Chapter 7 Bankruptcy

  • September 28, 2020
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What is Chapter 7 Bankruptcy?

By now, you have probably read that your property will be auctioned off if you file for a Chapter 7 Bankruptcy. That sounds scary, but it’s simply not true in most Chapter 7 cases. Most personal Chapter 7 cases classify as “no asset” cases, which means that the person filing has no assets for liquidation.

You may be thinking to yourself, “everyone has some assets and property,” how is it that in the overwhelming majority of Chapter 7 bankruptcy cases, nothing is auctioned off?
It is true that everyone has some assets, but not all assets can be liquidated.  Only non-exempt assets are liquidated.

So, what are non-exempt assets?

The Federal Law and the laws of every state allow you to keep your assets and property up to a limit. If the liquidation value of the stuff you own is less than what the law allows you to keep, then your property is exempt and cannot be sold off in Chapter 7.  In Texas, you have the option of using Federal Exemptions or Texas Exemptions.  Depending on the set of the selected exemptions, different types of property become exempt from liquidation.

A Chapter 7 Bankruptcy discharges (wipes out) your unsecured debt. Unsecured debt is generally any debt that is not attached to some form of collateral. For example, credit card debt is typically unsecured debt; whereas, a car loan is not unsecured because it is attached to the vehicle.

What do you lose when you file Chapter 7?

Federal Law and every state allow you to keep your property up to a specific value. In other words, up to a particular amount, your property is exempted. The laws that allow you to keep your assets are called exemption laws. You can read about exemption laws in more detail here.

When you meet with an attorney who knows what they are doing, they will ask you about the assets and properties you own. They will compare the value of what you own against what you can keep under exemption laws that apply to you. If not all your property is exempted, they will tell you that upfront. This way, you can decide if you want to file knowing the risks involved. If your property can be exempted, then Chapter 7 bankruptcy will not liquidate your exempted assets.

What if not all your assets are protected/exempted in a Chapter 7 case?

Depending on the free and clear value of what you own, some of your assets or property may not be protected/exempted. If that’s the case, you still can protect your assets by filing a Chapter 13 bankruptcy. I discuss this in more detail in the Chapter 13 bankruptcy section.

Can I keep things I am financing in a Chapter 7 Bankruptcy?

It depends. Chapter 7 bankruptcy does not force specific terms on creditors that have a lien on your property. For example, if you have a car loan and want to keep your car, you can declare your intention to keep it and pay the note. But if the car company wants to get the car back, then you can’t force them not to. Generally speaking, car financing companies don’t want your car. They want your payments, but if you are behind on your payment or have had a bad payment history, they may not want you to keep your auto. In my experience, most of car companies are willing to work with bankruptcy filers, but there is no guarantee.

Suppose your auto finance company is willing to work with you in a chapter 7 bankruptcy. In that case, they will do so by signing a reaffirmation agreement. I have an article dedicated to reaffirmation agreements you can read.

In essence, in a reaffirmation agreement, you agree to keep on paying for the auto you are financing according to the terms outlined in the reaffirmation agreement. With it, the auto finance company accepts that you can keep your vehicle.

How much debt do you have to have to file for Chapter 7 ?

There isn’t a minimum or a maximum amount of debt required for filing a Chapter 7 Bankruptcy. In deciding if you should file for a Chapter 7 Bankruptcy, it makes sense to compare your income to your debt. See if you can pay off your debt with your income. Add up all your expenses outside of your debt and deduct your take-home income from it. How much do you have left at the end of each month to pay off debt? If you have enough, you probably don’t need a Chapter 7 Bankruptcy, because you can pay off your debt with the money you have leftover at the end of each month. If you don’t have enough, then your debt is likely to increase with the interest that it accrues each month.

Next, see if you can increase your income without causing a significant hardship for yourself and your family. If you can increase your income enough to have enough leftover at the end of the month to pay off your debt, then you can probably avoid bankruptcy. Otherwise, you probably have enough debt for a Chapter 7 Bankruptcy.

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