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What you need to know about Chapter 7 Bankruptcy

If you’re considering filing Chapter 7 bankruptcy, here are a few things you need to know. Filing for relief under the Bankruptcy Code, including filing a Chapter 7 bankruptcy, can pose a number of advantages to individuals and businesses in financial difficulties. Two of the largest advantages are the discharge and the imposition of the “automatic stay” that prevents creditors from contacting or collecting against you. Although you may benefit from the “automatic stay” or one of the many other advantages you receive after filing for relief under the Bankruptcy Code, there are some disadvantages that may apply to your situation and of which your attorney will want to discuss with you first.

While no amount of information can replace a consultation with a bankruptcy attorney who can review your individual situation and make recommendations to you on the best way to navigate your financial difficulties, below are some important things to know about Chapter 7 bankruptcy before meeting with your attorney:

  1. Chapter 7 bankruptcy is also known as “liquidation” bankruptcy. That means the Court can discharge, or cancel your debts but the Trustee can also sell some of your property to repay creditors. This is also known as “straight” bankruptcy.
  2. Not all of your property can be sold by a Trustee in a Chapter 7 liquidation. Some property is “exempt”, meaning not accessible by the Trustee. Exempt assets are governed by state law, and your individual facts and circumstances may vary, but for most people they are able to exempt some (if not all) equity in their home, their cars, their bank accounts, their household furnishings, and their retirement accounts.
  3. Anyone who has not received a bankruptcy discharge in the past six to eight years (the time is dependent on which type of bankruptcy was filed) and is filing in good faith can file for Chapter 7 bankruptcy as well as anyone who does not qualify for Chapter 13.
  4. You will be asked to disclose all of the property you own; current income and monthly expenses; certain financial transactions that happened in the past few years; and all debts. You will also be required to claim your “exempt” property.
  5. Filing a Chapter 7 may impose certain restrictions on your assets, meaning you are not authorized to sell, give away, or otherwise dispose of any property that you own prior to filing Chapter 7 without Court permission, or until the Trustee can review your file and determine that your assets are exempt.
  6. The ultimate goal of a Chapter 7 bankruptcy is to obtain a discharge, which removes your obligation to have to repay debts. Certain debts are not dischargeable, and will survive a bankruptcy filing, including child support or alimony obligations, most tax debts that you’ve incurred, student loans, equitable distribution debts, or any loans that a creditor can show was made fraudulently.
  7. Loans to purchase property by using collateral – known as secured loans – such as a car or house – are treated differently. With a home, if you are current on your home payments when you file and remain current on your payments (in North Carolina), you can continue to keep the home. With a car, if you are current on your payments when you file, the creditor may ask for you to reaffirm the debt (to make it so the bankruptcy does not apply to the car loan). If you aren’t current, the creditor may repossess the property. Creditors can ask to have the automatic stay lifted in order to repossess or foreclose if you failed to stay current with payments.

Be sure to speak to your attorney in depth before filing Chapter 7 since you may qualify to file Chapter 13 instead. Chapter 13 bankruptcy has a separate list of advantages, some of which are the same and some of which are different than a Chapter 7 bankruptcy filing. Your particular facts and circumstances will dictate whether a Chapter 7 or a Chapter 13 would be more advantageous to you. Only your attorney can advise you on the best direction to take.

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