Chapter 7 bankruptcy is the most common type of bankruptcy filing, but very few people understand how this process works. If you're considering bankruptcy for debt relief, it's important to understand your options.
What Is a Chapter 7 Bankruptcy?
Chapter 7 cases are commonly referred to as straight bankruptcy or liquidation cases and may be filed by an individual, corporation, or a partnership. A Chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under Chapter 7 of the Bankruptcy Code. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. Sometimes, this type of filing is referred to as a liquidation bankruptcy.
A person who files a Chapter 7 case is called a debtor. The debtor must pass a means test to determine if he or she lacks the resources to pay the existing debts. This involves filing a document called Statement of Current Monthly Income and Means Test Calculation that shows the person’s current monthly income and the current monthly expenses that the person is allowed to claim. From this document, a person’s current monthly disposable income is calculated in relation to debt payments. If the means testing fails, the case will be dismissed or the person can choose to file for Chapter 13 bankruptcy.
Exemptions and Non-Exemptions When Filing Chapter 7 Bankruptcy in Nebraska
In a Chapter 7 case, the debtor must turn his or her nonexempt property, if any exists. Exemptions are given for a number of assets, including a person's home, vehicle, household furnishings, clothing, and tools of the trade. Each exemption has a dollar value attached, but the exemptions can be doubled when a married couple files together.
When the non-exempt property is turned over, the trustee then converts the property to cash and pays the debtor’s creditors. Priority is given to:
- Domestic support obligations
- Administrative expenses
- Claims for wages, salaries, and contributions to employee benefit plans
- Claims for the refund of certain deposits
- Tax claims
In return, the debtor receives a Chapter 7 discharge of the remaining debt if he or she pays the filing fee, is eligible for the discharge, and obeys the orders and rules of the bankruptcy court.