What Happens to Your Property in Chapter 7?

One of the biggest concerns people have about Chapter 7 is whether they will lose their house, car, bank account, furniture, or other property.

When a Chapter 7 case is filed, a bankruptcy estate is created that includes the debtor’s interests in property. A Chapter 7 trustee is appointed to review those assets and determine whether there is any nonexempt property that could be sold for the benefit of creditors.

But bankruptcy law also allows debtors to protect property through exemptions. In our practice, the overwhelming majority of individual Chapter 7 cases are no-asset cases in which the trustee does not sell any of the debtor’s property. Most individual Chapter 7 cases nationally are also no-asset cases.

The key is doing the exemption analysis before the case is filed. We review what you own, what it is worth, any liens against it, and the exemptions available so that you understand whether any property is actually at risk.

What Property Can You Protect in a Virginia Chapter 7?

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Virginia law provides exemptions that protect many of the things people ordinarily own.

Current Virginia exemptions include, among other protections:

• up to $10,000 of equity in motor vehicles;
• up to $5,000 of household furnishings;
• certain clothing, health aids, tools of the trade, retirement funds, and other protected property;
• a general exemption of up to $5,000 of selected real or personal property, or $10,000 if the householder is age 65 or older; and
• an additional exemption of up to $50,000 in property used as the principal residence of the householder or the householder’s dependents.

Other protections can apply depending on the type of property, how it is owned, and the debtor’s individual circumstances.

The important point is that owning property does not mean you cannot file Chapter 7. The real question is whether the equity in that property can be protected.

If we believe something would be exposed to a Chapter 7 trustee, we discuss that with you before filing and determine whether Chapter 13 or another option is safer.

Can You Keep Your House in Chapter 7?

Often, yes — if the equity in the home is protected and you are current on the mortgage.

For someone who is current on the mortgage, the main Chapter 7 issue is usually whether there is any nonexempt equity that a trustee could administer. We look at the value of the home, the balance of the mortgage and any other liens, how the property is titled, and the exemptions or other protections that apply.

A trustee is generally interested in a home only if selling it would produce meaningful money for creditors after paying valid liens, exemptions, and the costs of sale.

But if you are behind on the mortgage and want to keep the house, Chapter 7 is generally not the right tool. Chapter 7 does not provide a multi-year repayment plan for curing mortgage arrears. A valid mortgage lien also is not eliminated simply because the debtor receives a Chapter 7 discharge.

If you are delinquent on the mortgage and need time to catch up while keeping the property, Chapter 13 is usually the better option because it can stop a foreclosure and allow the past-due mortgage payments to be addressed through the Chapter 13 plan while the regular mortgage payments resume going forward.

Can You Keep Your Car in Chapter 7?

Often, yes — if the vehicle equity is protected and you are current on the loan.

Virginia currently protects up to $10,000 of value in motor vehicles, after taking into account a valid security interest.

If the vehicle is financed, there are really two separate issues:

1. whether the debtor’s equity is protected from the Chapter 7 trustee; and
2. how the debtor intends to deal with the lender and the vehicle loan.

A bankruptcy discharge can eliminate personal liability on many debts, but it does not automatically eliminate a valid lien on a financed vehicle.

If you are current on the vehicle loan and want to keep the car, Chapter 7 may still be a good fit depending on the vehicle’s value, the loan, the lender, and the available exemptions.

But if you are behind on the vehicle loan and need time to catch up, Chapter 13 is generally the better tool. Chapter 13 provides a repayment plan that can address delinquent secured debt over time and, depending on the circumstances, may also restructure the way the vehicle loan is paid.

If the vehicle has already been repossessed and you want it back, Chapter 13 is also generally much more useful than Chapter 7.

Do You Qualify for Chapter 7 Bankruptcy?

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Income matters, but earning more than Virginia’s median income does not automatically disqualify you from Chapter 7.

For individuals whose debts are primarily consumer debts, bankruptcy law uses a means test to determine whether a Chapter 7 filing may be presumed abusive. If household income is below the applicable median-income level, the analysis is generally straightforward. If income is above median, a more detailed calculation is performed using allowed expenses and certain secured and priority obligations.

Some people with income substantially above the median still qualify for Chapter 7 after completing the full calculation.

There are also circumstances in which the consumer means test does not apply in the ordinary way, including cases in which the debtor’s debts are primarily business rather than consumer debts.

So we do not determine Chapter 7 eligibility simply by looking at someone’s annual salary.

What Is the Chapter 7 Means Test?

The means test is a statutory calculation used primarily to determine whether an individual with predominantly consumer debt is presumed to be abusing Chapter 7.

The calculation begins with a defined measure of current monthly income, generally based on income received during the six full calendar months before the bankruptcy filing. If applicable income exceeds the relevant state median, additional calculations are performed using expenses and deductions permitted by bankruptcy law.

That means timing can matter.

A recent job loss, reduction in overtime, change in household income, bonus, commission, or other income event may affect the six-month calculation.

The practical takeaway is simple: being over median does not automatically mean you cannot file Chapter 7.

What Happens When You File Chapter 7?

Filing Chapter 7 normally creates an automatic stay that immediately stops most efforts to collect debts that arose before the bankruptcy case.

For a typical consumer debtor, that means creditors generally must stop:

• collection calls and letters;
• pending collection lawsuits;
• wage garnishments;
• many bank garnishments;
• repossession efforts that have not yet occurred; and
• other ordinary debt-collection activity.

There are exceptions, including special rules that can apply in repeat bankruptcy filings, but the automatic stay provides immediate relief from most ordinary creditor collection.

The Bankruptcy Court also sends notice of the case to the creditors listed in the filing.

What Does the Chapter 7 Trustee Do?

Every Chapter 7 case is assigned to a trustee.

