Business

Bankruptcy & Chapter 7: ‘Fresh start’

A Chapter 7 bankruptcy typically is filed by individuals, couples or businesses. Frequently referred to as the "fresh start" or liquidation bankruptcy, Chapter 7 usually allows the debtor to receive a discharge from unsecured debts. A discharge means that the debtor is no longer responsible for paying these debts and creditors can no longer collect on these debts.

Trustee

In Chapter 7, the trustee has an immense amount of power, including the ability to take ownership and control of the debtor's nonexempt assets. The trustee will then analyze them to determine whether to leave the assets with the debtor or sell them to satisfy debts. In most Chapter 7 cases, there are little to no assets. These cases are typically called "no-asset cases," which means that any creditor possessing an unsecured claim will be out of luck and will receive no payment because there are no assets to distribute.

Exempt property

In any bankruptcy filing, the debtor is typically worried about what property they will be allowed to keep. The property that is excluded from distribution to creditors and protected from liquidation is called exempt property. Under the Bankruptcy Code, each state is allowed to adopt its own exemption laws, which the debtor may use instead of the federal exemptions.

Exempt property usually includes, but is not limited to: automobiles up to a certain value; reasonably necessary clothing; reasonably necessary household goods; household appliances; jewelry up to a certain value; pensions; equity in the debtor's home up to a certain amount; tools of the debtor's trade or profession up to a certain value; public assistance such as welfare, social security, and unemployment compensation; and damages awarded for personal injury.

Non-exempt property

Property that is not excluded from distribution to creditors is called non-exempt property. Items that are not included in the exempt categories are lumped into the non-exempt category, which means that they are fair game for the trustee to consider liquidating. These items include: cash, bank accounts, stocks, bonds, and other investments; expensive musical instruments, if they are not tools of the trade of the debtor; hobby collections such as stamps, coins, and other valuables; family heirlooms; secondary vehicles; and additional real estate holdings.

Chapter 7 eligibility

If a debtor is current on the house, car or other secured assets, he or she may keep those assets under Chapter 7, if they are exempt. If not current, the debtor may have to surrender those assets in order to file Chapter 7.

Meeting of the creditors

Whether you are filing a Chapter 7 or Chapter 13, it will be necessary for the debtor to attend a brief hearing before the trustee. This hearing is very professional, organized, and designed to verify under oath what is in the petition.

Reaffirmation

If a debtor wants to maintain a certain asset, the debtor may choose to reaffirm the debt. In a reaffirmation agreement, the debtor and creditor agree that the debtor will continue to pay all or part of an otherwise dischargeable debt after bankruptcy. The creditor promises not to repossess the property as long as the debtor continues to pay.

Reaffirmation must be entered into before discharge and must be signed by the debtor and filed with the court. Unless the trustee requests additional information, the debtor will not be required to do anything more after this hearing. The trustee will send a report to the judge recommending discharge. Approximately three months after the judge receives the recommendation, the judge will sign the order of discharge and close the case.

Discharge

"Discharge" under Chapter 7 bankruptcy refers to releasing the debtor from repayment of certain debts. Bankruptcy does not wipe out all debts, only certain debts. No more calls or letters may be sent in an effort to collect from the debtor. Additionally, the discharge does not apply to any co-debtor or guarantor's liability.

Remaining debts

Certain debts are not discharged upon the completion of a Chapter 7. Such debts include: debts not listed on the schedules filed on the petition; most student loans, unless in the case of undue hardship; recent federal, state and local taxes; child support and alimony; government-imposed restitution, fines and penalties; court fees; debts resulting from driving while intoxicated; and debts because of the debtor's fraud, willful and malicious acts, embezzlement, larceny or breach of fiduciary duty, and frequently debts from a divorce settlement agreement or court decree.

NEXT WEEK: Chapter 13.

(Contact Carlee McCullough, Esq., at 5308 Cottonwood Road, Suite 1A, Memphis, TN 38118, or email her at This email address is being protected from spambots. You need JavaScript enabled to view it. .)