What is Chapter 7? Why do they call it “liquidation?”
(251)272-9148 – Attorney Judson E Crump
Chapter 7 is your traditional bankruptcy. You file a petition with the court where you basically sign 80 pages of paper that says “I have a ton of debt and I can’t afford to pay it all and I don’t want to spend the rest of my life enslaved to Capital One.” The court reviews your paperwork and you go to a meeting of your creditors to testify that everything you put in that paperwork was true. And a couple of months later, you don’t have any debt. Ideally. Like everything else, it gets more complicated the closer you look.
“Liquidation” is really an older term, heldover from the days when most bankruptcies were involuntary. ‘Involuntary’ meaning if you were up to your neck in debt, you didn’t run to the bankruptcy court for help: your creditors dragged you there. Why? Because back then, your state law protections against your creditors were stronger than federal bankruptcy rights, and forcing you into bankruptcy froze your finances in place so you couldn’t secretly let your unharvested corn get ‘stolen’ by your cousin. Today, the situation has become reversed, and the overwhelming majority of bankruptcy cases are filed by people who need protection from their creditors.
Enough history. Let’s talk Chapter 7 in 2014.
First, the general theory. It’s still called liquidation, because if you do happen to have anything of value and your state exemption laws don’t keep it out of your creditors’ reach, then this guy* called the Chapter 7 Trustee will take all of that stuff and sell it. He’ll have a garage-sale type “everything must go” free-for-all dump of your cherished possessions, and whatever money he’s left with will be distributed pro rata to your creditors.
Actual liquidations, though completely within the Chapter 7 Trustee’s power, are very rare. Why? Two reasons:
1. Most people who have things that they want to keep, but cannot protect choose not to file Chapter 7, opting instead for debt settlement or Chapter 13 or the long, hard road of dragging things out with minimum payments and waiting for Bad Things to happen.
2. Trustee’s don’t genuinely want to spend their own precious time sitting around in some rented warehouse waiting for tire-kicking American Pickers wannabes to come and offer $300 for your 1991 Caprice with the “leather” softop. They use the threat of liquidation far, far more than the act.
Once that liquidation is done, you’re free to go. Like a newborn baby, you have no possessions and no debt.
Now for the reality. As I said, real liquidations are very rare, and most Chapter 7 debtors don’t have anything worth the Trustee’s effort. Now here, you may be tempted to think: “What about my house? My car?” Good questions, which unfortunately I have to answer with another question: Are they paid for? Mostly paid for? There you go.
Most people who are in financial straits dire enough to be thinking about Chapter 7 don’t have paid-for homes and vehicles. If you own a $10,000 truck with a $13,000 note on it, that truck is worth -$3,000 to you right now. Yes, that’s a negative sign before the $. That truck is a negative asset. Which the Trustee most definitely does not want. If all your good stuff is encumbered by big loans, then you don’t own crap. The bank owns your good stuff and they’re letting you use it as long as you make payments.
So if you don’t own anything and your income is not too high compared to your expenses (based on your household size and what state you live in), then you can file Chapter 7 without really losing anything. The process takes about 3-5 months, costs about $1384 (for an individual, $1584 for a married couple), requires usually 1 court appearance, and a week or two to prepare the petition itself.
At the end of your bankruptcy, the Bankruptcy Court will enter a Discharge. This is the court order that declares all the debt you listed in your bankruptcy petition to be gone. No longer enforceable against you in court or elsewhere, and they cannot report the debts to credit reporting agencies as still being owed. Occasionally, some creditors will forget about a bankruptcy discharge and start collecting again or re-reporting the debts on someone’s credit. Woe to he that does so to one of my clients, because I thoroughly enjoy dragging those law-breakers back into court to explain why they’re disobeying Court Orders. Willful disobedience of the discharge injunction makes an offending creditor liable for actual damages, punitive damages, plus attorneys’ fees.
Should you file Chapter 7?
Everybody’s situation is different, and you don’t know if you need to file Chapter 7 until you’ve spoken with a lawyer that genuinely knows what he is talking about. But in general, here is what Chapter 7 is good for:
- People with lots of small bills.
- People who have been hit by a temporary, but drastic, reduction in their income.
- People with few unencumbered (i.e. “Paid for”) assets.
- People with low or medium income (or huge families).
- Unsecured debt.
- Old taxes (for which returns were filed timely).
- Folks on Social Security (which is excluded from the “means test” that determines if you make too much money to file Chapter 7).
Chapter 7 does not effectively deal with:
- Mortgage arrears.
- Stopping foreclosures and repossessions.
- Student Loans.
- Child Support.
- Criminal fines and restitution.
Bottom line is this: if you’re even considering Chapter 7, you probably are in deep enough trouble to need to speak to a lawyer who specializes in getting people out of debt. If that’s you, give me a call: 251.272.9148. The first consultation is free.