Chapter 7 Bankruptcy: What is it?
August 20, 2009
Bankruptcy is a federal court process that helps consumers and businesses eliminate debts. The two most common kinds of consumer bankruptcy are Chapter 7 and Chapter 13. This post discusses the basics of Chapter 7 bankruptcy.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is what most people think of when they consider filing for bankruptcy. It is also called “liquidation bankruptcy.” At the end of a Chapter 7 bankruptcy, many unsecured debts are wiped out. Personal liability on secured debts can often be eliminated as well.
Am I eligible to file a Chapter 7 bankruptcy?
Most people who call our office are eligible to file Chapter 7 bankruptcy.
But, if you have a certain amount of “disposable income,” you will not be permitted to file a Chapter 7 bankruptcy. (You may be eligible to file a Chapter 13 bankruptcy, however.)
Your “disposable income” is determined by subtracting certain allowed expenses and debt payments from your income.
Overview:Â Chapter 7 Bankruptcy
First, you must determine if you qualify for Chapter 7 bankruptcy.
Assuming you qualify for Chapter 7, the next step is making a list of everything you own.
You decide which items you would like to keep– up to a certain amount. This is called your “exemption amount.”
Your exemption amounts are determined by your state of residence.
In theory, the property you own that isn’t covered by your exemptions can be taken and sold to pay back some of your debt.
In reality, very few consumers filing Chapter 7 bankruptcy are forced to sell any of their property during the bankruptcy process. This is partly because filers can apply their exemptions to keep most of the property they own.
Most unsecured debt left over after this process is “discharged” or wiped out.
Secured debt is treated differently. And, not all unsecured debts can be discharged. More on this below.
Secured debt in a Chapter 7 bankruptcy
What is secured debt?
Secured debt is debt that is attached to (“secured” by) an asset. The asset can often be repossessed if you don’t make payments on the debt as agreed. An example of secured debt is a car loan, in which the debt (the car note) is secured by the car.
Secured debt might also be in the form of a lien on your property. An example would be judgments against you that have been reduced to liens on your property. There are other kinds of liens as well; for example, mechanic’s liens, tax liens, or liens for unpaid child support.
What happens to secured debt in a Chapter 7 bankruptcy?
Personal liability for some secured debts can be eliminated in a bankruptcy. But, often the lender retains the lien portion of the debt and can use it to enforce the lending agreement.
For example, you may not be personally liable for paying your mortgage if the mortgage debt is discharged in a bankruptcy. But, after bankruptcy, the lender keeps the lien on your house and can foreclose if you stop making payments.
If you owe money on a secured debt such as a car and you file for a Chapter 7 bankruptcy, you often have three options:
- Return the property to the creditor, or
- Continue making payments and keep the property, or
- Pay the creditor a lump sum amount equal to the current replacement value of the property (this is often referred to as “redemption,” and is only available for certain secured debts.)
What kinds of debts are NOT discharged in a Chapter 7 bankruptcy?
Child support, spousal support, most tax debts, and most student loans are not discharged in a Chapter 7 bankruptcy.
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