Real Estate Attorney
Licensed in California and Florida
In Chapter 7 — which some people call “straight bankruptcy” but is more accurately called a “liquidation” case — you essentially give up all of your assets, and in return you get out of all of your debts. This is a gross oversimplification, of course, but it illustrates the difference between Chapter 7 and Chapter 13.
A Chapter 13 case is designed for a wage earner who has the means pay at least some amount of money toward her debts, and it provides for a debtor to create a Plan to repay part of her debts back over a period of time — usually 36 or 60 months, depending on the debtor’s situation. In Chapter 7, you just walk away.
Of course, you don’t give up “all of your assets” in Chapter 7. Certain assets are exempt, which means that you get to keep them. For example, people in California who dont own a homestead (or if their home has no equity) can claim wild card exemptions of just over $23,000. This means that the first $23,000 of your assets cannot be taken in Chapter 7 and that doesnt even include retirement accounts. Most of our clients do not have to worry about giving up anything in Chapter 7.
Similarly, you aren’t relieved of all of your debts either: some debts, like student loans, can almost never be discharged. Others, like income taxes, can be discharged under limited circumstances. And debts that have arisen due to fraud or intentional tort (like, for example, the O.J. Simpson civil judgment) are generally nondischargeable.
A Trustee will be appointed to your case. The trustee is in charge of your bankruptcy estate and technically controls all of your assets while you are in bankruptcy. The trustee will determine whether you have any non-exempt assets, and, if you do, will liquidate those assets and distribute the proceeds to your creditors.
A discharge is an order entered by a U.S. Bankruptcy Court Judge that forever prevents creditors from taking any action to collect on your personal liabilities existing at the time you filed for bankruptcy. The discharge is the order that you want and is the reason why you file bankruptcy. In most cases it takes 4-5 months from the time of filing until you receive your discharge. The judge will issue a discharge after the Court determines that you qualify for a Chapter 7 discharge. Usually you do not have to appear in front of the judge in Chapter 7.
Certain requirements must be met for filing in Chapter 7. You may not be permitted to file under Chapter 7 if you have enough money after meeting expenses to repay your unsecured creditors. In that case a Chapter 13 bankruptcy may be appropriate. Other requirements exist but listing them would make this FAQ too large.
Most of my Chapter 7 clients don’t pay or give up anything in liquidation because they don’t have anything to begin with. When my clients do have assets that they want to keep through bankruptcy, and those assets cannot fit into an exemption, we usually encourage those clients to consider Chapter 13.
In Chapter 7, you are generally allowed to keep assets that secure a loan (like for a car or home) provided that you are current on the payments. You will have to surrender or catch up the payments on a secured asset if you want to keep it in Chapter 7.
Chapter 7 is generally the simplest and most streamlined of the forms of bankruptcy that consumers might consider. It takes less time and costs less in attorneys fees, but Chapter 7 has limitations. Chapter 7 will not be right for you if you earn too much money, have an ability to repay your debts (even if just a small amount), or if you are behind on your home or car and want to keep it. And if you want to make use of an option in bankruptcy such as redemption repaying the fair market value of a vehicle or home instead of what you owe you will definitely want to examine the benefits of repaying over 3 or 5 years in Chapter 13 before you consider filing Chapter 7.
Chapter 7 is the best alternative for a lot of people. Although you can file Chapter 7 without an attorney the forms are readily available I strongly discourage this practice because it is easy to make a mistake in your disclosures or exemption elections that costs much more than the lawyer would have cost in the first place.
Disclaimer: This is general knowledge and not legal advice. Please consult a professional in your jurisdiction for advice specific to your situation.