If you have looked at all of your debts, consulted with debt counselors, tried all your avenues and decided bankruptcy is your only option, you will begin the steps toward either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is known as straight bankruptcy or liquidation. Chapter 13 is a wage-earner plan and is not quite as drastic as liquidation in Chapter 7.
Chapter 13 is different than a liquidation bankruptcy case like Chapter 7, because when you file for Chapter 13, the judge works with you, your lawyer and your creditors to decide the kind of payments you can make. The judge negotiates with your creditors to lower your payments, your interest or your principle. The judge can also dismiss some of your debts, especially credit card debt. Lenders generally look upon this kind of bankruptcy less severely than Chapter 7, or liquidation, as creditors get some payment rather than none.
A liquidation case goes under Chapter 7 bankruptcy law. In liquidation, you file for Chapter 7 bankruptcy, which aims at removing all your debt in return for your cooperation in the liquidation of your assets to pay off the debts you can.
In a liquidation case, once you file for bankruptcy, the creditors can no longer contact you for collection. They may contact your lawyer and the court. During the bankruptcy process, the court will work with you, your lawyer and your creditors to come to an agreement. The agreement usually includes the liquidation, or selling off of much of your assets to cover many of your debts.
The court will probably decide in a liquidation case to charge off your unsecured debts. Unsecured debts are not covered by collateral, and these debts will generally be wiped out and you will not be required to repay any of them. Secured debts — those backed by collateral — are almost always left for you to pay, unless you decide to forfeit the collateral, such as your home or car.
The court will look at everything you have and decide which assets you have to liquidate in order to pay off your debts. You will also work with the court to decide which assets you will retain because they are exempt by law. The judge will give you a list of federal and state exemption lists so you will know the assets you do not have to liquidate in your Chapter 7 case. You also may decide not to liquidate other items, such as your car, and request to continue paying on that loan.
You will also be assigned a trustee by the court to oversee your liquidation case. He or she will make sure everything is done correctly and clear up any questions the court has about your case.
About a month after filing for Chapter 7, you will go to a meeting of creditors to do a last check-over of the liquidation case and the paperwork. The trustee will also ask any last questions for the court. At this meeting, you will also be required to turn over any of your non-exempt property or cash from liquidation of your property.
Within a few months, you will receive a notice your debts have been discharged as a result of your liquidation case. You may have “won” your case, but as a result of the liquidation of your assets, you are left with much less than you started. When trying to make the decision on bankruptcy, you need to try to balance the benefits against the consequences of liquidation and a mark on your credit report.
By D. Blair Thompson