Chapter 7
If you have a large amount of unsecured debt that you can't pay back (think credit card or medical bills), this may be the option for you. Months without a job, serious medical issues or heavy divorce payments may put you in this category. With Chapter 7, you are released from personal liability for particular kinds of debts. Creditors will no longer be able to take any payment for this "discharge" nor will they be afforded any legal action against you. They will not be able to communicate with you either, asking for debt payment...and this includes those dreaded calls from collection agencies.
However if you had a secured debt, this may not be covered by the discharge and the creditor can enforce the lien to reclaim their loss. Chapter 7 is sometimes call a liquidation bankruptcy as all of your assets, except any that are declared "exempt", are sold, and the resulting money used to pay off the lenders. If there is not enough in the pot to pay off everyone, the unpaid debts are "dischargeable debts" and will be erased.
In filing Chapter 7, you will list all your assets and all your outstanding debt. These assets are either
- exempt (assets you can keep after the bankruptcy which might include some equity in your home or car, some of your clothing, etc.) or
- non-exempt (assets that you will be forced to sell to pay off creditors.)
Whether an asset is exempt or non-exempt is determined in part by the state in which you file the bankruptcy.
There are also different kinds of debt. The secured debt is backed by collateral, so the lender does not incur as much risk. The mortgage on your house is a secured debt. If there is a default on the payment, the lender can take the house, sell it and use the money to pay the debt. Unsecured debt, such as credit card debt is therefore a higher risk.
Then there are the debts that bankruptcy cannot "discharge". These include
- child support or alimony
- fines and, in some cases, taxes
- debts you neglected to list on your petition
- loans you obtained fraudulently
- most student loans
Just because you file for Chapter 7 bankruptcy does not guarantee a discharge of your debts. A creditor can file an objection and instigate a lawsuit or "adversary proceeding" and can be on the basis of concealment of information or destroyed records, perjury or fraud. It is never a good idea to hide assets in a bankruptcy proceeding.
With the new law, if your income is over the state's median and you can afford to pay 25% of your unsecured debt you won't be able to file Chapter 7. Up to now, this has been the most popular form of bankruptcy because you can erase your debts, even though your home and cars may have to be sold. If your family's income goes over the state average such that you have over $100 left each month in income, you may have to file Chapter 13. The new law also makes it near to impossible for a sympathetic exception. You may have been forced into debt through circumstances well beyond your control, with a medical crisis, for example, however the bankruptcy court will have very little leeway in applying the law to your case.
