When you’re swimming in debt, and there’s no lifeboat in sight, filing for Chapter 7 bankruptcy is an excellent way to get your finances back on course. This remedy doesn’t come without a cost, however. In exchange for discharging (wiping out) your qualifying debt—such as credit card balances and medical bills—the bankruptcy trustee (the court-appointed official tasked with overseeing your case) will sell or “liquidate” your property and distribute the proceeds to your creditors. Have no fear, though. The majority of filers can keep everything that they own.
No. The purpose of personal bankruptcy isn’t to punish people but rather to provide individuals with a fresh financial start. Taking away all of your property would be counterproductive and would put you in a worse position. Instead, you’ll be allowed to keep assets that will be necessary for you to continue working and maintaining a residence, such as:
It’s likely that you’ll be able to keep even more, such as a retirement account and a certain amount of equity in a residential home. (You can find out more by reading Chapter 7 Bankruptcy Exemptions: What Property Can I Keep?)
Even so, some people own more property than they can protect, and it’s imperative that you know what you can—and can’t—keep before you file. If you make a mistake, you can’t count on the court letting you dismiss your case. Most courts will not do so, and the consequences can be severe. You could lose valuable property.
So how do you know what you can protect in bankruptcy? Ultimately, it’s up to your state. Each state lists the property that its residents can exempt (keep) in the state’s exemption statute (although some states elect to use the federal exemptions, instead).
(To learn what you’ll be able to protect, read How to Find Your State Bankruptcy Exemptions.)
Yes. In most cases, the trustee isn’t picky about who buys nonexempt property. In fact, a ready buyer makes the trustee’s job easier, and you might even get the property for less. Why? Because a trustee will often reduce the price by the amount it would have cost to sell the property.
Additionally, some trustees will allow you to make payments without interest—but don’t count on an extended payment plan. The trustee isn’t allowed to drag out the process longer than necessary and the trustee must collect and distribute all funds to creditors—as well as provide a final accounting to the court—before the case closes. Such rules preclude the trustee from giving you longer terms so it’s unlikely that you’ll be allowed more than a few months or so.
Of course, you’ll have to demonstrate that the money you’re using to pay for it is yours and not funds that you should have included in the bankruptcy. If you’re making payments, it shouldn’t be a problem because your post-bankruptcy earnings aren’t bankruptcy funds. However, paying for the property in a lump sum can be trickier (though not insurmountable). Most trustees will allow a friend or relative to give you the money or buy the property as long as it’s clear that the money comes from them and not some secret stash that you failed to disclose. (Get valuable tips for Avoiding and Reporting Bankruptcy Fraud.)
Example. Terrence had a vintage hot rod that he’d worked on for years that was nonexempt in bankruptcy. Because he didn’t want to part with it, he approached the trustee about selling it to him. The trustee agreed and reduced the $4,500 value by 20%—the amount it would cost to sell it—and allowed Terrence to pay it off over ten months. Although Terrence received his discharge in the usual period, his case remained open until he paid ten $360 payments.
It depends on the type of debt. Chapter 7 bankruptcy efficiently discharges (wipes out) the following debts:
However, this isn’t an exclusive list. If you’d like to learn more about bankruptcy exemptions, read Can I Eliminate All of My Debts by Discharging Them in Bankruptcy?
You might not have to pay anything. Again, it all depends on your particular bills. Here are examples of nondischargeable debts (debts that don’t go away in bankruptcy):
Exceptions to these rules exist in unusual cases. To find out how the court will handle your debt, you should consult with an experienced bankruptcy attorney.
(To learn more about debt that you’ll have until it is paid, read Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)
In a Chapter 13 bankruptcy, you must pay your discretionary income to your creditors over the course of a three- to five-year repayment plan. Discretionary income is the amount left over after you pay for food, housing, and other necessary expenses. But the expenses are not necessarily what you’d ordinarily pay. Rather, it’s the amount needed to live a modest existence—not the cost of your current lifestyle. In fact, most people need to make substantial adjustments to be able to afford the monthly plan payment.
Additionally, in a Chapter 13 case, the trustee doesn’t sell your property. But that doesn’t mean that you’ll get something for nothing. At a minimum, you must pay at least the value of your nonexempt property to your unsecured creditors. Considering that this amount is in addition to other required payments, depending on your financial circumstances, a monthly plan payment can get quite expensive.
Once you finish your payments, the court will discharge (wipe out) any outstanding balances on qualifying debts, such as credit card payments and medical bills.
(For more information, read Debt That Is Wiped Out In Chapter 13 Bankruptcy but not in Chapter 7 Bankruptcy.)
