Chapter 7 Bankruptcy – Petition For Discharge Of Unsecured Claims

February 27, 2010 by  Filed under: Bankruptcy 

A Chapter 7 bankruptcy petition is a liquidation (sale/disposition) of a debtor’s nonexempt property to generate cash for creditors in exchange for a discharge of all dischargeable debts.

A debtor has a “no asset” estate if the scheduled or recoverable assets, less encumbrances (balance of loan(s), judgment lien(s), etc.) and exemptions, equals no funds for creditors.

Such a debtor will be discharged from dischargeable debts, after filing of a “no asset” report by the trustee and issuance of a discharge order by the Bankruptcy Court. The case is subsequently closed as a matter of ministerial act.

Eligibility for Chapter 7 Petition:

Unlike a Chapter 13 petition which has limits on the amounts of unsecured and secured claims for eligibility, a Chapter 7 petition has no such limitations. But a Chapter 7 individual debtor must have a domicile (residence), a place of business, or property in the United States, under 11 USC § 109(a).

Moreover, U.S. citizenship and financial distress are not required for Chapter 7 eligibility. But a Chapter 7 debtor is not eligible to receive another discharge in a Chapter 7 bankruptcy case during the eight-year period after the filing date of the prior Chapter 7 petition, under 11 USC § 727(a)(8).

An individual debtor is required to receive credit counseling briefing from an approved credit counseling agency during the 180-day period before filing the Chapter 7 petition. The briefing may be delayed for 30-days, (and even up to 45-days, if approved by the Bankruptcy Court), after the Chapter 7 filing date, if there are “exigent circumstances” that merit waiver of the briefing and the debtor was unable to obtain a briefing within 5 days from request.

It has been held that emergency filing to stop foreclosure sale is not “exigent circumstance,” excusing compliance with the credit counseling requirement. After filing a Chapter 7 petition, the debtor is required to attend a financial management course, after the section 341(a) meeting of creditors.

The filing fee for a Chapter 7 petition is $299.00, payable to the U.S. Bankruptcy Court.

Means Test To Determine Abuse:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) instituted the “means testing” for individual Chapter 7 debtors to determine dismissal for abuse, in 11 USC § 707(b)(2). It is also used to determine “disposable income” in Chapter 13 petition for repayment to creditors and the length of the period of the plan.

The basic “means test” formula triggers the presumption of abuse in a Chapter 7 individual debtor whose debts are primarily consumer debts, if the debtor’s current monthly income, reduced by allowable monthly expenses (IRS’ National and Standards: http://www.irs.gov ) and multiplied by 60, is not less than the lesser of: (a) the greater of (1) 25 percent of the debtor’s nonpriority unsecured claims in the case; or (2) $6,000.00; or (b) $10,000.00.

If the means test applies and the presumption of abuse arises, the Bankruptcy Court may dismiss or convert the Chapter 13, unless the debtor can rebut the presumption by establishing special circumstances, such as call to Armed Forces active duty or serious medical conditions, justifying additional expenses or adjustments of current monthly income.

But if the debtor’s and spouse’s current monthly income multiplied by 12 as of the Chapter 7 filing date is equal to or less than the state median family income ($46,814.00 for 1 earner, $61, 742.00 for 2 people, $66,611.00 for 3 people, $76,931 for 4 or more people in California) based on the debtor’s household size, then the means test does not apply. And there is no standing to bring a motion to dismiss/convert, under 11 USC § 707(b)(2).

California Exemption Law:

With the California Legislature opting out of the federal exemptions in 11 USC § 522(d), individual debtors residing in California may choose between the so-called “703-series” or the “704-series” exemptions, the amounts of which are adjusted effective April 1 every three (3) years by the Judicial Council.

Some of the amounts of exemptions under the “703-series” are: real or personal property homestead – $20,725.00, motor vehicle – $3,300.00, clothing/household goods/appliances – $525.00 per item, jewelry – $1,350.00, personal injury recovery – $20,725.00, tools/books of trade – $2,075.00, and unmatured life insurance – $11,075.00.

And some of the amounts of exemptions under the “704-series” are: real or personal property homestead – $50,000.00, if single, $75,000.00 for family, $150,000.00 if 65 or older, motor vehicle – $2,500.00, jewelry – $6,750.00, personal injury recovery – amount needed for support, tools/materials – $6,750.00, and matured life insurance – $10,775.00.

The series most advantageous to the debtor depending on his or her circumstances should be used in the Chapter 7 petition.

Automatic Stay And Relief Therefrom:

The filing of a Chapter 7 petition results in stopping all collection efforts, all harassment, and all repossession and foreclosure actions by creditors against the debtor and the debtor’s property, until: (1) the stay is lifted by a Bankruptcy Court order, (2) the stay terminates or is ineffective, and (3) the case is closed or dismissed.

Creditors may seek relief form automatic stay to: (1) foreclosure or real estate collateral/ security interest, (2) repossess personal property as security for delinquent loan(s), or (3) continue litigation in another case stayed by the filing of the Chapter 7 petition.

Common grounds for relief from automatic stay are: lack of adequate protection of an interest in property, debtor has no equity in the property, or the property is not necessary for an effective reorganization.

Thus, Chapter 7 petition cannot prevent the foreclosure of the principal residence of the debtor, which is the collateral/security interest for a purchase money loan, as stated in the recorded deed of trust.

Discharged And Undischarged Debts:

A Chapter 7 discharge order by the Bankruptcy Court eliminates a debtor’s legal obligation to pay a debt that is discharged.

Some debts are, however, not discharged in a Chapter 7 bankruptcy case, to wit: most taxes, domestic support obligations, most student loans, most fines, penalties, or criminal restitution obligations, debts for personal injuries, death caused by driving under the influence, debts not properly listed in the schedules, debts decided as not discharged by the Bankruptcy Court, debts that are properly reaffirmed, and debts owed to certain pension, profit sharing, other retirement plans.

(The Author, Roman P. Mosqueda, Esq., had practiced bankruptcy law for over 15 years, representing debtors, creditors, and trustees.)

BY: Roman P. Mosqueda, Esq.

Atty Roman P. Mosqueda is a graduate from Michigan Law School with both an SJD and LLM. Visit http://www.MosquedaLaw.com for more information about his offices located all over Southern California.

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