The Basics: The Simple Chapter 7 Case

A simple Chapter 7 case protects you from all collections, discharges all your debts, lets you keep or surrender your collateral, and keep all your other assets.

 

Chapter 7 is the Bankruptcy of Choice

Consumers file more than twice as many Chapter 7 bankruptcy cases than Chapter 13 ones. In 2012, out of about 1.2 million bankruptcies, 816,000 were Chapter 7s and 363,000 were Chapter 13s. That’s 69% vs. 31% of the total.

“Straight Bankruptcy” in a Nutshell

In a simple Chapter 7 case, you would:

1) protect yourself and your assets immediately from all of your creditors;

2) discharge (legally write off) all of your debts, or at least all that you would want to;

3) keep or surrender collateral as you wish; and

3) retain all of your assets.

Immediate Protection

The “automatic stay” stops virtually all collection efforts at the filing of your Chapter 7 case. Just about any way of collecting a debt—garnishments, lawsuits and judgments, collection phone calls, bills and collection notices in the mail, foreclosures, repossessions, tax liens—all are stopped immediately when you file. If a creditor continues its collection efforts, it can be punished. So they generally don’t.

There are some very limited exceptions: 1) specific kinds of obligations the collection of which a Chapter 7 filing does not affect, such as child support arrearages and criminal fines; and 2) cases in which the “automatic stay” either does not come into effect at all or potentially expires after 30 days, because of the filing and dismissal of one or more bankruptcy cases within the prior year.

In a simple Chapter 7 case, the “automatic stay” applies to you and to all of your debts, and your creditors all dutifully comply with it.

Discharge of Debts

Most debts are legally written off—discharged—in a Chapter 7 case.

There are different kinds of exceptions. Very rarely, if a debtor hides assets or commits some other kind of fraud against the bankruptcy system itself, he or she could lose the right to a discharge altogether. Filing bankruptcy too soon after a previous filing can result in not getting a discharge of any debts in the new case (a tactic that is purposely done sometimes with Chapter 13).

Much more common, certain kinds of debts are either never discharged—such as child and spousal support; are only discharged under very specific or limited conditions—such as income taxes and student loans; or are discharged unless a creditor proves specific conditions—such as a loan incurred through the debtor’s misrepresentations.

In a simple Chapter 7 case, you are entitled to an overall discharge, and you have no individual debts that won’t be discharged.

Keep or Surrender Collateral

Chapter 7 gives you the opportunity to either surrender collateral on a secured debt—your home, vehicle, or furniture—or to keep it by maintaining payments on it.

When collateral is surrendered outside of bankruptcy, you are often left owing money—the “deficiency balance,” the amount you still owe after your creditor sells the surrendered collateral and credits the proceeds to your account. Chapter 7 almost always discharges any such “deficiency balance.”

If instead you want to keep the collateral, usually you can if you are current on the debt. Even if you are not, you can often keep the collateral if you can quickly get current.

In a simple Chapter 7 case, you either surrender the collateral, or can keep it if you are current on your secured debt or can get there very quickly.

Retain All Assets

In most Chapter 7 cases, everything the debtors own fits within “exemptions”—categories of assets, usually up to a certain amount in value, which are protected from creditors, and from the Chapter 7 trustee acting on behalf of the creditors.

Both federal bankruptcy law and each state’s laws provide sets of such exemptions. But some states require their residents to use their state exemptions, while other states allow them to choose between with the state or federal exemptions. There can be certain complications, like how long one must reside in a state before being able to use its exemptions, or how long one must own a homestead before being able to exempt it.

In a simple Chapter 7 case, everything you own is exempt and protected.