A bankruptcy is a legal declaration by a person (or business entity that qualifies), that they/it cannot pay all or a portion of their existing debt to their creditors and need protection from the creditors remedies to enforce payment. In California, and throughout the United States, this often means that a person cannot meet their contractual obligations to make their home, car, credit card and/or other monthly expense statements.
The law allows you to seek protection from your creditors by filing a “Petition” in the United States Bankruptcy Court. The filing of the “Petition” automatically “stays” (stops for a period of time) your creditors from trying to collect the debt. It also stays any pending civil legal action against you and/or your property (e.g. civil court lawsuits, foreclosures, repossessions, etc.).
There are different types of bankruptcies that apply to different types of circumstances. For purposes of the following articles we will be dealing exclusively with those designed for most people (“consumers”) and small businesses, Chapter 7 and 13.
In order to determine whether or not you qualify for protection the Court must be informed of your complete holdings including your income, expenses, assets, liabilities and property holdings (personal property, real property, life insurance policies, securities accounts, trusts, holdings in foreign countries of any kind, etc.).
In a Chapter 7 a “trustee” is assigned to your individual case to evaluate and determine what assets you can protect (keep) and what property may be sold to pay off your existing creditors. Property that you are allowed to keep is classified as “exempt” property. “Non-exempt” property can be taken by the U.S. Trustee to be sold to pay off your creditors.
What is a Chapter 7 Bankruptcy?
A Chapter 7 Bankruptcy allows you to completely eliminate certain debt and either “surrender” or “reaffirm” other debt. Debt is categorized as Secured, Unsecured Priority. Secured debt is something that is tangible like a car or home that can be repossessed or foreclosed on and the lender can physically take it back if you fail to make your payments. Examples of “unsecured debt” are credit cards and personal loans where if you fail to make your payments the lender’s only recourse is usually limited to filling a lawsuit and obtaining a judgment in order to collect on the debt. Common “Unsecured Priority” debt is usually tied to student loans or taxes that, by law are given special treatment and quite often not dischargeable in a bankruptcy.
In Chapter 7 Bankruptcy your debt is categorized into one of the three areas described above. Your unsecured debt is eliminated in its entirety. Your secured debt is either surrendered (i.e. given back to the creditor) or “reaffirmed”, which means that you can keep the property under the same terms and conditions as you had when you purchased the item, or in some instances creditors will negotiate a settlement with you. Unsecured Priority debt can be either dischargeable or non-dischargeable depending on the nature of the debt and when the debt was incurred. For instance, under certain circumstances tax obligations over three years old can be eliminated, whereas student loans cannot.