Chapter 7 Highlights
Chapter 7 is what most people think of when they think of bankrutpcy. It is the chapter most people file. It is often called the "liquidation chapter".
In a Chapter 7, you list out all your debts and everything you own. In bankruptcy, the idea of debt is very broad. You should tell your attorney about every debt anyone says you owe, or that you think you might owe. Ownership is very broad too. Tell your attorney about everything you have, you might have, or you might receive. Don't try to hide things. Your attorney can only protect the things he or she knows about; if you don't tell your attorney, you leave your things unprotected, and you increase the likelihood your property will be lost. Plus, not disclosing things you own may be a bankruptcy crime!
First, your attorney will identify things you own that are collateral for specific debt. These are called secured claims. Typical secured claims include house payments, car payments, and payments for furniture, electronics, major appliances and jewelry. Generally, on secured claims, you make a decision: you can keep the collateral and continue to make the payments on it, or you can give the collateral back to the creditor and never make another payment, ever again. Two points are important. Many people think that if you file bankrutpcy, you lose your house and car. For most people, that is not true; you can keep these things if you continue to make the payments. It is also important to remember that the decision to keep the property or give it back is yours. No one can force you to keep paying for property you want to give up, and creditors can't force you to give up property you keep paying on, as long as the paperwork is done right.
Once secured claims are taken care of, your attorney will use exemptions to protect your property that is not collateral. An exemption is a law that says creditors cannot take certain property from you. In Virginia, most people have about $10,000.00 in available exemptions, although the exact amount of available exemption varies with the circumstances.
If there is any property that is not collateral and not exempted (or property that is collateral, but value exceeds the debt, and the excess value is not exempted), the bankruptcy trustee will take that property from you and give it to your creditors. In most Chapter 7 cases, all property is either collateral or is exempted, so the Trustee doesn't take anything. The creditors share what the trustee has taken, if anything, and then their claims are discharged. Discharge means that the federal court issues an order that says that none of the creditors can ever again take any action to collect any debt from the person who filed the bankruptcy. Then the case is closed, and the debtor moves on with a fresh start free of the dishcarged debts.
Several kinds of debts are not discharged in Chapter 7; domestic support arrears; back taxes, student loans; fines and restitution; and substantial recent credit card charges or loans, to name a few of the possiblities. You should discuss the details with your bankruptcy attorney.
There are times when a Chapter 13 can be a much better choice that Chapter 7. Being substantially behind on secured loans and facing foreclosure or repossession is one example. Significant nondischargeable tax debt or domestic support arrears are another. Or if you have significant equity that would be lost to a Chapter 7 trustee. If you face any of these situations, you should consult with an attorney experienced in Chapter 13 cases. Don't assume all bankruptcy attorneys are experenced in Chapter 13. Many are not. Ask.
Please note that this is only an overview of the Chapter 7 process. It is not legal advice. And it is not detailed enough to allow you to successfully navigate a Chapter 7 filing. You should meet with an experienced bankriuptcy attorney to go over the details of your situation, and discuss how bankruptcy may help.
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