Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is designed to help people who are unable to pay their existing debts. The objective of filing for bankruptcy under this chapter is to get a discharge of your existing debts (or at least as many of them as possible.)

Under a Chapter 7 bankruptcy, the trustee appointed by the court takes possession of any of your assets which are not exempt by law and turns them over to your creditors in partial payment of their claims.  Very often, therefore, one of the key questions which must be resolved at an early stage in the bankruptcy is which of your assets are exempt from the claims of creditors.

In New York, the question of which assets are exempt from the claims of creditors is determined by New York state law.  Unlike other states, the debtor does not have the choice as to which law rules, Federal or State.  So the debtor must look to a host of disbursed New York laws to decide which property is exempt, which is not, and to what extent the property is exempt.

Exempt property (amounts will change from time to time) includes:

Household furniture with a value of up to $2,400;
Automobile with a total equity of up to $2,400;
Bank accounts with a total value of up to $2,500;
Clothing and jewelry with a value of up to $5,000;
Pension plans, 401(k), 403(b), deferred compensation, and other employer-related accounts    such as IRA accounts;
Home with a total equity of up to $50,000 ($100,000 for a married couple).

However, not every debt can be discharged.  Debts that cannot be discharged include:

Many outstanding income tax arrears (but more can be discharged than most think);
Child support;
Alimony;
Student loans (except that you can ask the bankruptcy court to relieve you of this debt              because repayment would create an undue hardship on you);
Court fines;
Damage awarded because of fraud or deception;
Personal injury debts caused by driving while intoxicated or taking drugs.

The basic premise of Chapter 7 Bankruptcy is to wipe out your unsecured debt.  Secured debts, such as mortgage loans, are secured by specific property and, in general, any non-exempt property will be transferred to the creditor in satisfaction of your obligation, unless you arrange to pay the debt in full during the bankruptcy proceeding.

Some Frequently Asked Questions:

Which creditors need to be listed on a Chapter 7 Bankruptcy petition?  Basically, all creditors need to be listed in the petition schedules for you to get a discharge from the  obligation you have to those creditors.  If a creditor is omitted from the schedule of creditors, that creditor's claim will not be discharged and that creditor may pursue his claim against you, even after your discharge is granted.  

What if I want to keep a credit card?  There is a procedure within the Bankruptcy proceeding for you to reaffirm a debt to a particular unsecured creditor.

Can I be discharged of my back taxes?  That is a complicated question.  In general, it depends on the type of tax (income, employer trust fund, etc.) involved, and how long it has been in arrears, i.e., has the IRS had sufficient time to try to collect it.  We will tackle this thorny question in greater detail in a future article.  

The alternative to a Chapter 7 Bankruptcy is a Chapter 13 Bankruptcy, called a Wage Earner Bankruptcy.  It is designed for individuals who want to and can repay their obligations over a three to five year period.  The details of a Chapter 13 Bankruptcy are discussed in the Article covering that chapter of the Bankruptcy Code.

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Last modified: December 26, 2007

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