Chapter 7 Bankruptcy - Can I get a fresh start?

An individual seeking relief from an unmanageable burden of debt may file a petition under chapter 7 of the US Bankruptcy Code. 

Filing Chapter 7 offers a “fresh start” to honest debtors who just can’t seem to climb out of the financial hole.   

Petitioners under chapter 7 surrender their assets to a bankruptcy “estate” overseen by a “trustee”, or an impartial arbiter appointed by the court.  The debtor may keep their retirement plan, IRA, or home equity up to a certain sum, as well as other assets contained under federal and/or state exemptions. 

You should consult with your attorney about the specific exemptions covered under your state’s laws.   All assets not included under these exemptions, if any, are sold by the trustee, who distributes the proceeds to the individual’s unsecured creditors who have filed claims on the estate. 

On the other hand, creditors holding a lien or a mortgage on the debt holder’s real estate generally cannot file such claims, as secured debts are usually not discharged under chapter 7. 

Most individual claimants under chapter 7, however, present “no-asset” cases, that is to say, they have nothing to contribute to the estate that isn’t exempt under state or federal guidelines.  Under this very common scenario, the individual’s debts are cancelled without the creditors’ receiving a penny in compensation. 

There are obvious advantages to pursuing chapter 7 liquidation of debt.  The debt holder retains certain fundamental assets, while escaping the stresses of litigation for unpaid loans, garnished wages, and persistent phone calls from collection agencies. 

As soon as chapter 7 proceedings are initiated, your creditors are required by law to leave you alone.  It is important to note, however, that a successful discharge under chapter 7 does not offer universal cancellation of debt.  Medical bills, personal loans, and credit card debt can be discharged; student loans, however, and debt from child support or alimony obligations don’t apply under the statute; neither does chapter 7 abolish a lien on property. 

There is some flexibility under chapter 7 for retaining certain nonexempt assets if the debtor agrees to restructure the debt agreement with the creditor and can show that he or she earns sufficient income to make payment in the future.  This agreement is called “reaffirming the debt.”  Your automobile, for example, can be a reaffirmed debt if you qualify.  It is not always an “all or nothing” deal, in other words, with nonexempt property.  You may not have to sell the entire estate in order to get rid of debts covered under the chapter 7 provisions. Consult with your attorney about the best course of action for handling the specific categories of debt that are obligating you.

There are some pitfalls involved in filing chapter 7 proceedings.  You must be precise in abiding by the rules of filing or your case will be dismissed.  The court will require financial schedules, tax returns, and a complete list of creditors; credit counseling is mandatory prior to and after filing.  You may continue to be liable for certain debts even after a successful resolution to your case, and your credit rating will take a hit.  Consult with an experienced bankruptcy attorney before making any serious decision about your financial future.