Chapter 7 bankruptcy is the simplest form of bankruptcy and is sometimes referred to as “liquidation bankruptcy”. There are certain requirements that you have to meet in order to qualify for Chapter 7, and there are also certain situations where Chapter 7 would not be the best form of bankruptcy for an individual if they owned certain assets that would not be protected. A qualified bankruptcy attorney can discuss your case with you and advise you if you qualify for Chapter 7 or not. If you do qualify, then the attorney would examine your personal situation to determine if Chapter 7 would be in your best interest, or if it would be smarter to file under Chapter 13.
The Law Allows People Who File For Bankruptcy To Exempt Or Protect Certain Property
In a Chapter 7 bankruptcy, you will meet with your attorney to compile a list of all the property you own, and all the debts that you owe to creditors. The law allows people who file for bankruptcy to exempt or protect certain property. The specific property you can protect depends on whether you are required to use the Federal bankruptcy exemptions or State bankruptcy exemptions. There are also differences between Missouri and Kansas exemptions, so an experienced bankruptcy attorney can explain these to you. A knowledgeable bankruptcy attorney will also be able to advise you which set of exemptions you are required to use.
Once Your Bankruptcy Petition Is Filed, A Trustee Is Assigned To Your Case
The trustee’s job is to review your bankruptcy petition and decide if there is any property that is not protected that can be taken and sold to generate money for creditors. In the vast majority of Chapter 7 cases that are filed, we are able to protect all of your property and there is nothing for the trustee to take. These are called “no-asset” bankruptcies because there are no assets that can be sold to generate money for creditors. If the trustee determines that all of your property is protected, then that is generally the end of their duty as trustee. If the trustee determines that there is property that is not protected, the trustee can take that property, sell it, and then divide the proceeds of the sale evenly amongst all of your creditors. In that situation, your creditors might receive a small percentage of what they are owed, but any remaining amount is wiped clean and you no longer owe that debt.
The Entire Chapter 7 Process From The Filing Of The Petition To The Date You Receive Your Discharge Is Generally About 90–120 Days
Once you receive your discharge, your debts, with certain exceptions, are completely wiped clean. You no longer owe the debt to creditors and they cannot even contact you in an attempt to collect on those debts. You truly get a fresh start with your financial future at that point.
Some Examples Of Common Debts That Are Wiped Clean In A Chapter 7 Bankruptcy Are As Follows:
Credit card debts.
Overdrafts on bank accounts.
Any personal loans you may have taken from banks or finance companies.
Any judgments that a creditor may have obtained against you from a lawsuit.
Any unpaid utility bills, cell phone bills, or cable bills.
Any unpaid rent or fees you may owe if you had previously been evicted from a rental unit.
Any amount that is still owed if property was repossessed but the creditor did not get enough money from the sale to pay the loan in full.
However, There Are Certain Debts That Are NOT Wiped Clean In A Chapter 7 Bankruptcy. Those Debts Are As Follows:
- Debts for taxes owed to local, state, or federal agencies that are less
than three (3) years old.
- Debts for money, property, services, or an extension, renewal, or refinancing
of credit, which were obtained fraudulently.
- Domestic Support Obligations, such as child support, spousal support, etc.
- Debts for most government-sponsored or guaranteed student loans.
- Debts arising from a court judgment for death or personal injury caused
by the debtor’s drunk driving or from driving while under the influence of drugs or other substances.
- Debts incurred after a bankruptcy was filed.
Additionally, Secured Debts Are Not Wiped Clean.
A secured debt means a debt that is backed by collateral. The most common examples of this would be mortgages on real estate or an auto loan on your vehicle. When you take out a car loan, you are pledging the car as collateral or protection to the creditor in exchange for the loan. The creditor knows that if you don’t make payments on a secured debt, they can take the property back through either a repossession of a vehicle or foreclosure on a home.
The good news is that even though you cannot simply keep your property and wipe away your mortgage or car loan, you do not have to give up the property. With secured loans, you generally can elect one of four options in order to keep your property.
You Can Enter Into A Reaffirmation Agreement With The Lender
This means that you basically reenter into the same contract that you had with them before you filed for bankruptcy. You keep your vehicle or home and keep making the regular payments that you were making before you filed for bankruptcy. Once the reaffirmation agreement is completed, you know you will be locked back in to the same contract as before. A knowledgeable attorney will assist you with the reaffirmation process.
You Can Always Surrender The Property And Walk Away From The Contract If You Feel That You Are Stuck In A Bad Loan.
Sometimes, people who file bankruptcy are stuck in a bad auto loan that carries an interest rate of 20 percent or more. The vehicle may be worth significantly less than what is owed on the loan. Perhaps, the car has mechanical problems and it isn’t a reliable vehicle anymore. Or maybe the excessive car payments a person was making each month were one of the things that pushed them into bankruptcy. A huge benefit of Chapter 7 is that you can simply elect to surrender the vehicle and walk away from the loan. The lender would take the vehicle back and any remaining balance on the loan would be treated just like a credit card debt. Once you received your discharge, the remaining balance is wiped clean and you no longer have to worry about those payments. For some people, this is the best option to get out of a bad contract that they may have gotten into. An experienced bankruptcy attorney will discuss your situation with you and determine if this would be a realistic option for you.
You Can Redeem The Property
This option does not happen very often in Chapter 7 bankruptcy, but depending on your circumstances, it is a possibility. In simplest terms, a redemption of secured property means that your attorney negotiates a settlement with the lender to pay off the debt. Under this option, the lender generally would want a one-time lump sum payment prior to your case being discharged. The payment would be for less than what is actually owed on the loan, but the lender may be willing to accept a settlement for less than full value if they can get a fair amount quickly.
This option is usually not realistic when dealing with vehicles. However, many stores that sell furniture actually are secured creditors. Customers often don’t realize that when they make a purchase from the store on credit, they are basically using the property they purchased as collateral. For example, if you purchased a television and computer from a company on their credit card, and the terms of the contract stated that by using the card, you grant the company a security interest in any property purchased, then the company could take back the television and computer if you didn’t make payments. In a situation such as this, the company knows that they won’t get much money for a used computer or used television. These companies are generally more than happy to settle for a fraction of what is owed if they can get a lump sum payment before your discharge date. While no guarantees can be made, our firm is routinely able to negotiate settlements for anywhere from 30–50% of the account balance. Once the payment is made, you own the property outright, and the remaining balance is wiped clean. An experienced attorney can discuss this option with you and advise you on your specific case.
The Final Option Is What Is Informally Called “Keep And Pay”
This option is more of an informal option that some creditors will agree to, but they are not required to do so. This option is used most often with mortgages, but also sometimes with vehicle loans. If you are current on your mortgage, you can continue making regular payments on your mortgage and stay in the home. The mortgage company still has a lien on your home through the original mortgage, and if you fall behind on payments after bankruptcy, they can still foreclose on your house. However, if they foreclose on your home and are not able to sell it for the amount that you owe, they cannot sue you for the difference. You still remain the owner of the home, and the mortgage company keeps their security interest in the property. However, if something would happen in the future that made it impossible for you to keep the home or keep making payments, you would have the option to simply walk away from the home without the mortgage company being able to do anything to you.
As stated previously, this final option is something that your bankruptcy attorney can discuss with you. Some lenders, especially auto lenders, require that you either enter into a formal reaffirmation agreement or surrender the vehicle, so this option would not work in all cases.