Chapter 7 bankruptcy was formerly called the "default" choice because it was available to nearly every business or individual in financial distress. The 2005 Act reduces the availability of Chapter 7 to individual Colorado consumer debtors through "means testing", which involves a complex income and expense analysis for single individuals with annual income exceeding $92,979 and four-person family debtors with annual income exceeding $75,775 (October 2007 amounts).  The other Chapters of relief under the Bankruptcy Code also contain eligibility restrictions. For example, Chapter 13 is unavailable to corporations, LLCs, and individuals whose secured and/or unsecured debt exceeds certain amounts. Chapter 11, as a practical matter, is unavailable to business entities or individuals without working capital, profitable operations, high personal income and liquid five-figure Initial Attorney Retainer funding capability.

The purpose of Chapter 7 is to liquidate the debtor's nonexempt (i.e., unprotected and unencumbered) assets for the benefit of creditors. When a Chapter 7 case is filed, a trustee is appointed to administer a bankruptcy estate to be created out of the debtor's nonexempt assets. From assets liquidated by the trustee, the estate pays the trustee's compensation and expenses "off the top" and distributes the remaining proceeds according to priorities set forth in the Bankruptcy Code. For trade creditors and ordinary consumer creditors, this generally means pro-rata payment of pennies on the dollar.

A few days after a Chapter 7 case is filed, the Court Clerk mails a notice to affected creditors setting a Meeting of Creditors in 25-40 days. The debtor appears at the Meeting and answers questions posed by the Trustee and occasionally by creditors (if any) who elect to attend. The creditors and the U. S. Trustee have between 10 and 60 days after the Meeting to object to:

• the discharge of individual debts,
• the debtor receiving a discharge in general, or
• the debtor's presumptive or alleged abuse of bankruptcy law because (based on the Means Test) a five-year Chapter 13 monthly repayment case was not filed instead of the Chapter 7 case.

In the vast majority of Chapter 7 cases, the trustee files a "no asset" report, the 60 days passes, no objections are filed, and the debtor shortly thereafter receives a Discharge. In about five percent of Chapter 7 cases, known as "asset cases", the trustee decides to administer assets by creating a bankruptcy estate and making a distribution to creditors.

Generally consumer debtors redeem their nonexempt property by paying the trustee the agreed (negotiated) value of their unprotected asset(s). The redemption payment can be lump-sum out of exempt property or over a period of months out of post-filing wage income. Whatever property isn't redeemed is sold by the trustee at auction. The debtor is paid the amount of any applicable exemption, and the remainder is deposited into the bankruptcy estate for future payment of trustee compensation and distribution to creditors.

Continue reading through this site, including checking out some of the links on the Bankruptcy Information Center and Web Resources pages to answer more of your questions about Chapter 7 bankruptcies. When you are ready, fill out the Business or Consumer Debtor Analysis Form and submit it. The firm will thereafter contact you to discuss what happens next.