Chapter 7
Chapter 7 bankruptcy, sometimes called "liquidation bankruptcy", discharges (cancels) most of your unsecured debt. In exchange, you might have to surrender some of your property. The whole Chapter 7 bankruptcy process takes about four months, and commonly requires only one trip to the courthouse.
Some debts aren't dischargeable in bankruptcy, meaning you'll still have to deal with them when the Chapter 7 case is completed. Taxes, child support, alimony, student loans, criminal fines, restitution awards, and drunk driving injury awards are usually not dischargeable in bankruptcy. Sometimes unusual circumstances can make ordinary debts survive the bankruptcy as well, or discharge ordinarily nondischargeable debts. This is a complex area, but I can provide details when we have a consultation.
I said you might have to surrender some of your property to get your bankruptcy discharge. What property is that? Like every other question in the law, the answer is "it depends on a lot of things". Here are the basics. Both federal and state law allow you to keep some equity in your home, your automobile, household furnishings, and other basic items. Protected assets are called "exempt property", and the laws that specify what property is exempt are called "exemption statutes". In the overwhelming majority of bankruptcies filed by individuals, all (or virtually all) of the debtor's property is exempt, and they keep it. If you schedule a free initial consultation with me I'll give you a specific estimate of any exemption problems I think you may have if you file a bankruptcy.
Filing for bankruptcy creates a federal injunction called the "automatic stay". The automatic stay immediately stops your creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally empty your bank account; repossess your car, encumber your house or cut off your utility service. Probably the first thing you'll notice is the phone will stop ringing, because the automatic stay prevents creditors from calling you, writing you, billing you, suing you, or continuing with a lawsuit they previously filed. Everything freezes in place. The automatic stay is replaced by the narrower post-discharge injunction once the case closes. The automatic stay can be lifted to permit a secured creditor to recover collateral a debtor is not paying for, but you will get plenty of warning of that type of action.
What happens to non-exempt property? The Bankruptcy Court appoints a neutral person called a "bankruptcy trustee". The trustee is like a referee, with you on one side and your creditors on the other. He or she is mostly interested in what you own and what property you claim as exempt. If there is non-exempt (unprotected) property, the trustee can sell it and use the proceeds to pay a portion of the debts you owe. This is fairly rare. Even if you have non-exempt property, the trustee most commonly sells it to the debtor. So if you have assets you can't protect, you may be able to buy them back from the trustee.
If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of secured debts are mortgage loans and auto loans. In most cases, you'll either have to continue to pay for the collateral according to the loan agreement or surrender it to the creditor. If a judgment creditor has recorded a lien against your property, that debt is also secured. You may be able to wipe out a judgment lien in bankruptcy.
If you're a party to a contract or lease, you may choose to cancel (or reject) the contract or lease without further payment. Alternatively, you may choose to accept (or assume) the contract or lease by continuing to honor the terms of the written agreement. If you come in for a consultation, we will discuss your choices in more detail.
At the end of the bankruptcy process, the debts that qualify for discharge are wiped out by the court. You no longer legally owe such debts. You can't file for Chapter 7 bankruptcy again for another eight (8) years from the date of your Chapter 7 filing. If disaster strikes, a Chapter 13 may still be available.
There are drawbacks to filing bankruptcy. Bankruptcy can be intrusive. You are required to disclose your prior financial activities as well as your current property holdings. If you have made certain types of loan payments or property transfers favoring relatives or close friends, a trustee may be able to "avoid" (undo) those transfers and get the money to pay creditors. Bankruptcy is a full disclosure business done under penalty of perjury. If you lie about your assets or debts it is possible you can be prosecuted; bankruptcy crimes are covered under Title 28 of the United States Code, and they are fourth degree felonies.