What does chapter 7 even mean?
We hear it and read it all the time, “Chapter 7 bankruptcy.” But what does this term mean? The laws of the United States are recorded in what is known as the United States Code. All of these laws are divided into different titles. Each title is then broken down into chapters, just like the chapters in any ordinary book. Chapter 7 of the bankruptcy code sets out the rules specific to the most common type of bankruptcy filed by Mississippi consumers. This type of bankruptcy can wipe out debts like credit card balances, hospital bills, and payday loans.
A Chapter 7 bankruptcy is often referred to as a “liquidation bankruptcy.” This common description is a little bit misleading since certain assets of the debtor are protected by what are called exemptions. In Mississippi, exemptions are set out in protective statutes that specify certain types and values of property that our state legislature has decided we get to keep through a bankruptcy. Exempt property is generally of the type that is needed to live and provide for one’s self and family. This property is what the debtor keeps to help them make a fresh financial start. After all, to make a fresh start, you need something to start with.
What happens to assets that aren’t exempt?
In a large number of bankruptcy cases the consumer’s assets will all be exempt and will not be subject to sale by the bankruptcy trustee. The bankruptcy trustee is a court appointed individual who collects and examines the debtor’s non-exempt property to decide whether there is anything to be collected and sold to pay creditors. The trustee sells property collected and then splits the proceeds between the creditors who are owed money by that individual. Often creditors are only paid pennies on the dollar for debts owed.
Are there ways to keep non-exempt assets in Chapter 7?
Many debtors choose to keep and pay for certain assets in a Chapter 7 bankruptcy rather than having them liquidated by the trustee. This can be done either by reaffirmation or redemption.
Reaffirmation is a voluntary agreement to keep paying a particular debt. You are reaffirming a particular debt you already had before the bankruptcy. This choice is typically made to keep ownership in the asset secured by that debt (i.e. reaffirming your car note so that you can keep the car). When you reaffirm a debt you still owe the debt after the bankruptcy just as you did before. The creditor continues to have a lien agains the property secured by the debt and your personal liability remains as to the debt reaffirmed.
Redemption is another way to keep property. Although redemption is not always an option, it is a process where a lump sum is paid to the trustee for property at its current value. Often times the current value of your property is much lower than what you owe on it. Redemption allows you to keep property that would otherwise be sold by paying what the property is actually worth rather than the total amount owed for the property.
Will I have to go to court? No, but . . .
In the vast majority of Chapter 7 filings, the consumer does not have to appear in court before a judge. Filers do, however, have to go to the courthouse to attend what is known as the meeting of creditors or a 341 meeting. At this meeting a trustee is able to ask the consumer questions under oath. Typically these questions relate to the accuracy of the schedules filed and reaffirmation of debts. While this is a serious proceeding, it is relatively informal when compared to a full blown court appearance.
Not everyone is eligible to file under Chapter 7 of the bankruptcy code
To determine eligibility for a Chapter 7 bankruptcy you will have to take what is called a “means test.” This test looks at your income and expenses to determine whether Chapter 7 is an available option for you. Even if Chapter 7 is not an option for you, there are other options under the bankruptcy code such as Chapter 13. There are also restrictions that limit how often you may file for bankruptcy. If you filed under chapter 7 before, you are not allowed another discharge for eight years from the date of filing your prior case. If you previously filed under Chapter 13, this time period is shortened to six years. If you paid at least seventy percent of your debts in a prior Chapter 13, this time bar does not apply.
What happens at the end of a Chapter 7 bankruptcy?
At the end of a Chapter 7 bankruptcy the eligible debts of the filer are discharged or no longer owed. There are a limited number of debts that are not discharged in bankruptcy such as child support obligations and alimony. There are also a limited number of debts that are only dischargeable under certain circumstances such as student loans and taxes. Most debts, such as credit card debt and medical bills do not fit within these narrow categories, and are typically no longer owed at the end of a Chapter 7 bankruptcy. In a typical case these debts are eliminated, allowing the debtor to get a fresh start in their financial life.