Chapter 7 bankruptcy is often called liquidation bankruptcy. As opposed to chapter 13 where the debtor must make a monthly payment for up to 5 years, chapter 7 bankruptcy allows the debtor a “fresh start” without the burden of making any payments to the court for distribution to unsecured creditors. The risk in filing for chapter 7 relief is the possibility of liquidation. The trustee that is assigned to oversee your chapter 7 case is in charge of determining whether you own any “non-exempt assets” which he can sell for money to distribute to your creditors. Many chapter 7 cases are “no asset cases” in which the trustee determines that there are little or no non-exempt assets worth selling. If you do have non-exempt assets that are reasonably valuable, you could be at risk in chapter 7 of losing these assets. It is therefore important to know which assets are exempt and which are not. It may also be the case that one or more of your assets is partially exempt. This can happen because Utah’s Bankruptcy exemptions are set at certain amounts, so if the value or equity in your car or house is above the exemption amount, the trustee could sell the property, pay you back the exemption amount, and use the rest to pay creditors. Here is a list of Important Exemptions:
• Up to $2,500 of equity (value minus debt) in a vehicle ($5,000 for joint filers).
• Up to $20,000 of equity in your home ($40,000 for joint filers).
• Unlimited amount of equity in washer, dryer, microwave, stove, refrigerator, freezer, sewing machine, carpets in use, beds and bedding, family clothing, and 12 months of provisions.
• $500 for sofas and related furnishings ($1,000 for joint filers).
• Your 401(k) plan, IRA, KEOUGH or other ERISA qualified plan.
A chapter 7 case may be the better alternative for you if you think that you have few if any non-exempt assets, or if you have below the exemption amount of equity in your home or cars. It is also important to remember that the value of your assets is not what you originally paid for them, but what they could be sold for at auction. Thus, your electronics, which are most often non-exempt, depreciate a lot with the passage of time. Barring any complications or fraud, you will receive your discharge in a chapter 7 case about 3-4 months after filing. A discharge means that your unsecured debts are eliminated. It is important, however, to remember that some of your debts are secured debts, meaning that those particular creditors have a secured interest in your property, like your home or your car or your furniture from RC Willey. These debts can be eliminated, but if you choose not to continue payments to these creditors, they have the right to repossess, confiscate, or foreclose. If you do decide to abandon the collateral, any deficiencies (the difference that may still be owing after your repossessed or foreclosed property is sold at auction for less than what you owed) will also be eliminated when you receive your discharge. However, if you elect to “reaffirm” such debts, meaning you wish to keep the house or car and continue to make regular payments, only to later default, any remaining debts will still be owed because reaffirming, in essence, means to take that debt out of the bankruptcy.
Advantages of Filing Chapter 7
• Provides a fast fresh start. You are not stuck for five years making monthly payments.
• Once you file, any income you receive after filing is yours.
• No repayment plan.
• No debt limits.
• Lower attorney fees.
Disadvantages of Filing Chapter 7
• You must be current on your payments to secured creditors (house, cars, etc.) if you want to keep them.
• The Chapter 7 trustee may sell your assets (including any lease or the debtor’s business) having more than nominal value over and above any liens and exemptions.