Chapter 7 bankruptcy is a form of bankruptcy that liquidates nonexempt assets to cover debts. During bankruptcy, any unsecured debts are paid down by liquidating those assets. When the money is gone, debts usually remain. Those debts are then discharged by the court.
Chapter 7 bankruptcy can help a family in a few ways. First, it helps take away the burden of dealing with debt collectors. If your home is facing foreclosure, then Chapter 7 bankruptcy stops that foreclosure immediately and gives you time to negotiate with the mortgage lender and to potentially catch up on that debt to save your home.
Chapter 7 bankruptcy may help you eliminate unsecured debts such as high medical bills or credit card debt.
What do you lose in a Chapter 7 bankruptcy?
Many people are worried that they’ll lose everything in a Chapter 7 bankruptcy, but that is highly unlikely. In Chapter 7 bankruptcy, you usually have a homestead exemption that allows you to keep a certain value of the property you own. You will also be able to keep vehicles valued below a certain limit and won’t have public benefits, like unemployment or Social Security, garnished in any way.
You may lose items that don’t fall under exemptions. For example, if you own two vehicles that are paid off and only one falls under the exemption that you were given, then the other vehicle may need to be sold to pay down your debts. There are many exemptions available, though, so there are cases where people get help from Chapter 7 bankruptcy without losing anything at all.
Will you lose your home in Chapter 7 bankruptcy?
It is possible, but it doesn’t always happen. Usually, you have an opportunity to renegotiate your mortgage, which may help you catch up on past-due payments or to reaffirm the debt. You may have a homestead exemption that is enough to cover the equity in your home, too. However, if you own your home outright or have too much equity, then the home may be sold to help cover the debts. Any value above what you owe would be given back to you, though.
There are many parts of bankruptcy that can be helpful, but you need to weigh the pros and cons. Know your legal rights and how bankruptcy will affect you before making a decision.