December 16, 2017

Chapter 7 Bankruptcy

 

Chapter 7 is the most common form of personal bankruptcy.  People who qualify for Chapter 7 bankruptcy typically have a great amount of unsecured debt with little income.  Filing bankruptcy will give them a fresh start so they can move forward with their life.

In a Chapter 7 bankruptcy filing, most of the debtor’s unsecured debt is discharged or eliminated.  This includes credit card bills, medical bills, signature or unsecured loans, and amounts owed after a home or car is surrendered to creditors and sold by the creditor.  Unsecured debts that cannot usually be eliminated include certain taxes, domestic obligations (like child support), student loans, and improper use of credit within 90 days of filing.

In a Chapter 7 filing, the debtor may decide to surrender the home or car and owe nothing on the remaining debt.  However, he may choose to keep the home or car if the debtor can continue making payments and stay current with the payments.  It is important to remember that bankruptcy discharges the debt, i.e. the personal obligation to pay the debt, but it does not discharge or remove the lien from the collateral.

Chapter 7 is often referred to as “straight bankruptcy”.  In a Chapter 7 proceeding the debtor is relieved from the responsibility to pay his or her debts (“discharged”), with certain exceptions.  In exchange for having the debts discharged, the debtor must surrender any property that is not protected or “exempted” from the Chapter 7 trustee.  The property the debtor claims as exempt is free from the claims of all pre-bankruptcy creditors and claims by the chapter 7 trustee.  All nonexempt assets are administered by the trustee.  This means the trustee can sell these assets to pay on some or all of the debts the debtor owed at the time of the filing of the petition.

In more that 90% of all cases file, all of the debtor’s property is exempt, which means that the debtor does not need to give up any of their property to the trustee.  A bankruptcy case in which all of the debtor’s assets are exempt is referred to as a “no asset” cases.  More detailed explanations of the exemptions and “exceptions to discharge” are set out in other area of this website.  All individual debtors must pass a “means test” or average income test to qualify to file Chapter 7.  If a debtor does not pass the means test, then the debtor’s only bankruptcy option is to file Chapter 13.

 

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CHAPTER 7 OPTIONS FOR SECURED DEBTS

REAFFIRMATION AGREEMENT


To be absolutely sure you can keep the personal property that secures a debt secured by personal property, you must sign a reaffirmation agreement.  Since the enactment of BAPCPA the creditor can repossess the collateral unless you enter into an agreement reaffirming the debt within 60 days after filing bankruptcy.  It appears that only a few of the vehicle creditors are likely to take this action.  It appears that this action is not likely for most secured creditors and in fact most secured creditors will not repossess the collateral if the debtor remains current with their payments, but there are no guarantees.   In certain cases the bankruptcy court will disapprove a reaffirmation agreements, but allowing the debtor to keep the collateral as long as he continues to make the payments.

A debtor should be very careful when reaffirming a debt because the reaffirmation reinstates the debtor’s personal liability on the debt.  This means if the debtor were later to default on the debt, he will be liable on the debt despite the fact he had filed bankruptcy.  A debtor should seek legal advice before agreeing to reaffirm a debt and fully understand the legal consequences of a reaffirmation agreement.  However, the final decision to reaffirm is the debtor’s and not the attorney’s.  If the debtor’s payments on a secured loan are substantially behind or if the creditor has threatened to repossess or foreclose, then it may well be more advisable for a debtor to file Chapter 13 to keep the collateral that to file Chapter 7 and reaffirm the debt.

 

REDEMPTION

Redemption is a legal process whereby the debtor buys the collateral from the secured creditor by paying the creditor the value of the collateral rather than the balance due on the loan.  Redemption is a favorable alternative to keeping the collateral if the balance on the loan is substantially above the value of the collateral and the debtor has the ability to pay the creditor the amount due in a lump sum.  Redemption requires a motion and order by the court approving the redemption and careful review by the attorney before proceeding with the redemption process.

 

SURRENDER

Surrender means the debtor gives the collateral back to the creditor.  The debtor is required to give physical possession of the collateral to the secured creditor within 30 day of filing the petition.  When the collateral is surrendered the debt discharged like all other unsecured debts of the debtor.

