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Chapter 7 Bankruptcy Protection

Chapter 7 bankruptcy can also be referred to as a “liquidation plan” because a debtor’s non exempt assets will be liquidated by the bankruptcy trustee in order to raise cash to payoff creditors (we will talk about exempt and non exempt assets in a bit). Chapter 7 bankruptcy is used to discharge most types of unsecured debts such as credit cards, medical bills and personal loans. Certain types of debts, such as federal or state taxes and student loans may not be discharged. Once the bankruptcy petition is filed and your creditors are informed, you will enter into the “automatic stay” period. This is a temporary period of time in which your creditors must stop all action against you – including foreclosure, collection calls, shut off of utility services and more. However, the automatic stay is temporary and eventually your creditors will resume action against you unless they are paid or an agreement is reached.

Exempt vs. Non-exempt assets: Examples of exempt assets are your primary residence and your primary vehicle. Non-exempt assets could be virtually everything else – including investments, real estate and other property. In a chapter 7 bankruptcy, your non-exempt assets will be sold in order to payoff your creditors. You will not get anything from the sale of these items.

What happens to your primary residence and your primary vehicle? Since the debts associated with these types of property are secured debts, the creditor has the right to foreclose on the home and repossess the automobile in the case of non-payment. If the debtor does not wish to keep the home or the car they can choose to simply walk away from these pieces of property and allow the bank to take possession. If the debtor does wish to keep possession of the home or car then they will need to work with the creditor to reaffirm the debt. This point is a little confusing but think of it this way – the chapter 7 bankruptcy discharges your responsibility to pay back all of your debts – but in the case of your home and your car (if you wish to keep them) you will need to reaffirm or take on those debts again. You, or more likely your attorney, will negotiate with the creditor to come up with terms for the reaffirmed debt that satisfy both parties.

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