What is a Chapter 7 Bankruptcy?

Utah Chapter 7 Lawyer

If you’re one of the many people unfortunate enough to be in some type of financial distress, you may be considering legal options to help you solve your financial problems. Sometimes a Chapter 13 repayment plan may be sufficient, but when it’s not, a Chapter 7 bankruptcy may be just what you need. This article will help explain some of the basics about it.

Chapter 7 bankruptcy is the kind of bankruptcy most people think of when they hear the word bankruptcy. There are two parts to a basic Chapter 7 bankruptcy. The first part is “liquidation” and the second is “discharge.”

Liquidate means to convert assets to cash. In the context of a chapter 7 bankruptcy, this is how it works. You first arrive at a value for your protected assets and then anything in excess of this exemption amount can be taken by the bankruptcy trustee. The bankruptcy trustee is the person who administers the case on behalf of the creditors that you owe. The trustee then liquidates those assets, paying the individual the exemption amount and disbursing the remainder among the creditors.

For example, let’s assume a debtor owns a car, a modest gun collection, and a refrigerator. With respect to the car, in Utah the debtor can protect $2,500 of equity. If the car’s value is $15,000, and the debtor owes $5,000, then there is $10,000 of net equity. In this scenario, the bankruptcy trustee could take the car, liquidate it for $15,000, and then distribute the proceeds as follows: the secured lender gets paid out for the $5,000, the debtor gets $2,500, the protected amount, and the creditors get a portion of the remaining $7,500. In Utah, guns are completely unprotected, so if the value of the debtor’s gun collection is significant enough to aid in covering obligations, they could be gone. A refrigerator is completely protected, regardless of value. Even if it’s a top of the line make and model, the trustee can’t take it.

Although the trustee has the power to seize any amount of unprotected equity, they usually won’t unless there is a reasonable likelihood of a net distribution to the creditors. So, even though the debtor’s kitchen table and chairs may exceed the $500 protected amount by a few dollars, the trustee most likely isn’t interested in taking it. This is an area where your attorney can help you with some valuable exemption planning prior to filing.

Discharge means to extinguish an obligation. So after a debtor has filed bankruptcy, attended the meeting of creditors, and any unprotected property is liquidated, the debtor will receive a discharge of any legal obligation to pay the debts, meaning the duty to pay on those debts is legally extinguished. The debtor walks away with a fresh financial start.

The discharge isn’t absolute, however. There are a few debts that stay with the debtor even after the discharge. Generally, secured debts, child support, taxes, criminal fines/restitution, and student loans are non-dischargeable. Most individuals are not surprised to find these types of debts stay with them after bankruptcy. Soon after receiving the discharge, the case will be closed. The debtor’s fresh financial start now begins.