A Chapter 7 Bankruptcy has often been referred to as a “fresh start” bankruptcy or like hitting a “reset” button. The reason for this is in Chapter 7 bankruptcy you do not make payments back to your creditors. Instead, your liability on those debts gets “discharged” and the creditor can no longer collect on those debts, forever.
The trade-off is a close examination of your assets which you must disclose with absolute clarity. You must itemize your assets so that they can be reviewed by creditors and a Chapter 7 trustee who determine whether your assets are “exempt” (protected from creditors and you keep) or “non-exempt” (you must turn the asset or the value of the asset over to a Chapter 7 trustee).
In addition to the value of non-exempt assets, trustees can also recoup some preferential payments made to creditors (both insider creditors and unsecured creditors) and other possible fraudulent transfers within certain time frames.
Once the Chapter 7 trustee gathers the money collected from these non-exempt assets, preferences, and fraudulent transfers, the trustee notifies creditors to file a proof of claim and that there will be a distribution to unsecured creditors in this case. In a huge percentage of Chapter 7 Bankruptcy cases there is zero distribution to unsecured creditors and nothing to distribute.
Yet, in other cases, Chapter 7 trustees will distribute the funds held by the estate to creditors in a priority system, and pro rata (based on the size of their claim). If the creditors receive 10 cents on the dollar, the balance of their claim, 90 cents on the dollar, gets wiped out, tax free, forever. Not a bad deal right?
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