The trustee reviews the bankruptcy petition, schedules, exemptions, income, financial history, and documents provided by the debtor. The trustee’s job includes determining whether there is any nonexempt property that should be administered for creditors.

In a typical no-asset case, the trustee reviews the debtor’s information, asks questions at the meeting of creditors, and ultimately determines that there is no property worth selling.

If a debtor does have valuable nonexempt property, the trustee may sell or otherwise administer that property and distribute the net proceeds according to bankruptcy law.

Accurate values, complete disclosure, and proper exemption planning are therefore extremely important.

What Happens at the Chapter 7 Meeting of Creditors?

A few weeks after filing, the debtor attends a meeting commonly called the 341 meeting or meeting of creditors.

Despite the name, creditors rarely appear in routine consumer Chapter 7 cases.

The Chapter 7 trustee places the debtor under oath and asks questions about the bankruptcy paperwork, property, income, debts, transfers, and financial history.

For a properly prepared routine case, the meeting is usually brief.

We prepare our clients beforehand and represent them throughout the process so they know what to expect.

How Long Does Chapter 7 Take?

A normal Chapter 7 case moves relatively quickly.

The meeting of creditors usually occurs several weeks after filing. Assuming there is no objection to discharge or other unusual issue, the discharge is generally entered a few months after the case begins.

The U.S. Courts explains that, in most cases, the discharge is entered about 60 to 90 days after the first date set for the meeting of creditors.

A case can remain open longer if the trustee is administering property, but most ordinary no-asset Chapter 7 cases are completed without a lengthy court process.

What Does the Chapter 7 Discharge Do?

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The discharge is the part of Chapter 7 that gives the debtor the financial fresh start.

A Chapter 7 discharge eliminates the debtor’s personal legal obligation to pay most dischargeable debts and permanently prohibits creditors from attempting to collect those discharged debts from the debtor.

For a typical individual who properly completes the Chapter 7 process, receiving a discharge is the expected result. Excluding cases that are dismissed or converted, individual Chapter 7 debtors receive a discharge in more than 99% of cases, according to the U.S. Courts.

The discharge does not automatically eliminate every type of debt, and it generally does not eliminate a valid lien against collateral unless separate action is taken.

That is why we review your debts before filing so you understand what Chapter 7 is expected to accomplish in your particular situation.

What Debts Are Not Discharged in Chapter 7?

Chapter 7 eliminates many common debts, but not every obligation is dischargeable.

Debts that commonly survive Chapter 7 include:

• child support and alimony;
• certain tax debts;
• most qualifying educational loans unless the debtor establishes a basis for discharge;
• certain criminal fines and restitution;
• debts arising from certain fraudulent conduct; and
• some debts involving intentional injury or other conduct addressed by the Bankruptcy Code.

The treatment of taxes, student loans, and other special debts can be fact-specific.

We review those debts before filing rather than simply assuming they will or will not be discharged.

Chapter 7 vs. Chapter 13

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Chapter 7 and Chapter 13 both provide powerful bankruptcy protection, but they solve different problems.

Chapter 7 is generally a strong option when the debtor can protect the property they want to keep, is current on secured debts they intend to keep, qualifies for Chapter 7, and wants to eliminate dischargeable debt without making payments to unsecured creditors through a three-to-five-year plan.

Chapter 13 is generally the better choice when someone:

• is behind on a mortgage and wants to keep the home;
• is behind on a vehicle loan and wants to keep the car;
• has property that would be exposed in Chapter 7;
• needs to address certain tax or support obligations;
• is trying to recover or protect a repossessed vehicle;
• does not qualify for Chapter 7; or
• needs the additional flexibility of a court-supervised repayment plan.

If we believe Chapter 7 would create unnecessary risk or would not solve the problem you actually have, we will tell you that before anything is filed.

Can a Corporation or LLC File Chapter 7?

Yes.

Corporations, LLCs, partnerships, and other qualifying business entities can use Chapter 7 to provide for an orderly liquidation of business assets.

A Chapter 7 trustee takes control of property belonging to the bankruptcy estate, liquidates available assets, and distributes proceeds to creditors according to bankruptcy law.

However, a corporation or LLC does not receive the Chapter 7 discharge that is available to an individual debtor. Chapter 7 for a business entity is therefore primarily a liquidation and administration process rather than a personal fresh start.

Whether a business should actually file Chapter 7 depends on the assets, liabilities, records, guarantees, pending litigation, and other circumstances.

What Information Do You Need to File Chapter 7?

Preparing a Chapter 7 case generally requires information about:

• creditors and balances owed;
• household income and employment;
• bank accounts;
• vehicles;
• real estate;
• retirement accounts;
• tax refunds;
• lawsuits or legal claims;
• household property;
• recent transfers of money or property;
• recent tax returns; and
• normal household expenses.

Married debtors may also need to provide information concerning a non-filing spouse’s income and household contributions because those figures can affect the bankruptcy analysis.

Complete disclosure is important. If you are unsure whether an asset, transfer, account, or other financial issue matters, tell us about it and let us determine how it should be handled.

Talk to a Richmond Chapter 7 Bankruptcy Attorney

If you are considering Chapter 7 bankruptcy in Virginia, the most important questions are whether Chapter 7 will eliminate the debts causing the problem, whether your property can be protected, whether you are current on secured debts you intend to keep, and whether you qualify under the applicable income rules.

Kane & Papa has helped Richmond-area individuals and families navigate bankruptcy for decades. We review your debts, income, property, exemptions, and financial goals before recommending Chapter 7 so that you understand what the case is expected to accomplish before it is filed.

If you are struggling with credit cards, medical bills, judgments, garnishments, personal loans, deficiency balances, or other overwhelming debt, contact us to discuss whether Chapter 7 can provide the fresh start you need.