What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy is the most common type of Bankruptcy.

Chapter 7 Bankruptcy is the most common type of Bankruptcy.

Chapter 7 Bankruptcy wipes out most debts, protects 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 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. The Jewish Torah, the Christian Bible, and most religions have the concept of forgiveness.

In Deuteronomy 15 verses 1-2, the seventh year is called the LORD’S release, where ALL debts are forgiven. It gives all people 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 also 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 FAQs.)

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 law is called a restraining order. In Bankruptcy, this is called an “automatic stay.” This automatic stay 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 timeshare obligations, furniture contracts, vehicle loans, and mortgages. This law helps 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 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 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.

  1. What will not be 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, they can foreclose if you are behind on the mortgage. If you are current on your mortgage, they cannot do anything.

This is not true for the vehicle debt. If you do not “reaffirm” the debt, the lender can repossess the vehicle even if you are current on the payments. After a Chapter 7 Bankruptcy discharge, they can repossess it without contacting you and without a Court order.

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. Reaffirmations are common and are easily done if your attorney or a Judge will sign off. However, your attorney or a Bankruptcy Judge will not sign off if they believe that it is not in your best interest or you cannot afford the payment.

  1. Most people are afraid that they will lose some assets such as their home, car, furniture, jewelry, etc. Losing any assets 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 have unprotected assets, you should not wait until the last minute to see a bankruptcy lawyer. Your lawyer can often 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, 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 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 are not wiped out in a Chapter 7 Bankruptcy. 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. Filing a Chapter 7 Bankruptcy does NOT get rid of the lien on your home, though that might be possible in some circumstances in a Chapter 13 Bankruptcy reorganization.

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. The fact that the person filing a Bankruptcy cannot run the business comes as a surprise to many bankruptcy attorneys and almost all people looking at Chapter 7 bankruptcy. The good news is that shutting down the business may be avoided with planning that prepares the business to survive with approval of the Chapter 7 Trustee and filing a motion for an order from the Bankruptcy Court forcing the Bankruptcy Trustee to “abandon” the business back to the person who filed the Bankruptcy. Then the business can continue to operate.

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 Fraley & Fraley, Sacramento Bankruptcy Attorneys, look around here at the Sacramento Bankruptcy Attorneys website, and CALL Fraley & Fraley to schedule a free in-person or online appointment with a real, experienced Bankruptcy attorney. Read my Client Testimonials so you can see what they say about my firm. Read my e-book “49 Do’s & Don’ts When Considering Bankruptcy.”

The most important thing you need to do now is call my friendly staff at (916) 485-5444 to arrange for your free in-person or online Bankruptcy attorney consultation with a highly trained Chapter 7 bankruptcy attorney.

There is a saying, “Knowledge is Power.” Isn’t it time you got your power back?

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