Making Sense of Bankruptcy: The Words You Need to Understand
Going through bankruptcy is much more comfortable if its language is decoded for you. Here’s a practical way to do this.
Instead of giving you a list of legal terms and their definitions, we think it makes a lot more sense if we do it by sentence: we’ll give you a sentence that you might hear your attorney or a creditor or a bankruptcy trustee say, and we’ll tell you what the terms in the sentence mean, and then what the whole sentence means.
Today we start with this sentence: In a Chapter 7 case, most of the time all of your assets are exempt and you will discharge all the debts that you don’t want to reaffirm.
Consumers and small businesses can file four types of bankruptcy, and the vast majority file one of two types. The four are Chapter 7, Chapter 11, Chapter 12, and Chapter 13. These are named after the part of the U. S. Bankruptcy Code they are codified within. Most consumers and small business owners file under Chapter 7 or Chapter 13. More Chapter 7 cases are filed than all the others combined. Of the 940,000 or so bankruptcies filed in 2014, about 620,000 were Chapter 7s, and about 310,000 Chapter 13s.
Chapter 7 is sometimes called “straight bankruptcy,” or “liquidation.” We’ll explain the first term here, and “liquidation” in the next two sections.
The procedure under Chapter 7 is—usually but not always—the quickest and the most straightforward of all the bankruptcy options. It often takes only about 3 or 4 months from start to finish. Two main things happen from a legal perspective. 1) your debts are (mostly) written off—discharged (more about that in a moment). 1) your assets are reviewed and (usually) nothing is taken from you.
Practically speaking the steps are:
1) your attorney prepares the bankruptcy “petition” and a bunch of other paperwork about what you own and who you owe, your income and expenses, and other financial and related information;
2) he or she files the petition and the rest at the bankruptcy court, which stops creditors’ actions against you;
3) about a month later there is a short (usually less than 10 minutes) formal meeting with the Chapter 7 trustee;
4) you may or may not choose to continue to owe certain debts, such as your vehicle loan;
5) your debts are discharged and your case is completed.
This is just a more formal way of saying all your possessions and property, in any and all forms. When you file a Chapter 7 case you do need to recognize that you are subjecting everything you own—tangible and intangible—to the jurisdiction of the bankruptcy court. The point, at least in theory, is that your creditors—through the bankruptcy trustee—may have a right to take assets that are not protected. Most of the time you can keep everything you own. But you need to be very honest and thorough with your attorney especially about what you own or have a right to so that he or she can determine how best to protect it.
Chapter 7 is a “liquidation” usually only in principle and not in reality. The trustee takes from you and liquidates—sells—your unprotected assets in order to distribute the proceeds of that liquidation to your creditors… but if everything you own is protected—as it usually is—there is nothing to collect. Your case is called a “no-asset” one—meaning there are no assets for the trustee to liquidate.
Your assets are exempt to the extent that they fit within the allowed property exemptions. Again, for most people all of their assets fit within the exemptions, so there is nothing for the trustee to liquidate.
There is a set of exemptions in the federal Bankruptcy Code and each state also has its own separate set of property exemptions. In some states you and your attorney can chose whichever of those two sets of exemptions are better for you, and in other states you are required to use the state exemptions. Ask your attorney about how it is in your state, and whether your assets are fully exempt.
The main goal of a consumer bankruptcy—especially a Chapter 7 one—is to get a permanent legal write-off of your debts: a discharge. In almost every Chapter 7 case a discharge order is signed by the bankruptcy judge just before the end of the case (usually just past 60 days after the meeting with the trustee). And that discharge order forbids your creditors from ever again pursuing you or your assets for collection of their debts. That court order is backed up by penalties against any creditor which makes the mistake of violating that order, so creditors seldom do so.
Certain debts are not discharged, and so that is one of the main issues to raise with your attorney. Examples of debts that either aren’t or may not be discharged include recent income taxes, child and spousal support, criminal fines, fraud-based debts, and many student loans. Some of these depend on the conditions—for example, older income taxes often can be discharged—so again this is something definitely to talk about with your attorney.
You reaffirm a debt in a Chapter 7 case (this term very seldom applies to Chapter 13 cases) when you voluntarily exclude it from the discharge of your debts. You can’t do this with just any debt; it has to meet a rather narrow legal definition of your self-interest. As a result it is primarily used with secured debts in which you need and want to keep the collateral—vehicle loans, home mortgages, business asset loans and such.
There is a very strict deadline for signing a “reaffirmation agreement.” So you have to decide quite quickly whether or not you want to reaffirm, and then must act on that decision by reviewing and signing that agreement, and then having it be approved and filed at court.
Under some circumstances your attorney can sign the reaffirmation agreement, or else you may need to go to a short hearing with the judge for its approval.
The sentence we started with is:
In a Chapter 7 case, most of the time all of your assets are exempt and you will discharge all the debts that you don’t want to reaffirm.
The translation is:
In the most common and straightforward type of bankruptcy everything you own comes within the jurisdiction of the bankruptcy court, but most of the time it is all protected and you can keep everything. Most debts are legally and permanently written off, with certain exceptions your attorney will tell you about. But you are allowed to exclude certain debts from that write-off if it is in your best interest to do so.