CHAPTER 7
Chapter 7 Overview
Entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases." A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.
Secured or Unsecured Debts
The bankruptcy petition asks you to list secured debts separately from unsecured debts. Some examples of Secured and Unsecured Debts would be:
- Unsecured Debts include personal loans and credit cards issued by banks, such as MasterCard, Visa, Discover, or American Express, and other credit cards used to purchase consumer goods. Medical bills, vehicle leases and personal loans are unsecured debts.
- Secured Debts include debts that the creditor has a security interest in property to guarantee payment. Secured debts include mortgages, car loans, and loans from finance companies secured by household items such as furniture, computers or electronics. Some goods purchased using store credit cards from Best Buy, Circuit City, Rooms to Go, and others, serve as a security interest, that make the stores secured creditors.
Secured Property
After filing a Chapter 7 bankruptcy, the debtor will have to choose to either reaffirm secured debts or surrender the secured items to the creditor. The debtor is entitled to keep any secured property as long as the debtor continues to pay the loan for such property. However, if the debtor elects to surrender secured property, the secured creditor may not thereafter recover any money from the debtor personally on account of that debt. Some mortgage companies may require borrowers to sign cross-collateralization agreements by which the mortgage borrowers pledge bank accounts and other financial instruments to secure their mortgage. A cross-collateralization clause allows the mortgage lender to get money in debtor financial accounts to pay delinquent mortgage payments. Debtor should review mortgage papers to determine whether debtor pledged financial accounts to mortgage lender.
Reaffirmation Agreements
The law requires debtor to execute a reaffirmation agreement for secured personal property debtor wants to keep. Debtor must sign a reaffirmation agreement within 45 days of the first meeting with the trustee (the meeting of creditors or 341 meeting). If debtor does not sign the reaffirmation agreement or redeem the property within 45 days, the automatic stay is lifted on such property and the creditor is permitted to take legal action to repossess the property, if payments are not current. A signed reaffirmation agreement ensures that the debtor will be personally liable to pay the debts after debtor’s bankruptcy is done. Debtor does not have the unlimited right to reaffirm a debt. The attorney representing the debtor must sign the reaffirmation agreement if he believes debtor can afford the debt. If the attorney is not sure debtor can afford reaffirmation, the attorney may choose not to sign the reaffirmation agreement. If that occurs, debtor must go before the bankruptcy court judge and explain why debtor believes he/she can afford reaffirmation and why reaffirmation is in debtor’s best interest.
Redemption
Bankruptcy also gives debtor the option to “redeem” secured personal property such as vehicles, computers, furniture, and other property purchased on credit and subject to a lender lien. Redemption requires purchasing the property from the secured lender at its current retail market value, taking into consideration the age and condition of such propety. When the current retail value is less than the amount due under the loan, redemption can be financially beneficial.
Student Loans
Student loans are not dischargeable unless debtor can show that his/her loan payments impose “undue hardship.” In order for debtor to eliminate student loans under the “undue hardship exception” debtor must file a separate motion with the bankruptcy court, and debtor must appear before the bankruptcy judge with proof of his/her hardship. It’s very difficult to demonstrate undue hardship unless debtor has some disability that prevents debtor from maintaining a job.
Contact a Chapter 7 Bankruptcy Attorney at Dominguez & Associates, P.A.
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