CHAPTER 7 BANKRUPTCY
Chapter 7 bankruptcy is often called a liquidation bankruptcy, as opposed to Chapter 13 where the debtor must make monthly payments into the bankruptcy for up to 5 years. Chapter 7 bankruptcy allows the debtor a “fresh start” without the burden of making any payments to the court for distribution to unsecured creditors. The risk in filing for Chapter 7 relief is the possibility of liquidation of your assets. The Trustee that is assigned to oversee your Chapter 7 case is in charge of determining whether you own any “non-exempt assets” which he/she can sell for money to distribute to your creditors. Many Chapter 7 cases are “no asset cases” in which the Trustee determines that there are little or no non-exempt assets worth selling. If you do have non-exempt assets that are reasonably valuable, you could be at risk of losing these assets in a Chapter 7. It is therefore important to know which assets are exempt and which are not. It may also be the case that one or more of your assets is partially exempt. This can happen on occasion because Utah’s Bankruptcy exemptions are set at certain amounts, so if the value or equity in the particular asset is above the exemption amount, the Trustee could sell the property, pay you back the exemption amount, and use the rest to pay creditors.
Here is a list of important exemptions:
- Up to $3,000.00 of equity (value minus debt) in a vehicle ($3,000.00 each for two vehicles in a joint filing or $6,000.00 for one vehicle in a joint filing).
- Up to $30,000.00 of equity in your home ($60,000.00 for joint filers)..
- Unlimited amount of equity in household appliances (limited to washer, dryer, microwave, stove/oven, refrigerator, freezer and sewing machine).
- Unlimited amount of equity in beds and bedding, carpets in use, wearing apparel and up to 12 months of food storage.
- Up to $1,000.00 for sofas and related furnishings ($2,000.00 for joint filers).
- Up to $1,000.00 for animals, books and musical instruments ($2,000.00 for joint filers).
- Up to $250.00 for firearms and ammunition ($500.00 for joint filers).
- Up to $5,000.00 for "tools of the trade" (any items used primarily in business) ($10,000.00 for joint filers).
- Your 401(k) plan, IRA, KEOUGH or other ERISA qualified plan, with the exception of any contributions made in the last year
A Chapter 7 case may be the better alternative for you if you think that you have few, if any, non-exempt assets, or if you have below the exemption amount of equity in your home or vehicles. It is also important to remember that the value of your assets is not what you originally paid for them, but what they could be sold for at auction. Thus, your electronics, which are most often non-exempt, depreciate a lot with the passage of time. Barring any complications or fraud, you will receive your discharge in a Chapter 7 case about 4-6 months after filing. A discharge means that your unsecured debts are eliminated. It is important, however, to remember that some of your debts are secured debts, meaning that those particular creditors have a secured interest in your property, like your home, your vehicle, or furniture and electronics purchased at RC Willey, Best Buy or Rent-A-Center. These debts can be eliminated, but if you choose not to continue payments to these creditors, they have the right to repossess, confiscate, or foreclose. If you do decide to surrender the collateral, any deficiencies (the difference that may still be owing after your property is sold at auction for less than what you owed) will also be eliminated when you receive your discharge. However, if you elect to “reaffirm” such debts, meaning you wish to keep the house or car and continue to make regular payments, only to later default, any remaining debts will still be owed because you reaffirmed that particular debt.
Advantages of Filing a Chapter 7 Bankruptcy
- Provides a fast fresh start. You are not stuck for five years making monthly payments.
- Once you file, any income you earn after filing is yours.
- No repayment plan.
- No debt limits.
- Lower attorney's fees.
Disadvantages of Filing a Chapter 7 Bankruptcy
- You must be current on your payments to secured creditors (house, cars, etc.) or be able to bring any delinquent payments current in a timely manner, if you want to keep them and continue to stay current after filing.
- The Chapter 7 Trustee may sell your assets (including any lease or the debtor’s business) having more than nominal value over and above any liens and exemptions.