Chapter 7 Bankruptcy FAQ

 

  • WHAT HAPPENS TO MY PROPERTY IN A CHAPTER 7 CASE?   Upon the filing of a Chapter 7 case a Chapter 7 Trustee is appointed to administer the case. It is the trustee’s responsibility to review your petition and schedules and determine if there is any property he has a right to take and sell.  The debtor has the right to keep all exempt property and any property that is collateral for a secured debt that the debtor wishes to continue to pay for, if the equity in the collateral does not exceed the exempt amount. After the trustee determines that there are no nonexempt assets that can be sold, the case is closed.  If the trustee determines that there are nonexempt assets that can be sold, then the trustee takes possession of these assets, arranges a sale of the property, gives all of the creditors an opportunity to file a claim, and once the claims bar date is past distributes the money he is holding to the claimants as provided for by the bankruptcy code.

 

  • WHAT HAPPENS IF THE DEBTOR WANTS TO KEEP A NONEXEMPT ASSET THAT THE TRUSTEE HAS A RIGHT TO SELL?  The trustee will be happy to negotiate a sale of the nonexempt property back to the debtor.  As long as the trustee receives that same amount of money from the debtor as he would receive from a third party purchaser then the creditors are not prejudiced and the debtor keeps the property.  The debtor is buying back his/her nonexempt equity in their property.  This is one of the areas that the debtor’s attorney is most helpful in negotiating with the trustee.

 

  • WHAT HAPPENS IF A CREDTOR HAS COLLATERAL SECURING THE PAYMENT OF DEBIT?  A secured debt is a debt in which the creditor has a perfected lien on the collateral to secure the payment of the debt.  The most common type of secured debt is a home mortgage or a lien on a vehicle.  Ordinarily, a secured creditor has two options.  The first is to recover possession of the collateral following default in payments on the debt.  The secured creditor may then sell the collateral and apply the proceeds to the debt.  Or second, the creditor may file a law suit in state court and obtain a judgment against the debtor.  Chapter 7 discharge the creditor’s right to obtain a judgment against the debtor, but does not abolish the creditor’s right to repossess and sell the collateral.  As a result of these creditor rights a debtor has the following options under Chapter 7.

 

  • WHAT DEBTS ARE NOT DISCHARGED?
  1. Debts not listed in the schedule of creditors. (It is important to list all creditors).
  2. Certain taxes, including funds borrowed to pay such taxes.
  3. A claim based upon money, property, services, or credit obtained by fraud or false pretense.
  4. Consumer debt of more than $500.00 used to purchase luxury goods or services owed to a single creditor and incurred within 90 days of filing bankruptcy.
  5. Cash advances on a credit card or line of credit of $750.00 or more and incurred within 60 days of filing bankruptcy.
  6. Alimony and child support referred to as domestic support in the bankruptcy code, and marital debts arising out of a separation agreement or court order.
  7. Damages for willful and malicious injury.
  8. Certain governmental penalties and fines.
  9. Educational loans, except in cases of prolonged and severe hardship. As a practical matter undue hardship to discharge a student loan is almost impossible to establish.
  10. Loans from retirement accounts.

 

  • IS IT POSSIBLE TO BE DENIED A DISCHARGE OF ALL MY DEBTS?  Discharged can be denied if the Court determines that that a debtor has committed any of the following acts:
  1. The debtor has been granted a discharge in a prior Chapter 7 case that was filed within eight years prior to the filing of the current Chapter 7 case.
  2. The debtor has been granted a discharge in a prior Chapter 13 bankruptcy case filed within six years of the current Chapter 7 case.
  3. The debtor  transferred, destroyed, or concealed property within one year prior to filing bankruptcy or at any time after filing bankruptcy with the intent to delay or defraud a creditor, the Chapter 7 trustee or the bankruptcy court.
  4. The debtor without justification, concealed, destroyed, falsified or failed to keep books, records and documents related to his financial condition and business transactions.
  5. The debtor knowingly and fraudulently in the bankruptcy proceeding:a. made a false oath, claim or account.b. gives or receives money for taking certain action or agreeing not to take certain  action withholds books, records, documents or other records from the bankruptcy  trustee or bankruptcy court.
  6. The debtor fails to explain satisfactorily any loss of an asset or deficiency of assets to meet his liabilities.
  7. The debtor refuses to obey an order of the bankruptcy court, or refuse to answer a material question put to him by the trustee or a court official.
  8. The debtor fails to complete a required course in personal financial management following the filing of the case.
  9. The debtor is the subject of a pending proceeding in which he may be found guilty of a felony, or he may be liable for a debt arising from the violation of federal or state securities laws, or he may be liable for other criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual within the proceeding 5 years.

 

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