Chapter 7 Bankruptcy

Chapter 7 Bankruptcy

Chapter 7 Liquidation -  “Straight Bankruptcy”

Chapter 7 is the “traditional” form of bankruptcy and is available to both individuals and businesses. It begins when the debtor files a “petition for relief” with the bankruptcy court. The debtor will also file detailed “schedules” of all assets, secured debts, unsecured debts, unexpired leases, tax claims, income, etc. A Chapter 7 case is administered by the United States Trustee’s Office. The Trustee’s Office, through an attorney hired by the Trustee, examines the debtor’s financial situation and determines whether any assets exist that can be sold for the benefit of creditors.

In approximately 95% of consumer Chapter 7 filings, the answer is “no.” This is because the Bankruptcy Code allows debtors to “exempt” certain assets from liquidation, up to a certain dollar amount. For example, the Code currently allows an individual to exempt up to $20,200 (as of January 2011) of “the debtor’s interest” in a primary residence, or $40,400 for a married couple filing jointly. “The debtor’s interest” means the equity the debtors own in the property.  If a home has a fair market value of $100,000, and carries a mortgage for $70,000, the married debtors can use their $40,400 exemption to shield their equity from liquidation by the Trustee.  If the debtors owned their home free and clear, however, the Trustee could step in, sell the house, pay the debtors $40,400, and distribute the nonexempt balance to unsecured creditors.  Similar exemptions exist for motor vehicles, household goods, tools of the trade, etc.

At the conclusion of a Chapter 7, the debtor receives a “discharge” from the court.  The discharge essentially wipes out the debtor’s personal liability for all scheduled debts, except for certain special debts like child support obligations, student loans, criminal fines, and others.  Creditors are thereafter prohibited, forever, from attempting to collect the discharged debts.

Unsecured creditors typically receive zero in a consumer Chapter 7.  Secured creditors, however, fare somewhat better.  Secured creditors are those that possess a voluntary lien (that is, a lien given voluntarily by the debtor) in some item of property.  One example of a voluntary lien is the lien you undoubtedly gave your bank on the new car you financed through the bank.  Even though the debtor’s personal liability for debt may be wiped out, the secured creditor’s lien lives on, and at the proper time the secured creditor may take back its collateral and sell it, reducing its loss.  The lesson?  It’s always better to be secured.

Related Services: Bankruptcy; Chapter 11 Bankruptcy; Chapter 12 Bankruptcy; Chapter 13 Bankruptcy; Michigan Bankruptcy Laws

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