When it comes to chapter 7 bankruptcy, you may be able to cancel all or several of your debts. Additionally, the trustee may choose to liquidate some of the property you own to pay back your creditors before discharging the rest.
This level of bankruptcy is commonly referred to as Chapter 7 bankruptcy because you can find the law regarding filing and qualifying in Chapter 7 of the federal bankruptcy code.
Wait – What Or Who Is The Trustee?
The court exercises its control over your property via a person the court appoints, called a bankruptcy trustee. It is the trustee’s role to ensure your creditors get paid most of what you owe them.
The trustee or staff of the trustee will thoroughly check your submitted documents and financial history to ensure they your documents are complete and to identify any nonexempt property that can be sold in order to pay the creditors. As it is with most who file under Chapter 7 bankruptcy, the trustee doesn’t find anything worth selling.
Chapter 7 Bankruptcy Process
The entire Chapter 7 bankruptcy procedure takes between four to six months, and the filling and administrative fees sum up to a total of $335. G an attorney to assist you in filing and dealing with creditors and the assigned trustee on your behalf can increase the cost for the added service a bankruptcy attorney provides.
As a prerequisite, you must complete credit counseling with an approved agency of the United States Trustee. Many of the approved providers provide online access to the courses as well as in-person opportunities. Once the course is completed, you are provided with a certificate that proves your attendance and that you have met this requirement of the bankruptcy process and is submitted to the bankruptcy court with your other documentation. This course goes over healthy credit borrowing habits, financial advice, and proper budgeting techniques to help you avoid ending up in a similar situation later down the line. For some, it provides more insight into their finances to handle their current debts and avoid having to file for bankruptcy.
You will fill a couple of forms and a petition, and file them in the bankruptcy court in your region. The forms would ask you to describe:
- Your debts
- Your property
- Your current income and monthly living expenses
- Property owned by you and money you’ve spent in the last two years
- Exempt and nonexempt property
- Property sold or given away by you in the last two years
- Proof of credit counseling
The Automatic Stay
In filing for Chapter 7 bankruptcy, there is something put into motion called an Automatic Stay. This prevents most creditors from collecting what you owe them. So, on a temporary note, creditors cannot foreclose on your home, garnish your wages or bank account, repossess your properties, or turn off your utility service.
The Creditors Meeting
Two weeks (sometimes it can be a week) after you file, you and the creditors listed in the bankruptcy papers will be invited for a creditors meeting. The trustee is in charge of the meeting and after swearing you in, the creditors and trustee may choose to ask a couple of questions about the papers you filed and your need for filing for bankruptcy. This is typically your only scheduled visit to the court.
What Happens To Your Property During A Bankruptcy?
If the trustee identifies you own some nonexempt property after the creditors meeting, you may be required to provide the equivalent of the property in cash or simply forfeit the property. Depending on the nature of property (i.e. it is too difficult to sell, or it isn’t worth very much), the trustee may choose may allow you keep it even though the property is nonexempt. Note that each state has its own variation as to which property is exempt.
Property owned as collateral for a secured debt (like a car or home) is often repossessed, although a debtor can reassume that debt in order to keep from losing their car or home but will be responsible for continuing payments. Any missed or late payments can result in repossession of the property by the lender.
Exempt vs Non-Exempt Property
For most states, exempt property you can keep include: clothing, furnishings, unspent social security payments, and any other necessities like materials you use for your trade or an older model car. Nonexempt property is essentially things of value that are not necessary for basic standards of living. Common nonexempt property can include:
- Investment property or real estate
- Newer vehicle with equity
- Valuable collection (i.e. art, stamps, coins, etc.)
- Stock and investments
- High end jewelry
- Expensive clothing (i.e. furs)
- Expensive tools, machinery, or instruments not used for your trade
Bankruptcy Court Is In Control Over Your Financial Affair
During the Chapter 7 Bankruptcy process, technically you place the debts you owe and the property you own in the care of the bankruptcy court. As soon as you file, you can’t give away or sell any of the property you own without authorization from the court.
How Your Secure Debts Are Handled
If you set aside property as collateral for a loan, that loan is called a secured debt. Vehicles and homes that are financed are good examples of collateral for a secured loan. If you are current on your payments, then such property can be kept by you as long as you keep making payments. When you are behind on loan payments, then the lender has the right to repossess (or foreclose) on the collateral property.
During A Bankruptcy
If there is enough equity in the property (car, home, etc.) the the trustee may sell the property in order to pay off some or all of your debt with that lender. If there is not enough equity into the property or the value is too low to justify its sale, you may be eligible to keep the property – but you will also be keeping the debt it is tied to. So, if your car is not new enough to justify a sale to pay off what you own on it, then you can reaffirm, or reassume, your current car loan and payments. The trustee may also allow you to reaffirm your home loan as well if making the current payments will not be a financial burden.
However, if you fall behind on your loan payments, the creditor or lender has the right to repossess or foreclose on the property. Reaffirming a debt excludes it from the automatic stay and is not discharged at the end of your bankruptcy case.
Chapter 7 Bankruptcy Discharge
After the bankruptcy procedure, the court discharges all debts except:
- Debts deemed non-dischargeable because of the objection raised by the creditor (for instance, debts incurred by your fraudulent actions)
- Debts deemed non-dischargeable automatically like student loans and child support
- Debts incurred shortly before filing and after filing
- Debts that were reaffirmed or reassumed by the debtor (you)
It is important to keep your bankruptcy discharge papers in the event that a creditor continues to attempt to collect on a discharged debt. Often debt that is passed on to a collection agency may not be marked as discharged, even if it was, and you may have to submit proof of your discharge to these collection agencies or creditors.