Guide to Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a personal form of bankruptcy which, when filed, erases at least some of your debt and gives you a fresh start at building credit. Under Chapter 7, a bankruptcy trustee will look through your assets and try to sell those assets he’s allowed to sell in order to pay off your debts.
The bankruptcy trustee will use the money made from selling your assets to pay off your creditors. The order in which creditors are paid depends on the applicable state and federal laws. Past-due child support and alimony are often paid first. Wages that are owed to others may be paid next. Credit card debts will be paid last.
What happens if you have no assets to sell? In this case, many of your debts will still be erased. The Chapter 7 process tries to appease creditors as best it can, but most creditors receive little from it. Chapter 7 bankruptcies are often called “no-asset bankruptcies” for this reason.
What Debts Does Chapter 7 Bankruptcy Erase?
Chapter 7 Bankruptcy erases, or discharges, most types of unsecured debt. An unsecured debt is one that is not attached to an item of property that guarantees payment through the possibility of foreclosure or repossession. Common forms of unsecured debt include credit card bills, personal loans and medical bills. Chapter 7 will also discharge court judgments against you that do not intentional infliction of personal injury, intentional property damage, or drunk driving. If, for example, you dinged someone’s car by accident and were being made to pay for the damage, such judgment would be discharged. If on the other hand you were in an accident as a result of driving drunk, the judgment would not be discharged.
What Debts Can Chapter 7 Bankruptcy Not Erase?
There are some debts which Chapter 7 bankruptcy cannot get rid of. These include:
- Unsecured debts. Unlike unsecured debts, secured debts are those that are attached to a particular item which can be foreclosed or repossessed if the debt is not paid. Car loans and home mortgages are common examples of secured debts. These debts do not automatically disappear when you file bankruptcy, but you usually have the option of getting out of the debt if the terms of the financing arrangement have become unbearable.
- Money owed to government bodies. Chapter 7 bankruptcy will not eliminate most debts owed to federal, state, or municipal government. These debts include taxes, extra tax penalties, and student loans.
- Child support and alimony. The law prioritizes money owed in child support and alimony. These debts cannot be erased through Chapter 7 bankruptcy.
- Court judgments for breaking the law. As said above, debts which stem from lawsuits involving intentional infliction of personal injury, intentional property damage, or drunk driving cannot be discharged.
In some cases, a Chapter 7 debtor may choose to reaffirm, that is to renegotiate and continue to pay, a debt rather than discharge it. Debtors may want to do this if the debt is secured by some item they need, say their car, and discharging it completely would result in the item being repossessed. Under a reaffirmation, they will have the opportunity to at least negotiate new terms that may be more favorable to them.
Exemptions and Exclusions
Chapter 7 bankruptcy law does not exist to erase someone’s debt in exchange for all of their possessions. It allows debtors to retain exemptions, or a certain dollar amount of property that your trustee may not sell. For example, Chapter 7 bankruptcy allows you to keep certain amounts of equity in your car or home. Say, for example, that you own a car worth $10,000 and have paid off the car loan in the amount of $2,000. If the federal exemption for automobiles is $3,000, you get to keep the car because your equity is less than the exemption. But keep in mind that you must continue to pay the loan to keep the lender from repossessing the car.
Federal law also lists exclusions, certain property which cannot be sold through bankruptcy no matter how much it’s worth. For example, your trustee is not allowed to sell your retirement funds, annuities and certain trust funds through a Chapter 7 bankruptcy.
Both federal and state bankruptcy laws include lists of excluded property under Chapter 7. Some states' exemptions are better than the federal rules. Some are not. Some states let you choose between the federal or state exclusions, and in this case a qualified bankruptcy attorney can help you make the best decision.
After you file a Chapter 7 bankruptcy, you must wait 8 years before you are allowed to file one again. This time limit exists to prevent people from abusing the system by constantly building up debt and filing for bankruptcy whenever their creditors come around to collect.
If you are in debt and are thinking of filing for Chapter 7 bankruptcy, consult a bankruptcy attorney who can help you through the process. Most bankruptcy attorneys file Chapter 7 bankruptcy for flat, relatively affordable fees.