What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy is the most common type of Bankruptcy.

It is designed to wipe out most debts, protect your home and possessions from being taken to pay those debts.

Here is some of the history of the basic concept of forgiveness of debt that was the basis for our present Chapter 7 Bankruptcy laws. The idea is to allow someone who has more debt than they can reasonably be expected to pay in the foreseeable future to get a “fresh start” by releasing that person from the obligation to pay most but not necessarily all of their debts.

The concept of having one’s debts forgiven by others is an old concept. It is found in the Jewish Torah, the Christian Bible, and is found in most of the religions in the world.

In Deuteronomy 15 verses 1-2 the seventh year is called the LORD’S release, where ALL debts are to be forgiven. It gives all that are in debt a chance to start over:

“At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord’s release . . .”

The concept is again found in Matthew 6:12 “the Lord’s Prayer”:

“…and forgive us our debts, as we forgive our debtors.”

IF YOU QUALIFY to file Chapter 7 bankruptcy (yes, you have to qualify. more on that in the article about the “Means Test” in the FAQ’s)

The Benefits of Chapter 7 Bankruptcy Include:

1. Keeping everyone from attempting to collect anything from you while you are under the protection of the Bankruptcy Court. This is what is referred to as a restraining order. In bankruptcy this is called an “automatic stay.” This also keeps any mortgage holder from taking your home in a foreclosure. Since Chapter 7 bankruptcy takes about 3 1/2 months to complete, that is the usual length of the automatic stay protective order.

2. In Chapter 7 Bankruptcy you wipe out your personal obligation to pay on credit cards, personal loans, signature loans, medical debts, business debts, lease liabilities, debts to 2nd mortgage holders that are owed money after foreclosure of the first mortgage, loans you have cosigned or guaranteed for others (except almost all student loans) and some tax debts. (yes, a lot of people do get to wipe out some or all of their back income taxes.)

3. Also it wipes out your secured debts such as time share obligations, furniture contracts, vehicle loans and mortgages. This is great if you have a secured vehicle that you are leasing or buying that you would like to get rid of because you owe more than that it is worth. Chapter 7 bankruptcy gets you out of the contract without paying the debt.

There are potentially major tax problems that can happen if you allow a foreclosure or a short sale to be completed. See a bankruptcy attorney before this happens even if you are not planning on filing bankruptcy. The informed debtor is the one who finds out about all their options before they make mistakes.

4. What is not wiped out is the lien rights on some furniture contracts, your home and your vehicle. Since they still have the right to foreclose or repossess, subject to the automatic stay of course.

The mortgage cannot foreclose while you are in Chapter 7 bankruptcy unless they get permission from the Bankruptcy Court. If you are current, the Court will not give the lender that permission. After your Chapter 7 bankruptcy is over, if you are behind on the mortgage they can foreclose, If you are current, they cannot do anything.

This is not true for the vehicle debt. The lender can get permission from the Bankruptcy Court to repossess the vehicle even if you are current on the payments. After a Chapter 7 Bankruptcy discharge when the case is over they can repossess it without a Court order and without even contacting you.

The good news is that they cannot repossess your car if you sign a “reaffirmation agreement.” Reaffirmation is simply agreeing to give them back the right to sue you if you don’t make the payments. This reaffirmation gives them back all of their rights as if you had never filed a Chapter 7 bankruptcy. This is a common procedure and is easily done if your attorney or a Judge that will signed off. They can refuse to sign off if they believe that it is not in your best interest or you cannot afford the payment.

5. Most people are afraid that they are going to lose some assets such as their home, car, furniture, jewelry etc. This rarely happens (only 1-2 % of cases.) In almost all Chapter 7 bankruptcy cases you can file without any worry as your assets are generally protected. A good bankruptcy lawyer can advise you if you have possessions that are at risk of being taken If you do have unprotected assets and you do not wait until the last minute to see a bankruptcy lawyer, the lawyer can do some asset planning. You may be able to keep the value so the Chapter 7 bankruptcy trustee can’t take it to pay your creditors.

The Problems With Chapter 7 Bankruptcy in Some Ways Can Also Be The Benefits.

The first problem is that Chapter 7 bankruptcy is short in duration, approximately 3 ½ months. If you are trying to buy time to stop foreclosure while you attempt to get a loan modification or get a new job to be able to reorganize some debts this is not the best way. Sometimes though, if you cannot wait and cannot qualify for a Chapter 13, Chapter 7 bankruptcy may at least get rid of most debts and when done, you may be able to have enough income to support a Chapter 13 bankruptcy reorganization.

The Second problem is that there are debts that cannot be wiped out in a Chapter 7. These include most but not all taxes, student loans, debts that are from fraud or theft. While secured debts may be discharged, the lien still exists on the asset.

The third problem is that, If you have assets (rights or possessions) that are not protected, you lose those things. As previously stated, with a good attorney, that situation rarely happens.

The fourth issue is that a sole proprietor (non-corporation) business owner may run into problems keeping the business open. Chapter 7 bankruptcy law says that the only individual that can run a business is the Chapter 7 Trustee. This comes as a surprise to many bankruptcy attorneys and almost all people who are looking at Chapter 7 bankruptcy. The good news is that a shutdown of a business may often be avoided with planning that prepares the business to survive with approval of the Chapter 7 Trustee and the filing of a motion to get an order authorizing the business to stay open from the Bankruptcy Court.

To understand the differences between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy reorganization click on the Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy Comparison Chart.

For more information on bankruptcy and about Fraley & Fraley, Sacramento Bankruptcy Attorneys, just look around here at the Sacramento Bankruptcy Attorneys web site. Read my Client Testimonials so you can see what they say about my firm. Read my e-book “48 Do’s & Don’ts When Considering Bankruptcy.” and most importantly, call my friendly staff at (916) 485-5444 to arrange for your free consultation with a highly trained bankruptcy attorney for your chapter 7 bankruptcy, you will be glad you did.

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