Chapter 7 Bankruptcy

Chapter 7 is commonly known as a “straight” or “liquidation” bankruptcy. Under Chapter 7 you are seeking to have your debts discharged, meaning that the legal obligation to re-pay creditors is canceled. You can pay all or some creditors after bankruptcy if you feel morally obligated, but cannot be legally required to repay. You can file Chapter 7 no more than once every 8 years.

In exchange for discharging debt, certain non-exempt assets may be liquidated under court supervision, with the proceeds to be applied to creditors. Does this mean you lose everything? Not at all. In most cases, valuable property such as your home or vehicle is either secured or exempt. Much of your other property, as a practical matter, may not be worth the expense of conducting a sale. A typical rule of thumb is that property with a value of less than $1000 will not be sold by a trustee.

Certain types of debts are non-dischargeable. With some exceptions, they include student loans; taxes; support payments; fraudulent debts; debts for embezzlement or larceny; fines and penalties; debts incurred as a result of a willful or malicious injury; and debts denied discharge in a prior bankruptcy.

Secured debts, such as mortgages and vehicle loans, are fully dischargeable, but you must surrender the collateral back to the creditor if you do not intend to continue making payments. If you want to keep the secured collateral, you can reaffirm the debt. Reaffirmation means a legal re-obligation to pay the debt as if the bankruptcy never occurred. Reaffirming a debt requires that you sign a written contract that must be filed with the court prior to the conclusion of the case. In exchange for reaffirming a debt the creditor allows you to keep your car, home or other secured property, but the creditor retains the right to collect on the debt should you later default after the bankruptcy case is over. You will most likely want to reaffirm on a home and automobile, but not credit cards or other unsecured debts.

Once your petition is filed, a trustee is appointed to represent the best interest of your creditors. The trustee is given broad power under the law. The trustee makes sure that all creditors are treated fairly and equally in the bankruptcy proceeding.Most importantly, the trustee is responsible for collecting and liquidating any non-exempt assets you are intending or required to surrender as part of your bankruptcy.

The trustee theoretically has an interest in all non-exempt assets you own up to the date the petition is filed. These assets, as a group, are called the Bankruptcy Estate. With limited exception property you acquire after filing does not become part of the Bankruptcy Estate, and cannot be taken by the trustee.

The law allows you to keep certain property above any liens or encumbrances to preserve your ability to live. These are called property exemptions. Exempt property, up to certain value limits, includes your home, vehicle, furniture, appliances and various other personal possessions. The trustee cannot sell secured property unless he first pays off the lien. Therefore, the trustee will not have any incentive to sell secured property that, at a minimum, does not exceed the value of the lien still owing against your property. For this reason, most people keep their home and automobile because there is usually no, or very little, non-exempt equity in such property after paying off the lien. A home, for example, may have a payoff amount on the mortgage close to the value of the property. Even if the home was worth more than the mortgage payoff it probably won’t matter. In New York, a husband and wife can exempt up to $165,550 of equity in their home. In other words, as long as the sale of your home would net you less than $165,550 after payment of all liens and closing costs, the home is exempt from sale by the trustee ($82,775 if owned individually). As long as equity does not exceed the exemption amount, your property has no value to the trustee and Bankruptcy Estate, and the trustee cannot sell the property. The same holds true for a motor vehicle with equity less than the allowed $4,425 exemption amount for vehicles.

Approximately 45 days after filing the petition, you are required to attend a meeting known as the Section 341 Meeting of Creditors. There, the trustee will review your case to see whether there are assets to be administered. There is usually only one meeting, but occasionally a second meeting is scheduled if further information is needed. Your creditors are free to appear and ask questions as well, but creditors rarely attend. The length of the meeting may vary. It usually takes no more than an hour for all scheduled cases on the calendar to be completed.

Approximately two months after the Section 341 meeting the court issues the Discharge Order signifying the conclusion of the case. The average case is completed in three to four months, and you will then have a fresh start.