Hi again! I am back for part 2 of What Is Chapter 7 Bankruptcy. In Part 1 we covered why bankruptcy in the first place. We learned that bankruptcy is a necessary process to create order out of chaos. We learned that chaos is bad and order is good. But, once you file a chapter 7 bankruptcy then what? What happens to debtor’s assets? Can you keep everything? Do you lose everything?
If there is one aspect that scares most people about a Chapter 7 Bankruptcy it is the prospect of losing assets when you file bankruptcy. Is it obvious that no one wants to lose assets? Yes, that should be obvious. When you are down and out and can’t pay your bills and you have lost so much already, the last thing you want is to lose even more.
WHAT THE HECK IS A BANKRUPTCY ESTATE?
Upon filing for Chapter 7 Bankruptcy, instantaneously, there is created what we call a bankruptcy estate. Technically, once you file for chapter 7 bankruptcy, all of your assets, wherever situated in the world, become an asset that belongs to the bankruptcy estate. Does this mean I no longer own my assets? Yes, technically, it means you no longer do not own your assets. But, don’t panic! Most people lose no assets in a chapter 7 bankruptcy.
Let’s back up just a little bit. Have you ever played poker? If you have you would know that you must hide your cards from everyone else in order for the game to make sense. You don’t want to let everyone else know what you have in your hand or you wouldn’t be able to play the game of poker.
Bankruptcy is the exact opposite of poker. In bankruptcy, in exchange for getting relief from your debts, you promise to disclose all your assets, wherever situated in the world. So, when you file a chapter 7 bankruptcy in Eden Prairie, Minnesota, all assets you own must be disclosed in the schedules.
What happens to these assets once the bankruptcy case is filed?
EXEMPT ASSETS
When you file a Chapter 7 Bankruptcy, and disclose all of your assets, you have an opportunity to claim an “exemption” on your assets. An exemption is a federal or state law that allows you to say, hey this asset is “exempt” from my creditors- ie. Creditors may not take this asset from me because Congress or my state legislature has said that the debtor can keep this asset for debtor’s use.
The vast majority of assets can be claimed as exempt in bankruptcy. Most debtors do not lose any assets in bankruptcy. For example, homes, furnishings, vehicles, jewelry, pensions, and even personal injury cases etc all of have exemptions that protect the asset for debtor.
For the attorneys at Kain & Scott, there is always an exemption analysis that needs to be done to see whether using the federal or state exemptions is more advantageous for debtor. Which set is more advantageous for debtor depends on debtor’s assets of course.
NON EXEMPT ASSETS
As stated above, the vast majority of assets are what we call “exempt” or protected from creditors or the chapter 7 trustee taking them. Some assets are not protected.
In terms of process, if no one objects to your exemptions within 30 days of your meeting of creditors, debtor’s exemptions are sustained and debtor’s “exempt” assets revert back to debtor. All exempt assets that revert back to debtor can now be used by debtor in whatever manner debtor sees fit.
However, if the Chapter 7 Trustee objects to your claimed exemption and a judge sustains the objection, or you don’t exempt the asset at all, the asset then remains in the estate as a non exempt asset. Any assets that remain in the estate, no longer belong to debtor and the trustee must administer the assets in the estate.
WHAT HAPPENS TO NON EXEMPT ASSETS?
So you ask, I filed a Chapter 7 Bankruptcy, and I own a boat that I know is non-exempt. What happens to the boat in my Chapter 7 Bankruptcy? Let’s give you an illustration of the way this would work. Say you have 50k in credit card debt right? The chapter 7 trustee does not want a boat. The chapter 7 trustee is mandated by law to liquidate (sell) all non exempt assets and pay creditors pro rata (everyone gets a little bit but it’s based on the size of the claim).
In this illustration, trustee will sell the boat, likely at an auction, and reduce the boat to money. My experience with these kind of auctions is assets do not go for top dollar. Let’s assume the boat sells for 10k. Normally, the trustee would get paid a percentage of fees in this transaction but to keep it simple- assume the trustee has already been paid her fees and 10k was leftover.
The Chapter 7 Trustee would disburse 10k to 50k in debt pro rata. So, in English, your creditors would receive twenty cents on the dollar.
WHAT HAPPENS TO THE UNPAID DEBT?
The balance of the unpaid debt gets wiped out or discharged in the bankruptcy case. So, even for those people who have modest non exempt assets, typically, only a portion of the debt gets paid and the remaining unpaid debt gets wiped out/discharged forever, tax free! Now, folks, when you are knew deep in debt, that is a huge relief. Getting your life back is the goal. Suffering from overwhelming debt in Eden Prairie, Minnesota, or anywhere else in Minnesota is unnecessary and inhumane.
Stay tuned, as we continue on our 3 part series on WHAT IS A CHAPTER 7 BANKRUPTCY? In Part 3, we will address what debts get wiped out in a chapter 7 bankruptcy and which debts do not, but then again, sometimes do! See, the Bankruptcy Code is confusing but at Kain & Scott, we untangle it for our guests.
See us anytime on line at www.kainscott.com.