What Happens to Property in a Chapter 7 Bankruptcy Case?
By David M. Siegel
Chapter 7 bankruptcy is a fresh start bankruptcy. A person lists all of his debts in a bankruptcy petition which is filed with the U.S. Bankruptcy Clerk. A typical Chapter 7 debtor receives a fresh start in that many of the debts in a Chapter 7 bankruptcy case are eliminated. There are exceptions to this general scenario which I will explain in greater detail later. Chapter 7 is basically for a person who does not have significant assets and who is strapped with an overburdening amount of unsecured debts. Unsecured debts are debts that are not secured by some form of property. These commonly include debts from credit cards, medical bills, personal loans, utilities, auto deficiencies as a result of a repossessed auto and rental deficiencies among others. Since there is no property or security attached to those debts, the debt is easily eliminated in a Chapter 7 bankruptcy case. Debts that are secured by property such as houses and cars are treated differently in a Chapter 7 bankruptcy case. Those debts must continue to be paid if the debtor wishes to keep the properties.
Options with regard to secured property:
The debtor can simply continue to make the contracted payment, on time, just as he did before he filed for bankruptcy relief. This act of continuing to pay on a debt is known as reaffirming a debt. By reaffirming on a debt, the debtor re-obligates himself on the loan. Another option would be to surrender the property and eliminate the underlying debt. The third option would be to redeem the property secured by the creditor. The act of redemption involves making a lump sum payment for the market value of the property. Since a debtor rarely has the ability to make such a payment, the redemption option is really not invoked all that often. The final option with regard to secured debt is to continue to make voluntary payments on the property. This is sometimes known as the fourth option; however, this option only exists in certain states. This option does not exist with regard to purchase money security interests. A typical purchase money security interest would be a furniture purchase, jewelry purchase or household appliance purchase. The voluntary payment option does exist with regard to real estate property in those states that permit the fourth option.
Property that can be kept in a Chapter 7 bankruptcy
If a person has significant assets, he will not likely decide to file a Chapter 7 bankruptcy. This is because there are limits on the amount of value that one can keep free and clear while at the same time being able to eliminate miscellaneous debt. Each state has exemption amounts that can be readily utilized by a debtor to protect property while he is in a bankruptcy. There are Federal exemptions and individual state exemptions. Some states utilize the Federal exemptions, other utilize the state exemptions, while other states can elect between the two. Obviously, if a debtor resides in a state in which an election can be made, the debtor will choose the exemption that best protects his property. The exemption limits differ so it is extremely important to discuss your rights and options with a qualified attorney who concentrates in bankruptcy law. If property is not protected properly by miss-applying the proper exemption and the proper amount of the exemption, property can be taken in exchange for the fresh start.
How is equity determined?
Some people struggle with the concept of equity in property. They don't know whether it is the market value, the amount owed, both or neither. Here is a simple way to calculate the equity in property. First of all, think of equity as ownership. The amount of equity in property is the amount of ownership that you have in the property. For example, let's say that you have a home with a market value of $250,000.00. Let's further say that you have a mortgage on the property with an outstanding balance of $200,000.00. When you take the market value of the property and subtract the mortgage debt associated with the property, you are left with the equity. In the above example, the equity or ownership in the property would equal $50,000.00. This same concept would apply to vehicles, boats, jewelry, furniture and any other property that is secured by a lien.
How is fair market value calculated?
Another issue arises when calculating the fair market value of property. Fair market value of property is not what you think it is worth. Rather, it is what the property would sell for if placed on the market for a reasonable period of time. When it comes to real estate property, market value can be determined by obtaining an appraisal. Since appraisals can be costly, another option is to get a free, market evaluation from a licensed realtor. Any dedicated realtor would be happy to provide a listing of comparable homes that are currently listed in your area or that have recently sold in your area. When requesting your free market analysis, advise the realtor that you are looking for an accurate evaluation. You don't want one that is elevated or unrealistic. You want one that will accurately list the likely price that the home would sell for if place on the open market. You can check general home values at http://www.realtor.com or http://www.housevalues.com. With regard to autos, you can check the value with Kelly Blue Book or N.A.D.A. (www.kbb.com) You can also have the vehicle evaluated by an auto dealership. They will put in writing what you car is worth as a trade-in. Of course, don't rely on only one person or entity to provide a market value for your property. Check with a few sources so that you know that the values being provided are accurate.
David M. Siegel is the author of Chapter 7 Success: The Complete Guide to Surviving Personal Bankruptcy. He is a member of the American Bankruptcy Institute and currently practices bankruptcy law in Chicago and its surrounding suburbs. Additional information is available at http://www.chapter7success.com .
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