Your Chapter 7 trustee may pay your priority debts—in full or in part—through the proceeds of the sale of your unprotected, not exempt assets.

Our last blog post was about what happens to priority debts in a no-asset Chapter 7 case. Most consumer “straight bankruptcy” Chapter 7 cases are no-asset ones. This means that the bankruptcy trustee does not take anything from the debtor because everything is protected, “exempt.” The trustee does not take and liquidate any assets, and has nothing—no assets—to distribute to the debtor’s creditors. That’s a no-asset Chapter 7 case.

In a Chapter 7 case all or most “general unsecured debts” get “discharged”—legally written off. That’s one of the big benefits of Chapter 7.

Last time we said there are two kinds of unsecured debts, “priority” and “general unsecured”:

Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.

The Means Test

To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.” That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”

What does the completion of a successful Chapter 7 “straight bankruptcy” case look like? What happens to your debts?

A Sample Chapter 7 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. Today we’re doing the same thing with a Chapter 7 case.

With smart timing you can take advantage of the unusual way that your “income” is calculated for the Chapter 7 means test.

Passing the Means Test

We introduced the means test a couple of weeks ago and said that many people pass this test simply by having low enough income. Their income is no larger than the published median income for their state and family size.

We also explained that income for this purpose has an unusual definition. It includes: