtor an opportunity to adjust income by documenting additional expenses or loss of income in situations caused by a medical condition or being called or order to active military service. However, the assumption of abuse is only rebutted where the additional expenses or adjustments for loss of income are significant enough to change the outcome of the means test. Otherwise, abuse is still presumed despite the "special circumstances."

Credit counseling

Another major change to the law enacted by BAPCPA deals with eligibility. §109(h) provides that a debtor will no longer be eligible to file under either Chapter 7 or Chapter 13 unless within 180 days prior to filing, the debtor received an "individual or group briefing" from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator. The financial management program is experimental and the effectiveness of the program is to be studied for 18 months.

Applicability of exemptions

BAPCPA attempted to eliminate the perceived "forum shopping" by changing the rules on claiming exemptions. Under BAPCPA, a debtor who has moved from one state to another within two years of filing (730 days) the bankruptcy case must use exemptions from the place of the debtor's domicile for the majority of the 180-day period preceding the two years (730 days) before the filing §522(b)(3). If the new residency requirement would render the debtor ineligible for any exemption, then the debtor can choose the federal exemptions.

BAPCPA also "capped" the amount of a homestead exemption that a debtor can claim in bankruptcy, despite state exemption statutes. Also, there is a "cap" placed upon the homestead exemption in situations where the debtor, within 1,215 days (about 3 years and 4 months) preceding the bankruptcy case, added value to a homestead. The provision provides that "any value in excess of $125,000" added to a homestead can not be exempted. The only exception is if the value was transferred from another homestead within the same state or if the homestead is the principal residence of a family farmer (§522(p)). The stay also would not apply in a situation where the eviction is based on "endangerment" of the rented property or "illegal use of controlled substances" on the property, §362(b)(23). The new notice provisions require the debtor to give notice of the bankruptcy to the creditor at an "address filed by the creditor with the court" or "at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case".

References

Further reading

  • United States Bankruptcy Code via usbankruptcycode.org