What to expect in a Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is often referred to as a “straight” bankruptcy or a “liquidation”. In Chapter 7, most of the debtor’s property or assets are protected by law (See explanation of exempt assets below). In rare cases, the bankruptcy trustee will take the unprotected or non-exempt assets and sell them to use the funds to distribute pro-rata among the unsecured creditors. In Mississippi, very few debtors in Chapter 7 are required to turn over any property to the trustee. On secured debts, the debtor either reaffirms the debt (continues to make payments), surrenders the property back to the creditor, or redeems the property (making a lump sum payment equivalent to the value of the merchandise).
What Happens to Collateral on My Secured Debts in Chapter 7?
A debtor has four options on secured debts, where the creditor is holding collateral to enforce the payment of the debt. The most common examples of secured debts are home mortgage loans, automobile purchase loans, seller’s or vendor’s liens retained at the time of purchase by retailers such as furniture or jewelry stores, loans by finance companies taking such items as vcrs, stereos as collateral.
First, the debtor can reaffirm the debt, meaning that the debtor agrees to keep making payments as if there had never been a bankruptcy filing. On most auto loans and house mortgages, the creditor will require that the entire loan be reaffirmed, the loan be current and that the regular monthly payment be maintained. Most loans secured by household goods (if valid) can be
renegotiated, reducing the balance and the monthly payment.
Second, the debtor can “redeem” the collateral by making a one-time lump sum payment equivalent to the value of consumer goods. For example, if a debtor owes $10,500 on a car and it is only worth $6,000, the debtor can obtain clear title to the car by paying the creditor $6,000. Obviously, most debtors cannot use redemption as a method to retain the collateral. However, many times the collateral’s value is low enough and my clients have enough income to use this power if they file near the time they receive their tax refunds.
Third, the debtor can surrender the collateral back to the creditor. The entire debt will then be discharged, and the creditor cannot collect a deficiency balance following the sale of the item.
Fourth, in some instances, a debtor may avoid the lien, retain the collateral and discharge the debt. If a creditor such as a finance company has a non-purchase money lien on household goods such as a microwave, lawn mower or furniture, the debtor can avoid the lien pursuant to section 522(f) of the Bankruptcy Code. Items on which the lien can usually be avoided are: appliances (includes outdoor appliances such as lawn mowers, weed eaters, etc.), furniture, wedding and engagement rings, all other jewelry worth less than $200 per item, most televisions, stereos and other electronic entertainment. Items such sports equipment and most firearms and some large ticket items such as lawn tractors cannot have the lien on them avoided. If a lien cannot be avoided, then the debtor must choose one of the other three options described above.
What can I keep if I file Bankruptcy under Chapter 7?
If you have lived in Mississippi less than two years at the time of the filing of a bankruptcy, then where you were living two years prior to the filing may control what you can keep. But for the debtors that have lived in Mississippi for at least two years, an explanation of what can be kept is at: Exemptions in Mississippi
State and federal laws provide what are called “exemptions” and Mississippi has opted to not allow a debtor to claim federal exemptions. An exempt asset is determined by our state law and allows a debtor to keep certain property up to a particular dollar value. Certain categories of assets such as money in bank accounts, stock, and real property other than the debtor’s home are assets which are considered “non-exempt assets.” In other words, exempt items are protected, which allows the debtor(s) to retain them and non-exempt items are not protected and can be taken by the trustee to be sold and/or converted to cash for distribution to the unsecured creditors in a chapter 7 bankruptcy proceeding
If the non-exempt (non protected) assets have a high enough value to provide for payment of the trustee’s fees and expenses and have money remaining to distribute to the unsecured creditors, the trustee will take these non-exempt assets, liquidate them to cash, and distribute those assets pro-rata to the unsecured creditors. Although there is no magic dollar figure, the trustee rarely liquidates any assets unless he can receive at least $3,000.00, after any expenses, from the sale of the non-exempt assets. To avoid liquidation, a debtor can choose to file a chapter 13, chapter 12, or chapter 11 reorganization, which are explained in:
Differences between chapter 7, 11, 12 & 13 and also in Chapter 13
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