Q: I’ve heard various references to Chapter 7, Chapter 11 and Chapter 13 bankruptcy. Several people have told me that Chapter 7 bankruptcy is most appropriate for me. What is Chapter 7 bankruptcy?
A: Chapter 7 bankruptcy is a liquidating bankruptcy. That means that in return for having most or all debts discharged (no longer legally obligated to pay them), the debtor must turn over any non-exempt property.
If the debtor has more assets than can be exempted, the trustee sells/liquidates those assets and gives the money/proceeds to the creditors as payment. There are laws to establish which creditors have priorities over others. However, in most cases, the debtor has nothing so the creditors receive no money. In Chapter 7 cases, the debtor comes out of bankruptcy without any future financial obligations to creditors. However, there are certain debts that cannot be discharged through bankruptcy, including child support, alimony and debts incurred through fraud.
Chapter 7 – Exempt Property:
In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors.
It is important to check the exemptions that are available in the state where you live. (If you moved to your current state from a different state within two years before your bankruptcy filing, you may be
required to use the exemptions from the state where you lived just before the two-year period.) In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions. If your state has “opted” out of the federal bankruptcy exemptions, you will be required to chose exemptions mostly under your state law. However, even in an “opt-out” state, you may use a special federal bankruptcy exemption that protects retirement funds in pension plans and individual retirement accounts (IRAs).
If you are allowed to use the federal bankruptcy exemptions, they include:
- $20,200 in equity in your home;
- $3225 in equity in your car;
- $525 per item in any household goods up to a total of $10,775;
- $2,025 in things you need for your job (tools, books, etc.);
- $1075 in any property, plus part of the unused exemption in your home, up to $10,125;
- Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance, and pensions–regardless of the amount.
The amounts of the exemptions are doubled when a married couple files together. Again, you may be required to use state exemptions which may be more or less generous than the federal exemptions.
In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at your equity in property. That means you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $50,000 house with a $40,000 mortgage, you have only $10,000 in equity. You can fully protect the $50,000 home with a $10,000 exemption.
While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.
David Giller, Esq. is a Consumer Law attorney, providing professional, confidential and compassionate legal advice throughout New York City and northern New Jersey in financially stressful matters including bankruptcy, foreclosure defense, debt settlement, Fair Debt Collection Practices Act and Fair Credit Reporting Act. To learn more about David or his law practice, visit www.gillerlaw.com.
