Giving More Thanks for Chapter 7 "Straight Bankruptcy"

 Posted on November 27, 2015 in Chapter 7

Here are more features of Chapter 7 worth knowing and taking advantage of.

The day before Thanksgiving we talked about the following features of “straight bankruptcy”:

1) The “Automatic Stay”: The IMMEDIATE stopping of virtually all collection actions against you and everything you own.

2) Property “Exemptions”: Protection for ALL you own, for most people who file bankruptcy.

3) “Reaffirmation” of Vehicle Loans and Other Secured Debts: The ability to be selectively choose to keep SELECT secured debts and the collateral securing them—if and only if you want to.

4) Paying Favored “Creditors” If You Want: The right to choose to pay a SPECIAL debt that you feel a deep moral or family obligation to pay, after the bankruptcy is over and you’ve legally discharged (written-off) the debt.

5) Qualifying for the “Means Test” by Income: Most people filing Chapter 7 pass the “means test” EASILY by having less than “median income.”

Here are five more, maybe less familiar but potentially extremely helpful features of Chapter 7:

6) “Avoidance” of Judgment Liens on Your Homestead:

Chapter 7 can turn back the clock to before a creditor sued you and got a judgment against you and a judgment lien on your home, by permanently “avoiding” that lien.

It’s quite amazing that you can file a Chapter 7 case so that the “automatic stay” stops a lawsuit from turning into a judgment lien. It’s that much more amazing that even AFTER that judgment lien has attached to the title to your home it can often be REMOVED through judgment lien “avoidance.”

If your home qualifies for the homestead exemption (they almost always do), and that exemption covers all of the equity in your home (if you’re filing a Chapter 7 case that’s usually the situation), then most likely that judgment lien can be erased (“avoided”) from your title.

Then, when the debt itself is “discharged” (legally written off) just 3 or 4 months after your Chapter 7 case is filed, this debt previously secured by your home turns into no debt at all. And the equity in your home eaten up by that judgment lien becomes your home’s equity again.

7) “Redemption” of Secured Debts

If you own a vehicle worth less than what you owe on it, through a Chapter 7 “redemption” you can make your vehicle lender give you the vehicle free and clear of its lien by paying to the lender an amount equal to the vehicle’s fair market value. That fair market value could be thousands of dollars less than you owe on the vehicle, saving that much money plus the anticipated interest that would have been paid over time on that amount.

Most people don’t have the money to pay the “redemption” amount in a lump sum, which is what is required. But sometimes the money can come from a relative or some other friendly source. And then you’d have that much less to pay for the vehicle.

If you have no one who could lend you the “redemption” amount, there may be “redemption lenders” which would lend you the required amount (your vehicle’s fair market value). Trading one creditor for another in this way may well be worthwhile if you owe thousands of dollars more than the fair market value, so you’d be trading a bigger debt for a smaller one, likely with smaller monthly payments.

8) Payment of Special Debts through Your Bankruptcy “Estate”

In our last blog post we said that usually everything that a person filing a Chapter 7 bankruptcy case owns is covered by property “exemptions,” and so everything is protected from being “liquidated” by the trustee to pay to your creditors. But sometimes you own an asset or set of assets you don’t care about surrendering—for example, if you closed down a business and have inventory or business equipment you no longer need, or if you own a boat that you don’t mind parting with because it costs too much to maintain. If you surrender such assets to the Chapter 7 trustee after selling them, he or she may use most of the sale proceeds to pay a debt or two that you want to be paid, and/or a debt that can’t be “discharged” (legally written off) and so you would have to pay otherwise.

The reason debts that you want to pay could be paid by the Chapter 7 trustee instead of the other debts is that by law “priority” debts must be paid in full before anything at all is paid on the rest of the debts. So, any child or spousal support arrearage would be paid first. Then recent income tax debts which can’t be “discharged” would next be paid, ahead of most other debts. (There are other “priority” debts but support and income taxes are the most common in consumer bankruptcy cases.)

So if you owe support arrearage or income taxes, it may make sense to surrender assets that are not protected by “exemptions” so that the Chapter 7 trustee can use the asset sale proceeds to pay all or part of those special debts.

9) Getting Back “Preference” Payments from Creditors:

Chapter 7 also empowers you to turn back the clock in another quite astounding way—you can sometimes force a creditor to pay BACK what you either voluntarily or involuntarily paid to that creditor before you filed bankruptcy.

For example, if a creditor garnished your paychecks or bank account during the 90-day period before your Chapter 7 case is filed, and the amount garnished totaled $600 or more, that creditor could likely be ordered to return that garnished money, the “preference” payment.

In most cases that money would be returned to you, if it could be covered by a property “exemption.” (See item 2 above and in our last blog post.) You may have a “catch-all” “exemption” available to you that applies to miscellaneous money such as this.

Even if there is no available “exemption,” so that the money goes to the Chapter 7 trustee instead of to you, that money could still benefit you by paying a child/spousal support arrearage or recent income taxes, as just explained in section 8 above.

10) “Discharge” of Debts:

The primary point of bankruptcy—especially Chapter 7—is to get rid of unmanageable debts. This power to undo your legal obligations is truly something to be grateful for. Throughout much of the history of bankruptcy laws over the centuries, the debts that remained after a debtor’s assets were liquidated continued to be owed. There was no “discharge” at all of any debts.

So, to be able to get rid of all or most of your debts, and to get it done usually in a matter of 3 or 4 months, is indeed a wonderful thing. It, along with these other powerful features of Chapter 7, allows you to get a truly fresh start.