Chapter 7 is what most people think of when they think of bankruptcy. Chapter 7 bankruptcy allows the debtor a “fresh start” without the burden of making any payments to the court for distribution to unsecured creditors. The risk in filing for Chapter 7 relief is the possibility of liquidation. All of the debtor’s non-exempt property become property of the bankruptcy estate and is liquidated by the bankruptcy trustee who distributes the sales proceeds to the debtor’s creditors.
Many Chapter 7 cases are “no asset cases” in which the trustee determines that there are little or no non-exempt assets worth selling. If an individual does have non-exempt assets that are reasonably valuable, he or she could be at risk in Chapter 7 of losing these assets.
Note: once you file a Chapter 7 bankruptcy case, you do not have the right to “unfile” it.
Debts that are eligible for discharge:
- most medical bills
- credit cards
- debts secured by vehicles, real or personal property, or other assets surrendered to the debtor’s secured creditors.
- certain income taxes over 3 years old
Debts that are not eligible for discharge:
- fraudulent debts
- domestic support obligation
- education loans
- new taxes or business taxes
- personal injury if you were drunk
- debts that were willfully or maliciously incurred
Since there are always exceptions, if you have an unusual debt, we would need to meet with you to discuss your situation. Please call for your first, free consultation.
What assets might I lose?
Generally, you get to keep your basic, necessary household goods in a chapter 7. Common items that a trustee can take include:
- income tax refunds
- luxury items, including luxury household goods
- the money that is in your bank account on the date that you file
- accounts receivable (if you are self-employed)
- non-business related tools
- business related tools over the protected amount
- vehicles, if there is equity over the protected amount (see exemptions below)
A debtor may have the option of retaining possession of assets (such as a vehicle or house), but only if they keep current on the loan payments for that asset. Generally the debtor must be current on their payments before filing for bankruptcy or they risk losing the asset.
In the majority of consumer Chapter 7 bankruptcy cases, most assets owned by the Debtor are exempt from being sold under applicable state and federal laws. Therefore, in most cases, a debtor can file Chapter 7 and retain possession and ownership of his or her property. It is possible for one or more assets to be partially exempt. This can happen because Utah’s bankruptcy exemptions are set at certain amounts, so if the value or equity in your car or house is above the exemption amount, the trustee could sell the property, pay you back the exemption amount, and use the rest to pay creditors.
- Up to $2,500 of equity (value minus debt) in a vehicle ($5,000 for joint filers).
- Up to $20,000 of equity in your home ($40,000 for joint filers).
- Unlimited amount of equity in washer, dryer, microwave, stove, refrigerator, freezer, sewing machine, carpets in use, beds and bedding, family clothing, and 12 months of provisions.
- $500 for sofas and related furnishings ($1,000 for joint filers).
- Your 401(k) plan, IRA, KEOUGH or other ERISA qualified plan.
There are other exemptions (protections) that you can claim. Visit with a bankruptcy lawyer to discuss your specific situation.
It is important to remember that the value of your assets is not what you originally paid for them, but what they could be sold for at auction. Thus, your electronics, which are most often non-exempt, depreciate a lot with the passage of time.
A trustee is appointed to liquidate the estate. The trustee’s job is to collect money from you to pay your unsecured creditors. They do this by taking property that you own or are entitled to, selling that property and then paying the money to your creditors. State law determines what portion of his property a debtor may keep by claiming exemptions, as described above. The trustee will sell the rest of the debtor’s property and distribute the proceeds to creditors. If all the debtor’s property is exempt, the case will be a “no-asset case,” with no distribution to creditors.
Chapter 7 Results
Barring any complications or fraud, you will receive your discharge in a Chapter 7 case about 3-4 months after filing. A discharge means that your unsecured dischargeable debts are eliminated.
It is important, however, to remember that some of your debts are secured debts, meaning that those particular creditors have a secured interest in your property, like your home or your car or your furniture from RC Willey. These debts can be eliminated, but if you choose not to continue payments to these creditors, they have the right to repossess, confiscate, or foreclose.
At the end of your Chapter 7, creditors with non-dischargeable debts (like alimony, child support, student loans, and certain taxes) can resume requiring payments on those debts.
Advantages of Filing Chapter 7
- Provides a fast fresh start. You are not stuck for five years making monthly payments.
- Once you file, any income you receive after filing is yours.
- No repayment plan.
- No debt limits.
- Lower attorney fees.
Disadvantages of Filing Chapter 7
- You must be current on your payments to secured creditors if you want to keep the property (house, cars, etc.).
- The Chapter 7 trustee may sell your non-exempt assets to pay your creditors.
A Chapter 7 case may be the better alternative for you if you think that you have few if any non-exempt assets, or if you have below the exemption amount of equity in your home or cars.
If you want to keep property like a home or a car and you are behind on the mortgage or car loan payments, a Chapter 7 case probably will not be the right choice for you. That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt, unless you agree to continue making payments.