What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a legal process under which a person whose bills and debts are greater than his or her income surrenders non-exempt property in exchange for eliminating the obligation to pay his or her debts.

In a chapter 7 bankruptcy, the consumer files a petition asking the court to wipe out (discharge is the technical term) his or her debts.  In addition to the petition, the consumer also files (i) schedules of assets and liabilities; (ii) a schedule of current income and expenditures; (iii) a statement of financial affairs; and (iv) a schedule of executory contracts and unexpired leases.

In order to complete the bankruptcy schedules and forms the debtor must provide the following information:

  • A list of all creditors and the amount and nature of their claims;
  • The source, amount, and frequency of the debtor’s income;
  • A list of all of the debtor’s property; and
  • A detailed list of the debtor’s monthly living expenses (food, clothing, shelter, utilities, taxes, transportation, medicine, etc.).

Married individuals must gather this information for their spouse even if the spouse is not filing for bankruptcy. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the household’s entire financial position can be evaluated.

In order to file a chapter 7 bankruptcy the consumer must first qualify.  Higher-income consumers whose household income is above the state median must complete a ‘‘means test’’. The means test is designed to keep debtors with higher income from filing for Chapter 7 bankruptcy.  If the test reveals that the debtor has a certain amount of discretionary income that could be paid to unsecured creditors, the bankruptcy court may decide that they cannot file a chapter 7 case, unless there are special extenuating circumstances.  Taking the means test doesn’t mean that a debtor must be in poverty in order to file a Chapter 7 bankruptcy. Debtors can earn significant monthly income and still qualify for Chapter 7 bankruptcy if they have a lot of expenses, such as high mortgage and car loan payments and other expenses.

When a chapter 7 petition is filed, an impartial case trustee is assigned to administer the case and liquidate the debtor’s nonexempt assets. If all the debtor’s assets are exempt or subject to valid liens, the trustee will normally file a “no asset” report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases.

Commencement of a bankruptcy case creates an “estate.” The estate technically becomes the temporary legal owner of all the debtor’s property. The Estate includes all legal or equitable interests of the debtor in property as of the date the petition if filed.

In exchange for the discharge, the debtor must surrender all of his or her property to pay off creditors. However, the consumer can keep all property which the law says is ‘‘exempt’’ from the claims of creditors.  The property of most chapter 7 debtors will be entirely exempt.  New York State bankruptcy exemptions include:

  • Between $75,000 and $150,000.00 in equity in your home depending the county in which you live
  • Up to $4,000.00 in equity in your car
  • With certain exceptions, up to $10,000.00 in certain items of personal property
  • The full amount of pensions and public benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance
  • With certain exceptions, cash up to $5,000 if not using Homestead Exemption
  • Divorce awards to the extent reasonably necessary for the support of the debtor and any dependents of the debtor;

If you have questions or concerns about filing for chapter 7 bankruptcy, we urge you to contact The Law Offices of Robert J. Nahoum, P.C. today by calling 845-232-0202.

This Law Offices of Robert J. Nahoum, P.C. is a Debt Relief Agency. We assist individuals to become debt free through Bankruptcy.