Liquidation- The basic theory behind Chapter 7 liquidation is you sell everything you have for the benefit of creditors. That means that you sell your stuff and use the proceeds of the sale to pay off your creditors. Whoever is not paid off at the end of the process gets discharged. In Chapter 7 it is the bankruptcy trustee’s job to find and sell assets for the benefit of creditors. That means that the trustee wants to find your stuff that is worth money so that he can sell it to pay your creditors. To help turn around your financial situation, turn to The Law Offices of Brad Weil in Carson, California today to schedule a free consultation.
There are a series of state law exemptions that we use so that you can keep some of your stuff. If we exempt something from the bankruptcy estate it does not become part of the bankruptcy and you get to keep it
For example, all of your household goods and furniture is able to be exempted. Your clothing is exempt. Some of the equity in your house (assuming you have equity) is exempt up to a certain amount.
The reason for exemptions is so that people will not be reliant on the state due to the fact that they filed for bankruptcy. The government realizes that people need certain items to be able to live and they do not want to deprive people of those items so the state makes a public policy decision as to what they will allow people to keep and what they won’t or how much of a certain category of items you are allowed to keep.
Some items can be fully exempt and some items can be only partially exempt. In the case of partially exempt items if you want to keep them you will have to “buy” the item from the bankruptcy estate by paying the trustee the non-exempt amount of the item. If you allow the trustee to sell the item you are entitled to keep the exempt portion in the form of money from the sale of the item.
Exemption planning can be complicated and gets tricky if you have assets. Make sure you seek the advice of an attorney before you do anything especially if you think that you may have a non- or partially exempt item. Attorneys are allowed to help their clients plan for bankruptcy by transferring a potentially non-exempt asset into an exempt one but this should only be done under the direct supervision and advice of an Attorney.
Most Chapter 7 bankruptcy cases (around 90%) are non-asset cases. A non-asset case is one in which there are no assets to administer by the trustee. That means that all of the stuff the debtor owns is fully exempt. A no-asset Chapter 7 case takes about 4 to 6 months from filing to discharge.
If the debtor owns an asset that is not exempt or that is only partially exempt then they have what is known as an asset case. This means that the trustee will sell the debtor’s stuff in order to pay creditors. This process takes a longer period of time and these cases usually last 1-2 years depending on the asset and the trustee.
If a piece of the property serves as collateral for a debt then that debt is secured by that piece of property. Usually, houses serve as collateral as do vehicles for the debt people incur when purchasing or refinancing said house or car. If you file a Chapter 7 and you owe secured debt then you will need to choose how you want to handle that debt
Reaffirmation, Redemption, and Surrender of secured collateral.
Your first choice is to surrender or give back the item that serves as security for the debt in exchange for not being held liable for the rest of the debt (the amount of the debt over the value of the collateral). If the collateral is worth more than the debt then you are entitled to receive the equity assuming it is exempt from the bankruptcy estate otherwise the equity is an asset of the estate and the trustee will want to sell the item to get at the equity.
Your second choice is to call reaffirmation. A reaffirmation agreement is an agreement to be bound post-discharge to a pre-bankruptcy debt in exchange for being able to keep the item in question. This is usually used with car loans. It allows you to keep making payments on the vehicle during the bankruptcy and to keep the vehicle after the bankruptcy, however that debt will not be discharged at the end of your bankruptcy and you will still be personally liable for the debt so you have to consider this option carefully. I usually only advise this option if you already have a good deal or are getting a better deal in exchange for reaffirming the debt.
Your third choice is called redemption. This option is rare because it requires you to “buy” the collateral out of the bankruptcy by paying the creditor the current market value of the collateral in a lump sum in exchange for a discharge of the rest of the debt. This option requires you to have non-exempt cash to be able to afford to pay the current market value of the collateral in a lump sum. Most people in bankruptcy cannot afford to take advantage of this option. This is a better option for Chapter 13 (more on that later).