Taxes owed by the debtor as a transferee of assets from another person who is liable for a tax, if the tax claim against the transferor would have received priority in a chapter 11 case commenced by the transferor within 1 year before the date of the petition filed by . The creditor priority rules do apply to all types of bankruptcies, however, the order of priority varies according to the type of bankruptcy. In Chapter 7, where non-exempt property is sold, the creditors are paid from the profits by priority. Chapter 7 Bankruptcy. In a Chapter 7 case, the trustee uses any available funds to pay off priority debt first. The trustee's payment will decrease the debt you’ll be left owing after your case is over. If the available funds don’t fully satisfy the priority creditors, you’ll be responsible for the remaining balance (in most instances.
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Such debtors should consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code. In addition, individual debtors who have regular income may seek an adjustment of debts under chapter 13 of the Bankruptcy Code.
A particular advantage of chapter 13 is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to "catch up" past due payments through a payment plan. Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of chapter 7. If the debtor's "current monthly income" 1 is more than the state median, the Bankruptcy Code requires application of a "means test" to determine whether the chapter 7 filing is presumptively abusive.
Unless the debtor overcomes the presumption of abuse, the case will generally be converted to chapter 13 with the debtor's consent or will be dismissed. Debtors should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing. A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims creditors in accordance with the provisions of the Bankruptcy Code.
Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain "exempt" property; but a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property. To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity.
Subject to the means test described above for individual debtors, relief is available under chapter 7 irrespective of the amount of the debtor's debts or whether the debtor is solvent or insolvent. An individual cannot file under chapter 7 or any other chapter, however, if during the preceding days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
In addition, no individual may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.
There are exceptions in emergency situations or where the U. If a debt management plan is developed during required credit counseling, it must be filed with the court. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a "fresh start.
In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property. A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets.
Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case including tax returns for prior years that had not been filed when the case began. Individual debtors with primarily consumer debts have additional document filing requirements.
They must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions.
Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors. The Official Forms may be purchased at legal stationery stores or download. They are not available from the court. Normally, the fees must be paid to the clerk of the court upon filing. With the court's permission, however, individual debtors may pay in installments. The number of installments is limited to four, and the debtor must make the final installment no later than days after filing the petition.
For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than days after filing the petition. If a joint petition is filed, only one filing fee, one administrative fee, and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must provide the following information:.
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing.
In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee and creditors can evaluate the household's financial position. Among the schedules that an individual debtor will file is a schedule of "exempt" property. The Bankruptcy Code allows an individual debtor 4 to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor's home state.
Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions. In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult an attorney to determine the exemptions available in the state where the debtor lives.
Filing a petition under chapter 7 "automatically stays" stops most collection actions against the debtor or the debtor's property. But filing the petition does not stay certain types of actions listed under 11 U. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments.
The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. Between 21 and 40 days after the petition is filed, the case trustee described below will hold a meeting of creditors.
If the U. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions.
The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors' meeting and answer questions. Within 10 days of the creditors' meeting, the U. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests.
The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge, and the effect of reaffirming a debt.
Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors. In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a chapter 7 case to a case under chapter 11, 12, or 13 6 as long as the debtor is eligible to be a debtor under the new chapter.
However, a condition of the debtor's voluntary conversion is that the case has not previously been converted to chapter 7 from another chapter. Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another. When a chapter 7 petition is filed, the U. 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. Courts website. Chapter 7 documents include a voluntary petition for relief, schedules of assets and liabilities, declarations regarding debtor education, and a statement of financial affairs.
They include listings of all of your property, debts, creditors, income, expenses, and property transfers. You or your attorney will file everything with the clerk of your local bankruptcy court and pay a filing fee. Visit the federal court locator page , choose "Bankruptcy" under "Court Type" and add your location in the bottom box to find your local court.
Almost every individual debtor who wants to file a Chapter 7 case must participate in a session with an approved credit counselor before the case can be filed. The session can be attended in person, online, or by telephone. The U. Department of Justice provides an interactive search tool on its website to help you find approved credit counselors in your area. The rationale behind this requirement is that some potential debtors don't know that they have other options.
A credit counselor might be able to suggest alternatives that will keep you out of bankruptcy. Most debtors will also have to take a course in financial management before they can receive a discharge.
This class is often given by the same group that you used for credit counseling. Debtors must also successfully pass the means test calculation, another document that must be completed when you file for bankruptcy. This test was added to the Bankruptcy Code in , and it calculates whether you're able to afford or have the "means" to pay at least a meaningful portion of your debts.
The means test compares your household income with the median income for your state, and it compares your expenses to IRS Local Standards—what people typically pay for similar expenses in your area. You can only file Chapter 7 bankruptcy under very specialized exceptions if you fail the means test.
Your alternative would be to file a Chapter 13 repayment plan case. The means test calculation requires completing and submitting Official Form A-2 with the bankruptcy court.
The court will issue notice of a debtor's "meeting of creditors," often referred to as the " meeting" after the bankruptcy code that provides for it, when a Chapter 7 bankruptcy is filed.
This notice is also sent to all the creditors that are listed in the bankruptcy documents. As the name suggests, any creditor can appear at this meeting and ask the debtor questions about their bankruptcy and their finances. In reality, however, the only creditors who typically might appear are auto lenders to ask what you intend to do about your car payments. Bankruptcy court judges aren't permitted to attend the meeting of creditors. This rule is intended to ensure that they remain impartial.
The bankruptcy trustee will ask the debtor various questions at this meeting as well, such as whether all the information contained within the bankruptcy documents is true and correct.
They'll determine that the debtor understands all the ramifications of filing for bankruptcy and receiving a discharge. The bankruptcy court will automatically grant a discharge if the trustee and the creditors don't object on supportable grounds. The last day to file a complaint objecting to a debtor's discharge is 60 days after the meeting of creditors, or after the date of the first meeting if it's continued and carried over to another date or dates.
The discharge is usually entered several days later if no complaint is filed. Some debts, including certain taxes and child or spousal support obligations, aren't dischargeable.
They'll survive the Chapter 7 proceedings and you'll still owe them. A creditor can also still collect on a discharged debt from a co-debtor if someone signed on the loan or debt with you and didn't file for bankruptcy. United States Courts. National Consumer Law Center. United States Department of Justice. What Is Bankruptcy.