What You Can Expect
Chapter 7 Bankruptcy is sometimes referred to as a “liquidation” bankruptcy. In Chapter 7 many items of personal property or and other assets are protected by law or “exempt.” Secured debts must be either reaffirmed (continue to make payments and sign a new agreement under the original terms) or surrendered to the creditor. If your property is not exempt the Chapter 7 bankruptcy trustee can take the non-exempt property to sell. Cash in the bank on the day you file for bankruptcy can also be taken by the trustee (even if you have to pay it later). The trustee will use any funds generated to distribute to unsecured creditors. You may retain non-exempt property by agreeing to pay the difference in value to the trustee. In Utah very few debtors in Chapter 7 turn over property but it does happen. One favorite asset of the trustees in Utah are tax refunds. During tax season all of the prior years taxes not yet received are considered property of the “bankruptcy estate”. Interested in knowing more about how bankruptcy works?
What Happens to Collateral on My Secured Debts in Chapter 7?
As a Debtor you have just a few options on secured debts. A secured debt is a debt on which the creditor holds a lien on the collateral itself. The most common examples of secured debts are home mortgage loans and automobile purchase loans. Other consumer loans that may be secured are appliances, furniture and jewelry. Some finance companies will make you commit property you already own as collateral for a loan.
In a chapter 7 you can reaffirm the debt by agreeing to continue to make the payments. Reaffirmations happen most often on car loans. The creditor will require that the entire loan be reaffirmed but the terms remain the same. It is important to remember that if you reaffirm the loan you stay current on your payments. Most loans secured by household goods can be renegotiated, reducing the balance and the monthly payment.
If You Reaffirm You Must Stay Current Until the Account is Paid In Full
Once you reaffirm a debt you had better plan on paying the debt in full because you cannot seek another discharge for 8 years. The other big secured debt you should be concerned with is your home. As long as the equity is under the exemption limit a Chapter 7 should not be ruled out. If your equity is greater than your allowed exemption filing a chapter 13 may be a better option. Your house payments must also be current in order to file a Chapter 7. If the house payments are behind your best choice is a Chapter 13 where past due payments can be included in your plan. The current exemption in Utah for homesteads is $42,700 per owner, so if you own your home with your spouse you can take double that amount as an exemption.
If you decide not to keep an asset you can surrender the collateral back to the creditor. The entire debt will then be discharged and the creditor cannot collect any more on the debt. Be sure that the property surrendered is not be damaged or you may be facing a lawsuit.
What About Non-Purchase Money Liens?
In some instances you may avoid the lien, retain the collateral and discharge the debt. You may avoid a lien pursuant to section 522(f) of the Bankruptcy Code if the creditor has a non-purchase money lien on some of your household goods. Items on which the lien can usually be avoided are: appliances, electronic entertainment etc. Items like sports equipment, most firearms and some large ticket items such as lawn tractors cannot have the lien avoided. If a lien cannot be avoided, then you must choose one of the other options described above.
What can I keep if I file Bankruptcy under Chapter 7?
State and federal law provide for the exemptions in bankruptcy. Each state has the option to adopt the federal exemptions. Utah opted not to allow debtors to claim the federal exemptions. In Utah whether an asset is exempt is determined by Utah code. Utah allows debtors to keep certain property up to a particular dollar amount. Certain categories of assets such as cash, money in the bank, most stocks and real property which is not the debtor’s primary residence are considered “non-exempt assets.” Exempt assets are protected from attachment by the trustee. Those assets debtor can retain. Non-exempt assets are not protected and can be sold by the trustee. Once the asset is converted to cash the trustee will distribute the money to unsecured creditors.
Non-exempts asset have to have enough value to provide for payment of the trustee’s fees (around 10%) and administrative expenses and still benefit creditors. The trustee will take these non-exempt assets, liquidate them and distribute payments “pro-rata” to unsecured creditors. In order to receive payment creditors must file a “proof of claim” with the Bankruptcy Court. Creditors who do not file a proof of claim receive nothing. Unfortunately there is no magic formula to determine how much value an asset must be worth before a Trustee thinks it is worth taking. That really varies from trustee to trustee. Trustee’s fees and other fees (such as real estate commissions) may make it undesirable to collect assets to sell. To avoid liquidation of an asset you can and probably should choose to file a chapter 13.
Some Standard Utah Exemptions
The most used exemption probably Utah are:
- Personal Residence – $42,700 per owner on the title. (Times 2 or $60,000 for married couples)
- Automobile – $3,000
- Clothing is unlimited
- Personal property varies by type of item
- 2 guns are exempt (check types with your attorney)
- Retirement accounts are unlimited.
There are more and you should check with an attorney if you have concerns. Examples of property not exempt are boats, trailers, ATV’s and expensive furs and jewelry. Have questions still?
Contact us for more information on Chapter 7 at (801) 558-2266 or email me at email@example.com