Chapter 7
Chapter 7 bankruptcy is a “liquidation” bankruptcy. When an individual (or a married couple) files for Chapter 7 bankruptcy most of their unsecured debt will be discharged (eliminated). However, if the debtor (the person filing bankruptcy) owns non-exempt property or assets, the property or assets could be sold, and the proceeds used to pay (or partially pay) the debtor’s creditors.
If you are reading this and think, that does not sound good, do not worry. Most Chapter 7 debtors have little or zero non-exempt assets. Arizona law defines what property you may keep in a Chapter 7 bankruptcy case (see A.R.S. 33-1101 through 33-1133 https://www.azleg.gov/arsDetail/?title=33). It is important to have a lawyer who is knowledgeable about the exemption laws to make sure that you get the benefit of your Chapter 7 discharge while keeping as much of your property as possible.
A Chapter 7 bankruptcy will not discharge secured debt. Secured debt is a debt that is secured by the lender having an interest in an asset. The most frequent forms of secured debt are vehicle loans and home mortgages. If you want to keep your vehicle and/or house after your Chapter 7 bankruptcy case is filed, you will have to keep making those payments.
Unsecured debt is debt like credit cards, most personal loans, etc. Most unsecured debt is legally eliminated, or discharged in a Chapter 7 case. However, some unsecured debt is not. Child support arrears cannot be discharged in bankruptcy. Student loans usually cannot be discharged in bankruptcy, although under the right circumstances it is possible to discharge student loans. An experienced bankruptcy lawyer can make sure you under stand what debt will, and will not be, discharged in your Chapter 7 bankruptcy case.
Many people are aware that there is a “test” for whether a debtor qualifies for Chapter 7 bankruptcy. That test is called the Means Test, which is found in 11 U.S.C. 707 https://www.law.cornell.edu/uscode/text/11/707#:~:text=This%20section%20authorizes%20the%20court,%5B%C2%A7%201911%20et%20seq.%5D.
The Means test is a two part test. The first part of the test compares the average monthly gross income of the debtor (or debtors if a married couple is filing together) for the last six months to the median income for individuals with the same size household in the debtor’s state. For example, the current median income for an Arizona household of 4 is $86,950 https://www.justice.gov/ust/eo/bapcpa/20200501/bci_data/median_income_table.htm. If the debtor(s) current monthly income (the six month average) is less than the median, they qualify for Chapter 7 bankruptcy.
If the debtor does not qualify under the first part of the Means Test, they may still qualify under the second part of the test. For the second part of the Means Test, allowable expenses are subtracted from the debtor’s current monthly income. For allowable expenses, some expense are what the debtor actually pays for that category of expense (like a mortgage or a vehicle payment), and others are based on allowable averages provided by the IRS (like for rent, food, utilities, etc.). When all the allowable expenses are subtracted from a debtor’s current monthly income, whatever remains is classified as “disposable income”. If a debtor has more than a minimal amount of disposable income, they are not eligible to file a Chapter 7 bankruptcy.