In Chapter 7 personal bankruptcy, your assets are liquidated and the proceeds are used to pay off your debts. The trustee assigned to your case figures out what you own and what can be sold. You might be concerned that you'll be left with nothing, but bankruptcy law doesn't let this happen.
Chapter 7 Liquidation Raises Money to Pay Your Debts
When the trustee liquidates your property, the money is used to pay your creditors – those to whom you owe money. Some creditors have a higher priority than others. For example, if you owe past-due child support or alimony, the trustee pays these debts first. Wages that owed to others might be paid next. Credit card debts will be paid last.
Chapter 7 Liquidation Exemptions
Chapter 7 bankruptcy law allows you exemptions, or a certain dollar amount of property that your trustee may not sell. For example, you can keep a limited amount of furniture. You can also keep your retirement accounts and some of the equity in your car or home - the difference between the amount you owe and what the property is worth.
In Chapter 7 Bankruptcy Liquidation Equity in Property Counts
The equity that you have in an asset such as your car or your home is usually much less than the asset is worth. For example, you might own a car worth $10,000. If the federal bankruptcy exemption for automobiles is $2,900, you might think you can't keep your car because it's worth more than that. This might be true if you don't have a loan against the car but, if you still owe money, you only have to protect the difference between the loan and the car's value. If you owe $8,000 and you have only $2,000 in equity, this is less than the federal exemption and you get to keep the car.
Although protected or exempted equity means the trustee can't sell your property to pay your debts, it doesn't mean the lender can't take the property back. In the above example, you don't get to keep the car without paying the loan. You'd have to enter into an agreement with the lender as part of your bankruptcy, promising to continue making payments on the car.
Your Debts Go Away Even if You Have No Property to Liquidate
If you have no property that the trustee can sell after your exemptions have been applied, Chapter 7 bankruptcy will still erase most of your debts. Chapter 7 cases are called "no-asset bankruptcies" for just this reason. Certain debts, such as child support, can't be discharged at all, even if you declare bankruptcy.
A Personal Bankruptcy Lawyer Can Help
The law surrounding Chapter 7 personal bankruptcy is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a bankruptcy lawyer.