What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is one of the most common bankruptcies filed in the United States today. Chapter 7 is often referred to as the liquidation bankruptcy because your non-exempt assets are sold (liquidated) by a bankruptcy trustee, with the proceeds (money) being distributed among creditors in order of highest priority to lowest.
Chapter 7 is often the quickest and simplest form of bankruptcy and is available to just about anyone including: Married couples, individuals, and corporations. When a person is considering filing for Chapter 7 bankruptcy the first thing that is often on their mind is the amount of property and assets they will be able to keep.
This largely depends on what types of property that individual owns, how much that property is worth, and the bankruptcy exemptions available for that specific case.
Exemptions in Chapter 7 Bankruptcy
When an individual, couple, or corporation files for Chapter 7 bankruptcy, almost all of their assets and property become property of the bankruptcy estate. The first step in their case would be the assigning of a bankruptcy trustee who is given the authority to sell available assets in order to pay creditors. NOTE: Filing for Chapter 7 bankruptcy does not mean you give up your right to all of your property. This is where exemptions come into the picture.
Exemptions
Exemptions were put in place to allow a debtor to keep some of their property so that they have the ability to create a fresh start after the conclusion of the bankruptcy case. In a Chapter 7 bankruptcy, if an asset is exempt, the bankruptcy trustee is not allowed to sell it to pay your creditors. The amount of property you can keep in a Chapter 7 bankruptcy case depends on the value and the specific exemptions in place. Because of exemptions, most Chapter 7 debtors are able to keep all of their property.
What are you allowed to exempt?
Through the federal exemption system, and in most state systems, the debtor is allowed to keep a certain amount of equity in their home and personal property – such as money in the bank or a vehicle.
While some states allow debtors to choose between the state and federal exemption systems, California requires debtors to pick between one of two state exemption systems.
- System 1 – The exemptions in this system are usually more favorable to homeowners with large equity in their homes
- System 2 – Can be a more desirable system of exemptions for debtors with large sums of money, or other valuable items.
- Both systems have exemptions for homesteads, vehicles, personal property, retirement accounts, and more.
- Exemptions in both systems are changed frequently in California. So it’s important to discuss with an experienced bankruptcy lawyer which system of exemptions will be a better benefit to you.
How Do Exemptions Work In Chapter 7 Bankruptcy?
Before exemptions can be put in place, the Chapter 7 bankruptcy trustee must first look into the value in owned property and then decide whether to include that in the liquidation.
In the bankruptcy proceedings; loans securing property, such as a mortgage or car loans, do not affect the creditor’s lien. What this means is that the bankruptcy trustee will have to pay the creditor the loan amount from the sale of said property. If you have a vehicle worth $8,000 but the loan on it is for $4,000 then the vehicle is only worth $4,000 to the trustee.
For example: If the debtor lived in a state where the car exemption of $4,000 or greater, the debtor should have no concerns about the trustee selling it to pay off creditors. Unfortunately, if the debtor lived in a state which only allows a $2,000 car exemption, then the debtor is at a higher risk of the trustee taking the vehicle and selling it. If sold, the debtor would be paid the exemption entitled ($2,000 in this case), subtract the costs of sale + trustee’s commission, then distribute whatever remained among the creditors.
Some homeowners are able to combine certain exemptions to save their property. The federal exemptions system, as well as certain state systems, have what they call a wildcard exemption. This exemption can be used to exempt any piece of property. So, following our above example, if the state only had a $2,000 car exemption, but also a $4,000 wildcard exemption, a debtor could in theory use both exemptions to exempt the equity in their vehicle up to $6,000.
What if the Bankruptcy Trustee abandons a piece of my property?
Just because an individual can not fully exempt an asset, does not mean the bankruptcy trustee will choose to sell it. Bankruptcy trustees have the freedom to abandon assets if their value is only slightly more than the debtor’s exemption amount. Why would they do this? On occasion, the costs and fees associated with selling a specific asset may take up all of the equity resulting in nothing left over for creditors. If the Chapter 7 bankruptcy trustee decides to abandon the property, the debtor gets to keep it.
Whether you choose to pursue chapter 7 bankruptcy or not, contacting our Los Angeles Bankruptcy Attorneys is a step in the right direction. We encourage you to take advantage of the free consultations offered by Ure Law – so you are able to may make informed choices regarding your financial future. Waiting to contact a bankruptcy professional may cause you, your family, or your business greater expenses connected to your debts. Contact Ure Law Firm today for a free initial consultation!