Chapter 7 bankruptcy, sometimes called “liquidation bankruptcy,”
cancels your unsecured debts without further repayment. In exchange,
you might have to surrender some of your property. The whole Chapter 7
bankruptcy process takes about three months, and commonly requires only
one trip to the courthouse.
If you’re thinking about filing bankruptcy, you’ll probably
want to know what property you’ll be able to keep. Both federal and
state law may allow you to keep your homestead, your automobile,
household furnishings, and other basic items. These items are called
“exempt property,” and the laws that specify what property is exempt
are called “exemption statutes.” In the overwhelming majority of
bankruptcies filed by individuals, all (or virtually all) of the
debtor’s property is exempt.
Filing for bankruptcy puts into effect what is called the
“automatic stay.” The automatic stay immediately stops your creditors
from trying to collect what you owe them. So, at least temporarily,
creditors cannot legally empty your bank account; go after your car,
house, or other property; or cut off your utility service.
Until your bankruptcy case ends, your financial problems are
in the hands of the bankruptcy court. It assumes legal control of the
property you own (except your exempt property, which is yours to keep)
and the debts you owe as of the date you file. Nothing can be sold or
paid without the court’s consent. The court exercises its control
through a court-appointed person called a “bankruptcy trustee.” The
trustee is mostly interested in what you own and what property you
claim as exempt. This is because the trustee’s primary duty is to see
that your creditors are paid as much as possible on what you owe them.
If you’ve pledged property as collateral for a loan, the loan is called
a secured debt. The most common examples of secured debts are mortgage
loans and auto loans. In most cases, you’ll either have to continue to
pay for the collateral according to the loan agreement or surrender it
to the creditor. If a judgment creditor has recorded a lien against
your property, that debt is also secured. You may be able to wipe out a
judgment lien in bankruptcy.
If you’re a party to a contract or lease, you may choose to
cancel (or reject) the contract or lease without further payment.
Alternatively, you may choose to accept (or assume) the contract or
lease by continuing to honor the terms of the written agreement.
At the end of the bankruptcy process, the debts that qualify
for discharge are wiped out by the court. You no longer legally owe
such debts. You can’t file for Chapter 7 bankruptcy again for another
eight (8) years from the date of your Chapter 7 filing.
If you’re deeply in debt, bankruptcy may seem like a magic
wand. But there are drawbacks. Bankruptcy can be intrusive. You are
required to disclose your prior financial activities as well as your
current property holdings, allowing the trustee to look for anything of
value that the law allows to be taken and sold to pay your creditors.