Our Team of Bankruptcy Attorneys File Chapter 7 Bankruptcies for Clients Across the State of Alabama; including Houston, Henry, Geneva, and Surrounding Counties
Chapter 7 bankruptcy is the process of liquidation of the debtor’s assets, which means the bankruptcy trustee gathers up all the debtor’s property (subject to certain exceptions and exemptions), and sells them in order to distribute the proceeds pro rata to the debtor’s creditors. All unsecured debts are discharged, which means that once the bankruptcy proceedings are finalized, the debtor no longer owes on these debts. Typically, the discharge takes place four months after the debtor files the petition with the bankruptcy court clerk. To qualify for Chapter 7, a debtor must pass the “means test.” The means test is a screening mechanism – it keeps those debtors out of bankruptcy who most likely could repay their debts through a well-drafted repayment plan under Chapter 13. The test is also designed to prevent abuse of the bankruptcy system, a policy build into the bankruptcy code in recent amendments. However, debtors whose monthly income falls below the state median are not subject to the means test and can proceed to Chapter 7 liquidation.
When a business files for Chapter 7 bankruptcy, it must cease all operations unless a trustee is appointed to oversee such operations. If a company is large enough, entire divisions might be sold off. Ultimately, the trustee sells all the company’s assets (liquidation) and divides the proceeds to creditors (distribution). An important thing to not is that corporations and partnerships do not have all their debts discharged, as is the case in individual bankruptcies. Instead, the business is dissolved. Depending on the way the company is set up, the owner or equity partners might still be on the hook for outstanding debt.
When an individual files for Chapter 7 bankruptcy, certain property is exempted from the liquidation process. Alabama has exemptions for numerous classifications of property, including homesteads, personal property (such as jewelry, clothing, etc.), wages, pensions, public benefits, and any other applicable federal exemptions. Non-exempt assets (such as second homes, personal property above applicable dollar limits) are liquidated for distribution to unsecured creditors. Most unsecured debts are discharged by the bankruptcy proceeding, although there are a few types that may not be discharged, including child support, income taxes less than 3 years old, property taxes, many student loans, and criminal fines and restitution imposed by a court. A Chapter 7 bankruptcy stays on an individual’s credit report for 10 years after filing. This can make future credit terms less favorable, or even restrict the availability of credit entirely in some circumstances. However, the benefit of such a “fresh start” often outweighs the temporarily restricted availability of credit.