What Makes a Simple Chapter 7 Case

Law Office of Robert L. Firth Aug. 21, 2017

A simple Chapter 7 case 1) protects you from all collections, 2) discharges all your debts, 3) lets you keep or surrender collateral and 4) keep all your other assets.

Chapter 7 Is the Most Common Kind of Bankruptcy

Consumers file significantly more Chapter 7 bankruptcy cases than Chapter 13 ones. In 2016, out of almost 800,000 bankruptcies, about 490,000 were Chapter 7s and almost 300,000 were Chapter 13s. (The rest were almost all Chapter 11s and 12s, plus a few Chapter 9s and 15s.)

A Simple Chapter 7

In a simple Chapter 7 case, you would:

1) protect yourself right away from (almost) all of your creditors;

2) discharge (legally write off) all or most of your debts, excluding some you may choose not to;

3) keep or surrender collateral mostly based on your own choice; and

3) keep (usually) all of your assets.

1) Immediate Protection

The “automatic stay” stops virtually all collection efforts at the filing of your Chapter 7 case. See Section 362 of the U.S. Bankruptcy Code. Just about any method of collecting a debt are included. For example, garnishments, lawsuits and judgments, collection phone calls, bills and collection notices in the mail or email, foreclosures, repossessions, and tax lien recordings are all “stayed,” or stopped immediately when you file. If a creditor continues its collection efforts, or starts any new collection action, it can be punished. So they generally respect the automatic stay and stop.

There are some very limited exceptions:

1) specific kinds of debts that a Chapter 7 filing does not affect, such as back child support and criminal fines; and

2) cases in which the automatic stay

  • either does not come into effect at all or

  • potentially expires after 30 days

because of the filing and dismissal of one or more bankruptcy cases within the prior year.

SO: In a simple Chapter 7 case, the automatic stay would apply to all of your debts, and your creditors would quickly comply with it.

2) The Discharge of Your Debts

Most debts are legally written off—discharged—in a Chapter 7 case.

There are exceptions, of different types. See Section 523 of the Bankrutpcy Code.

Very rarely a debtor could lose the right to a discharge of ANY debts. This happens if he or she hides assets or commits some other kind of fraud against the bankruptcy system itself.

Also, filing bankruptcy too soon after a previous case results in not discharging any debts in the new case.

Certain kinds of debts are simply never discharged—such as child and spousal support. Some are only discharged under very specific or limited conditions—such as income taxes and student loans. And some are discharged unless a creditor proves specific circumstances—such as a loan entered into through a debtor’s misrepresentations.

SO, in a simple Chapter 7 case, you are entitled to an overall discharge, and you have no individual debts that won’t be discharged.

3) The Option to Keep or Surrender Collateral

Chapter 7 gives you the opportunity to either surrender the collateral on a secured debt or to keep it by paying for it.

When collateral is surrendered outside of bankruptcy, you are often left owing money—the “deficiency balance.” That’s the amount you still owe after your creditor sells the surrendered collateral and credits the proceeds to your account. Chapter 7 almost always discharges the “deficiency balance.”

If instead you want to keep the collateral, usually you can if you are current on the debt. Even if you are not, you can often keep the collateral if you can quickly get current.

SO, in a simple Chapter 7 case, you either surrender the collateral, or can keep it if you are current or can quickly get current.

4) Keep All Your Assets

In most Chapter 7 cases, everything the debtors own fits within “exemptions.” These are categories of assets, usually up to a certain amount in value, which are protected from creditors. These are also protected from the Chapter 7 trustee acting on behalf of the creditors.

Both federal bankruptcy law and each state’s laws provide sets of such exemptions. Some states require their residents to use their state exemptions. Other states allow them to choose between with the state or federal exemptions. See Section 522 of the Bankruptcy Code.

There can be certain complications about exemptions. For example, you have to live in a state for a certain length of time before being able to use its exemptions. And you must own a homestead in a state for a certain length of time before being able to exempt it.

SO, in a simple Chapter 7 case, everything you own is exempt and protected.