Chapter 7 Bankruptcy: Liquidation

Chapter 7 bankruptcy involves the dissolution of debt and some properties. Chapter 7 is designed for debtors who are having financial difficulties and are unable to repay their debts. You can only file a Chapter 7 bankruptcy if your income does not exceed a certain amount. A Chapter 7 bankruptcy allows those who qualify to discharge their general unsecured debt, including credit card debt, medical bills, deficiency on a repossessed vehicle or foreclosed home, and unsecured personal loans. The debtor is allowed to keep some of their necessary household goods, including:

  • one vehicle of up to $5,000 in (value), and
  • the debtor’s home if the (equity) is less than or equal to $49,500 for a single person or $95,000 for a disabled individual, a person over the age of 60 or for a those with a dependent child.

You may also keep most retirement, household goods and other personal belongings, and other exempt property. Your attorney can give you more details about the different assets that you can keep in a Chapter 7 bankruptcy.

Eligibility

To be eligible for a Chapter 7 bankruptcy, you must first pass the Means Test. In each state, a median income has been established for various household sizes. If your income exceeds the median income for a family of your size, you may not be eligible to file for a Chapter 7 bankruptcy. However, you may still file for a Chapter 13 bankruptcy. Even if your income exceeds the medium income in Maine for a family of your size, certain debts or expenses may bring your disposable income lower and thus qualify you to file for a Chapter 7 bankruptcy. Your attorney can explain this to you in more detail at your first meeting.

During the consultation, your attorney will discuss the pros and cons of a Chapter 7 bankruptcy and Chapter 13 bankruptcy. Depending on your particular situation, Chapter 13 bankruptcy may be a better option for you.

What Types of Debt Are Dischargeable?

In a Chapter 7 bankruptcy, you can receive a discharge of many debts, including credit card debt, medical bills, personal loans, deficiencies on repossessions or foreclosures, and past-due utility bills.

What Happens to my Vehicle or House that I am Still Making Payments on?

When you file for a Chapter 7 Bankruptcy you may do one of three things with each of your secured assets, such as a car or a house. You may surrender it, reaffirm it, or redeem it.

Surrendering Secured Collateral

Surrendering a car or house is just what it sounds like; you turn the asset back over to the creditor, and any remaining amount due will be included in the bankruptcy and be discharged. With a vehicle you may set up an agreeable time for the creditor to pick up the vehicles or for you to drop it off, or you may simply allow them to come repossess it.

With a house, the creditor is still legally required to go through the foreclosure process.  After the foreclosure is final and your home is sold, any remaining debt will be discharged through the bankruptcy.

Reaffirming Debt on Secured Collateral

Reaffirming a debt on secured collateral is a serious decision and should only be made when one is able to make the payments. By reaffirming your debt, you are re-obligating yourself on a debt that would otherwise have been discharged in the bankruptcy. This means if you fall behind on the debt or are unable to pay it, you are NOT protected by the bankruptcy and will be stuck with the debt. However, if you wish to keep the secured property, you will likely have to reaffirm your debt.

Redeeming Debt on Secured Collateral

Redeeming secured property may be done when the property is worth less than what is you owe on the loan. This approach is usually taken with a vehicle that is “upside down,” or worth less than what is owed. To redeem a debt on secured collateral, the debtor must make a lump sum payment after filing their case. Accordingly, this requires that the debtor have sufficient funds to make this payment.

The Automatic Stay

The automatic stay starts the day you file your bankruptcy. This means that your creditors must cease all collection actions against you. This includes all collection letters, phone calls, and lawsuits. Any garnishments or court-ordered payments on unsecured debt will also stop. Any action in violation of the automatic stay may be pursued by legal action.

There are exceptions to the automatic stay: some domestic support proceedings are allowed, including actions for child support or custody. Your attorney can explain this in more detail.