Chapter 7 is the “liquidation” bankruptcy. What that means is that some assets you have equity in can be “liquidated” or sold by the Chapter 7 Trustee to get money for creditors. The Chapter 7 Trustee will not take the clothes off your back or go to your house to inventory everything you own. The bankruptcy code gives you certain “exemptions” that allow you to keep many of the things you own where the value of it is below a certain dollar amount. This allows you to get a “fresh start”:.
There are primarily two types of debts in a bankruptcy, secured and unsecured debts. If you do not have equity in an item of property you owe money on to a creditor and the property is collateral for creditor, the debt is a secured debt and it typically is between you and your creditor to work out an arrangement on it. There are three options if the debt is a secured debt (and you do not have equity in the collateral) in Chapter 7:
- You may be able to keep the property if you maintain your payments and take other steps required by the bankruptcy code to “adequately protect” the collateral. This is usually done through an agreement with your creditor. Itt is the creditor’s option on whether they will agree to it and allow you to keep the item. However, creditors agree to this option typically 99% of the time if you are current in your payments since their only other choice would be to sell it at an auction. Most creditors are not in the business of selling property and do not make any money when they have to sell property at an auction. The agreement is called a “reaffirmation” and it requires that you sign a paper agreeing to maintain the agreed on payments –if you ever fail to make the payments or provide the “adequate protection”, the creditor can sue you or repossess the collateral, just as if you had not filed bankruptcy on that item. Creditors typically require that you be “current” on payments prior to agreeing to reaffirmation. Please note that if you wish to keep an item that is a secured debt, you must keep up on your payments on that debt before, during, and after the bankruptcy is completed. If you fall behind and then want to try to keep it, you may not be able to do so. It will cost you more in finance charges and attorney fees if you later on attempt to catch up. The Court may hold a hearing on the Reaffirmation Agreement to ensure you can afford the payments.
- You can allow the property to be returned to the creditor and be relieved of payments on the debt. The debt will then be considered an unsecured debt and will be discharged in your bankruptcy with all other unsecured debts.
- If you can come up with cash, you can petition the Court to allow you to be discharged of the obligation. If you can pay the balance of the value debt in cash, this is called “redemption”. The remainder of the money owed will be considered an unsecured debt.
Unsecured debts are typically “discharged” in Chapter 7 bankruptcy. A “discharge” means that the creditor cannot force you to pay debt in any legal proceeding or otherwise. You can pay the creditor if you wish, but they cannot force you to pay them. Certain types of debts may not be dischargeable in either Chapter 7 or 13 bankruptcy. The most common ones are 1) taxes or monies owed a government entity with certain exceptions, 2) student loans with certain exceptions 3) domestic support, 4) debt incurred by fraud, such as lying on a credit application, 5) debts incurred as a result of willful and malicious injury, such as assaulting someone or injuring someone as a result of drunk driving, 6) fines or restitution awards, 7) credit card or other debts incurred within 60 days or 90 days prior to the filing of the bankruptcy or subject to abnormal use within a year or so of bankruptcy.
A secured debt stays with the collateral; this means that if you owe money to a creditor and they have a lien on your property and that lien is not dealt, that lien will continue until it is released by the creditor. The same holds true for the taxes, student loans and other government debts; in order to discharge them in bankruptcy in a Chapter 7, you must file an “Adversary Proceeding” to do so. Other debts of the above type can be discharged unless the creditor files an “Adversary Proceeding”. Otherwise, they remain. You also must take additional steps to deal with them in a Chapter 13.
Any item sold or large amounts of money received within one year prior to, and creditors paid within 120 days of the bankruptcy (1 year for family members) are carefully scrutinized, particularly in Chapter 7 and it is best to make no changes in your finances or assets and liabilities after you’ve consulted counsel with talking to your retained counsel.
Bankruptcy normally does not trigger forgiveness of debt that is taxable like settlements with creditors may with the IRS since it is a federally protected law and the debtor is presumed to be insolvent under the IRS code.