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What Happens to Most of Your Debts in Chapter 7 “Straight Bankruptcy”?

Posted by Kevin on September 1, 2019 under Bankruptcy Blog | Comments are off for this article

First, let’s review the different types of debts in bankruptcy.

Secured debts are collateralized usually by your home, your car or your truck, maybe your furniture and appliances. Priority debts are ones that are usually not secured but are favored in various ways in the bankruptcy law. For most consumer debtors, they include child and spousal support, and certain taxes.

The remaining debts are called general unsecured debts.   Think credit cards and medical bills.   What do all these debts have in common-no collateral attached to these debts and not given a favored (priority) position under the law.

In most Chapter 7 bankruptcies, the vast majority of debts are general unsecured debts.  In Chapter 7 bankruptcy, most general unsecured debts are legally, permanently written off.  The legal term is “discharged”.  That means that once they are discharged—usually about 3-4 months after your case is filed—the creditors can take absolutely no steps to collect those debts.

The only way general unsecured debts can be paid anything is if either 1) the debt is NOT dischargeable or 2) it is paid (in part or in full) through an asset distribution in your Chapter 7 case.

 1) “Dischargeability”

A creditor can dispute your ability to get a discharge of your debt.  In the rare case that the discharge of one of your debts is challenged, you may have to pay that particular debt. That depends on whether the creditor is able to establish that the facts fit within the  narrow grounds for an exception to dischargeability.  This usually involving allegations of fraud, misrepresentation or other similar bad behavior on your part. If the creditor fails to establish the necessary grounds, the debt is discharged.

There are also some general unsecured debts that are not discharged unless you convince the court that they should be, such as student loans. The grounds for discharging student loans are quite difficult to establish.  Check /http://studentdebtnj.com/ for more detailed information relating to your student loans.

2) Asset Distribution

In order for a debtor to get a fresh start, the Bankruptcy Code allows a debtor to exempt certain property.  That means you keep that property.  If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of your assets from you. This is what usually happens—you’ll hear it referred to as a “no asset” case. But if the trustee DOES take possession of any of your assets for distribution to your creditors—an “asset case”— your “general unsecured creditors” may receive some of it. The trustee must first pay off any of your priority debts, as well as pay the trustee’s own fees and costs.  Whatever remains goes to the unsecured creditors on a pro rata basis.

Conclusion

In most Chapter 7 cases your general unsecured debts will all be discharged and, most of the time, general unsecured creditors will receive nothing from you.  Rarely, a creditor may challenge the discharge of its debt.  If the creditor is successful, you will still owe that debt after the close of the bankruptcy.  And if you have an “asset case,” the trustee may pay a part, or in extremely rare cases, all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.

Attacking Your Debts with Chapter 7 vs. with Chapter 13

Posted by Kevin on November 19, 2012 under Bankruptcy Blog | Be the First to Comment

The type of debts that you have are a factor in deciding whether to file under Chapter 7 or Chapter 13.

The Overly-Simplistic But Still Helpful Rule of Thumb

Here’s a decent starting point: Chapter 7 handles your simple debts better than does Chapter 13, and Chapter 13 handles your more complicated debts better than does Chapter 7.

There are three kinds of debts:  “secured” for which there is collateral given, e.g., your house; “priority” debts which for most consumer creditors is child support, alimony or taxes; and “general unsecured” debts which include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many, many others.

Simple debts are generally general unsecured debts, and secured debts in cases where a) the debtor is current, their is no equity in the collateral and the debtor wants to keep the collateral or b) the debtor wants to give up or “surrender” the collateral.

Simple Debts- Better Off in Chapter 7

Chapter 7 treats “general unsecured” debts the best by usually simply discharging them (writing them off) forever in a procedure lasting barely three months.  You make no payments and you get to keep the property if it is exempt.

Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are slated to be paid 15% of the amount owed.  Moreover, if your income goes up during the term of the plan, your payments can increase.  So, unless you feel morally compelled to make restitution to your creditors, Chapter 7 is the preferred economic method of disposing of “general unsecured” debts.

As for simple secured debts, in Chapter 7, if you surrender, you give up the property, the debt is discharged and you make no further payments.  If you surrender the collateral in a Chapter 13, however, you may be subject to paying a portion of any deficiency through your plan.  Clearly, in that case, Chapter 7 is the better alternative.

If you want to keep the property which is current with no equity, in a Chapter 7 the trustee “abandons” the property.  That means that it drops out of the bankruptcy and you keep it subject to the secured claim.  As long as you keep paying the secured creditor, you get to keep (and someday own outright) the collateral.  Moreover, the underlying debt  to the bank is discharged, so the bank can never come after you for a deficiency if you default down the line.

Now, you get pretty much the same deal in Chapter 13 ( you keep the collateral and continue with your payments), but you are subject to court supervision for up to 60 months. That can be  a hassle.    Hence, Chapter 7 is a better alternative because it is quicker and cleaner.

The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.