Chapter 7 Bankruptcy: What Every Consumer Needs to Know

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Chapter 7 Bankruptcy

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Posted by: John O'Connor

Chapter 7 bankruptcy
Chapter 7 bankruptcy overview

Chapter 7 Bankruptcy Basics

Perhaps you’re considering filing for bankruptcy and have some questions. Why is the word “liquidation” associated with chapter 7 bankruptcy? Why is chapter 7 bankruptcy called “straight” bankruptcy?

Maybe you’ve met with a bankruptcy attorney who has reviewed your case and assured you that your property is safe from the bankruptcy trustee.

As you read more about bankruptcy law, you see that you don’t automatically lose your home or car. Where is the liquidation for the average Joe? How does the chapter 7 process actually work?

Chapter 7 Costs, Attorney Fees and Court Costs

The cost of attorney fees in a chapter 7 case varies widely by region of the country, however, all bankruptcy filings are a matter of public record and it is possible to look up the fees typically charged in your jurisdiction by doing some research on the PACER system. The filing fee for a chapter 7 bankruptcy petition is currently $306 (not including the cost of a bankruptcy lawyer) although it is possible to ask the court to waive the fee in certain cases.

Chapter 7 Bankruptcy Forms

When a chapter 7 case is filed, the debtor lists all of their debts and all of their assets on a series of forms called schedules. With the help of your bankruptcy lawyer, you’ll fill out the following forms that describe your property and liabilities:

Schedule A. On Schedule A, you’ll list any real estate that you own.

Schedule B. Schedule B will have a list of your personal stuff, couch, TV, dresser, jewelry etc.

Schedule C. Schedule C will list the property you’re claiming as exempt, property that is protected from liquidation by the trustee. Helping you draft Schedule C is one of the areas that your bankruptcy lawyer will really earn his or her keep. Your lawyer will know which laws to use in order to best protect your property. Keep in mind, however, that your attorney can only help you protect items he is aware of. For this reason, it is very important to disclose all of your property to your lawyer. Failing to do so can land you in big trouble.

Schedule D. Schedule D lists creditors who hold secured claims. Mortgage and car lenders will be listed on Schedule D since they have a security interest in your home or car, meaning they can take back the property in the event you fail to make payments.

Schedule E. Schedule E lists what are called “priority” claims. Priority claims are debts that are paid off first or non-dischargeable, such as certain tax bills and child support obligations.

Schedule F. Schedule F lists your unsecured creditors who aren’t given priority under the law such as credit card lenders, medical debts and personally guaranteed loans.

Where the List Goes: The Trustee

Once a chapter 7 case has been filed, the list of schedules (along with other required forms) go to a case trustee for review. In most jurisdictions, cases are randomly assigned to a panel of chapter 7 trustees. In many cases, the chapter 7 trustee is a practicing attorney, but there are exceptions. Upon receiving your bankruptcy schedules, trustees divide cases into two basic classes: asset cases and no asset cases. No asset cases are the most common.

A no asset chapter 7 case means there is no non-exempt property for the trustee to administer. By contrast, an asset case involves property of greater value than the applicable exemption limits and requires the trustee to sell property to pay back creditor claims. This is where Schedule C comes into play. If the available exemption laws are insufficient to “cover” all of a debtor’s assets, the trustee will come calling. Put simply, the job of the chapter 7 trustee is to evaluate each debtor’s assets and sell (liquidate) those items that are non-exempt. Trustees essentially work for your creditors and are paid a percentage of all the property they find and sell. The remaining sale proceeds are then distributed to pay back creditors. Despite the trustee’s right to liquidate non-exempt property, many chapter 7 cases open and close without one single item of property being sold. Thousands of bankruptcy cases are filed each year by people who are entitled to eliminate their debts and whose property is also entirely exempt. In other words, they keep everything.

The Chapter 7 Discharge of Debts

After the debtor has turned over property that the law leaves unprotected, their unsecured debts are forgiven or discharged. A discharge eliminates all personal liability for debts incurred prior to the bankruptcy case.

How Do I Know Whether My Property Will be Sold?

Exemption laws vary by state, so the best way to determine whether your chapter 7 case will involve liquidation is to meet with a bankruptcy attorney. Although the cost of bankruptcy is always a concern for those facing financial hardship, most bankruptcy attorneys offer free consultations and are generous with their time. Your attorney can compare your property against the applicable exemption laws to determine whether you have any non-exempt assets that the trustee would be interested in.

Some Common Chapter 7 Liquidation Scenarios

Think the trustee never sells/intercepts/takes assets? Think again. One of the most common assets that trustees successfully go after are tax refunds. Tax refunds are often an easy target because most exemption laws only allow a relatively small amount of cash to be protected as exempt. When a tax refund hits, it swells the bank balance above the exemption limits and the next thing you know, the trustee comes knocking.

Trustees are also always on the lookout for big ticket items such as homes and cars. While most chapter 7 debtors are able to file bankruptcy and retain ownership of their home and means of transportation (if they want to), occasionally a trustee will liquidate a home or car that has significant non-exempt equity. As we’ve pointed out before on the forum, trustees really don’t want to liquidate property as it takes lots of time and effort. They’re much more interested in cash. For this reason, it’s often possible to settle with a trustee by buying out the non-exempt value of an asset. Need an example?

Let’s say Jim and Susan own a home worth $150,000 with a mortgage of $75,000. In this example, Jim and Susan have accumulated $75,000 of home equity. Unfortunately, Jim and Susan have large credit card and medical bills that they simply can’t afford to pay. They file bankruptcy in a state that allows married couples to exempt $50,000 of home equity. Their credit card and medical bills will be wiped away but the trustee will surely take notice of the $25,000 of non-exempt home equity. One option is to let the trustee sell the home. In that case, Jim and Susan would be entitled to a check for $50,000 (the amount of their state’s homestead exemption) after the sale. However, in order to get at the $25,000 in equity, the trustee will incur costs for an appraisal, real estate broker and closing fees. This leads to option #2 in which Jim and Susan ask their bankruptcy attorney to negotiate a cash settlement that pays out some of the value of their home equity in exchange for keeping their home. Deals like this are struck all the time, without a single asset being actually liquidated.

Liquidation of Corporate Assets

Although corporations are not entitled to receive a discharge in chapter 7 bankruptcy, it is not unheard of for the shareholders of a struggling closely held corporation to place the business in bankruptcy so that a trustee can preside over the sale of the business assets in an orderly manner.

Meeting the Trustee

Approximately thirty days after your chapter 7 case has been filed, you will attend a hearing called the meeting of creditors over which your case trustee will preside. Usually these meetings don’t last more than five minutes, however, the trustee might have questions for you based on the information provided in your bankruptcy schedules and other filings.

How Long Does a Chapter 7 Case Last?

Assuming everything goes smoothly, a typical chapter 7 case usually lasts between three to four months, with the debtor receiving their discharge approximately 70-90 days after filing.

The Bottom Line

The bottom line is that non-exempt assets are liquidated as part of chapter 7 bankruptcy. Many middle class families file for bankruptcy without losing a single item of property, but exemption laws vary greatly by state. It is always wise to meet with a bankruptcy attorney to learn about how your assets will be affected.

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