What to expect in a Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is sometimes referred to as a “liquidation” bankruptcy. In Chapter 7 most of the debtor’s property or assets are protected by law (exempt). If the property is not exempt the bankruptcy trustee can take the unprotected or non-exempt assets and sell them. He/she will then use any funds generated to distribute pro-rata among the unsecured creditors. In Utah, very few debtors in Chapter 7 are required to turn over any property to the trustee. One favorite asset of the trustees in Utah are the debtor’s tax refunds which they will find a way to take some or all of depending upon when you file for bankruptcy relief. Secured debts must be either reaffirmed (continue to make payments) surrendered (give the property back to the creditor) or a debtor can redeem the property by making a lump sum payment equivalent to the value of the merchandise.
What Happens to Collateral on My Secured Debts in Chapter 7?
Debtors have just a few options on secured debts which are essentially debts which the creditor is holding collateral to enforce the payment on the debt. The most common examples of secured debts are home mortgage loans and automobile purchase loans. Some other consumer loans have a secured claim against retail purchases like furniture and jewelry. Loans by finance companies which claim an interest in property already owned by taking items like DVD’s or stereos as collateral.
One way to keep property is that the debtor can reaffirm the debt, meaning that the debtor agrees to keep making payments as if there had never been a bankruptcy filing. On most auto loans and house mortgages, the creditor will require that the entire loan be reaffirmed, the loan be current and that the regular monthly payment be maintained. Most loans secured by household goods can be renegotiated, reducing the balance and the monthly payment.
The debtor can surrender the collateral back to the creditor. The entire debt will then be discharged and the creditor cannot collect a deficiency balance following the sale of the item.
In some instances a debtor may avoid the lien, retain the collateral and discharge the debt. If a creditor such as a finance company has a non-purchase money lien on household goods such as a microwave, lawn mower or furniture, the debtor can avoid the lien pursuant to section 522(f) of the Bankruptcy Code. Items on which the lien can usually be avoided are: appliances, electronic entertainment etc. Items such sports equipment and most firearms and some large ticket items such as lawn tractors cannot have the lien on them avoided. If a lien cannot be avoided, then the debtor must choose one of the other options described above.
What can I keep if I file Bankruptcy under Chapter 7?’
State and federal laws provide what are called “exemptions” and Utah has opted to not allow a debtor to claim federal exemptions. An exempt asset is determined by our state law and allows a debtor to keep certain property up to a particular dollar value. Certain categories of assets such as money in bank accounts, stock, and real property other than the debtor’s home are assets which are considered “non-exempt assets.” In other words, exempt items are protected, which allows the debtor(s) to retain them and non-exempt items are not protected and can be taken by the trustee to be sold and/or converted to cash for distribution to the unsecured creditors in a chapter 7 bankruptcy proceeding.
If the non-exempt (non protected) assets have a high enough value to provide for payment of the trustee’s fees and expenses and have money remaining to distribute to the unsecured creditors, the trustee will take these non-exempt assets, liquidate them to cash, and distribute those assets pro-rata to the unsecured creditors who file a proof of claim with the Bankruptcy Court. Unfortunately there is no magic formula to determine what a Trustee will decide is enough money to make it worth their time and trouble to sell an asset to pay creditors. Trustee’s fees and other fees (such as real estate commissions) may make it unfeasible to collect assets to sell. To avoid liquidation of an asset a debtor can also choose to file a chapter 13.