CHAPTER 7

Debt Discharge (relief from your payment obligations)

Chapter 7 bankruptcy is a process by which an appointed trustee will sell or otherwise liquidate your “non-exempt” assets, if any, for purposes of paying your creditors.  As part of the process creditors will usually receive, as proceeds of liquidation, only a fraction of what they otherwise would be owed.  If all your assets are “exempt”, unsecured creditors will receive nothing.  Under Chapter 7 debts eliminated will normally include credit cards, medical bills, signature loans (unsecured debt, to which no repossession or foreclosure right attaches) and deficiencies relating to repossessed personal property (automobiles, for instance, so long as they are not recently purchased).  A Chapter 7 bankruptcy could possibly eliminate your obligation to pay deficiencies on formerly owned real estate already foreclosed upon.

Certain debts, however, are non-dischargeable.  These cannot be eliminated in a Chapter 7. They generally include student loans, “drunk driving” personal injury awards, unpaid child support, penalties, liabilities for fraud and recently incurred taxes. When a bankruptcy is filed an injunction, called the automatic stay, usually goes into effect.  An automatic stay prohibits creditors from proceeding with collection activities (including obnoxious phone calls, garnishments and foreclosures), unless creditors obtain the bankruptcy court’s approval (called a relief from stay).

In Bankruptcy You May Keep Exempt Assets

Exemptions can protect certain property from being liquidated by the Trustee. Exemptions typically include up to $70,200 of equity in your Alaska primary residence, up to $3,900 of equity for a single vehicle worth less than $26,000 in total, most items of personal household property (up to certain dollar limits), trade tools up to $3,640 in value, jewelry and pets (also subject to dollar limits) and several other categories (including, but not limited to, IRAs, 401K plans and Limited Entry fishing permits).

Not all property is exempt, however. “Non-exempt property” is often sold by the Trustee in order to pay creditors. Non-exempt property generally includes bank deposits (checking and savings accounts and any pending but not yet received PFDs*), investments (except for retirement accounts), business interests (in an LLC or corporation, for instance), boats and recreational vehicles and other property having significant value. Consultation with an experienced bankruptcy attorney is critical to being able to classify assets under available exemptions.  Alaska debtors can also, as an alternative to the exemptions outlined above, take advantage of “federal exemptions” that allow the use of a wild-card designation to exempt from liquidation assets of any sort up to specific dollar limitations (often in excess of $10,000.00). 

Secured Debt

Secured debts are those that are tied to particular assets that secure them (by lien or mortgage, for example). Car loans are usually secured debt. If you want to stop making car payments and have your loan discharged, you’ll have to give back the car since it is collateral for your secured loan. If you want to keep your car, you may be able to agree to continue making payments in exchange for the right to keep the vehicle. This is done by reaffirming the debt. Reaffirmation has serious ramifications; you should consult with a bankruptcy attorney to make certain it is the right thing to do.

The Means Test

Before filing for Chapter 7 bankruptcy, you will have to qualify by analyzing your finances with a means test. Your monthly income (as calculated under very specific rules) is compared to the median income in your state for a family that is the same size as yours. If your income is at or below the median income, you may qualify for Chapter 7 bankruptcy. If your income is higher than the median income, then you may still be able to file for Chapter 7 bankruptcy protection.  However, your eligibility will depend on a comparison of your disposable income to your allowed expenses.