Function

• When a petition is filed for a Chapter 7 bankruptcy, an impartial trustee is appointed by the bankruptcy court to administer the case. The trustee will hold a meeting of creditors between 20 and 40 days after the filing of the petition. The meeting gives the creditors the opportunity to question the debtor under oath. The trustee will report to the court within the following 10 days with his determination as to whether the case is an abuse of Chapter 7 or if it should continue. One method of determining the viability of a case and the eligibility of the filer is the means test.
  
  

Eligibility

• Debtors with regular income may be subject to the means test. This is a comparison of the debtor's monthly income with the state's median income. After deducting necessary expenses, such as food, rent or mortgage, from the debtor's income, the remaining income is considered. If the remaining income is less than $100 per month, the debtor may pursue a Chapter 7. If the remaining income is between $100 and $166, the court will consider if the disposable income is sufficient to resolve unsecured debts and decide if the debtor may file under Chapter 7 or under Chapter 13, which allows debtors to create a repayment plan. If the income is greater than $166, the debtor must file under Chapter 13.
  
  

Features

• The debtor's non-exempt property will be liquidated while exempt property may stay in his possession. Standards for exempt and non-exempt property are determined by both federal and state laws so variations occur from state to state. Some states allow the debtor to choose which law the debtor will use, but most states insist on the state exemption laws. For instance, federal standards allow debtors to claim $16,500 of their home's equity as exempt but Georgia limits that to $5,000. Those considering filing under Chapter 7 should consult their state's laws.
  
  

Considerations

• Individuals may receive a discharge, or release from their debts, by filing under Chapter 7, but this is not available to partnerships or corporations. Discharges are not absolute; certain types of debts can not be discharged including those arising from alimony or child support and certain types of taxes or criminal restitution orders.
  
  

Effects

• Creditors are paid according to the amount of risk attached to their debt -- the creditors who take the least risk are repaid first. The first to receive repayment are those with secured debt, or debt backed by collateral. After the secured debt is resolved, the next to receive the proceeds of liquidation are holders of unsecured debt such as bondholders or suppliers. The last to receive repayment are stockholders. As owners of the company, they have taken the least amount of risk and have the smallest chance of collecting in the event of bankruptcy.