Chapter 7
Under the Bankruptcy Reform Act of 2005, the filing of a chapter 7 bankruptcy (liquidation)
eliminates most unsecured debt such as, credit cards, medical bills, business loans,
personal loans, claims for damages, and secured debts where the collateral is surrendered
to the creditor. In some instances, state and federal taxes are eliminated provided
that the criteria for tax discharge are met. This is the most common type of bankruptcy
filed by debtors.
Once a chapter 7 bankruptcy is filed, a Trustee is assigned to the
case. The Trustee
is endowed
with many duties, including the duty to administer non-exempt assets
for the benefit of your creditors. Translated into laymen’s terms, State and Federal
laws allow you to protect assets up to a specific dollar amount. If the value of
your asset exceeds the amount protected under the laws, the Trustee may sell that
asset and distribute the excess proceeds to the creditors.
Even though the Trustee has this power, in practice, the vast majority of debtors
are able to eliminate their debt without losing any personal assets. Most people’s
personal assets are simply not worth enough to compel the bankruptcy trustee to
administer them for the benefit of creditors. There are debtors, however, who own
valuable homes, vehicles, heirlooms, etc. For such debtors, it is crucial to seek
the advice of a qualified attorney to determine whether their valued possessions
are exempt from the bankruptcy estate or risk losing them to the Trustee.
After the chapter 7 bankruptcy is filed and the initial hearing is conducted, the
debtor will receive a Discharge in approximately two to three months. A discharge
is a permanent Court Order that enjoins creditors from ever collecting their money.
The Discharge gives the debtor a “fresh start” and allows him / her to begin rebuilding
credit immediately.
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