How Does the Trustee Handle My Debts in a Chapter 7 Bankruptcy?
Many people are aware that Chapter 7 bankruptcy is one of the fastest and most efficient means to eliminate most types of unsecured debts. Secured debts can include credit card bills, hospital bills, store charge card bills, doctor’s bills, and basically, all other debts that are not secured debts. Secured debts are debts where the creditor’s interest is protected and strengthen by the property. While Chapter 7 bankruptcy is more amenable to eliminating unsecured debts, holding some secured debts doesn’t automatically mean that Chapter 7 bankruptcy is inappropriate for your situation.
Everyone filing for bankruptcy has questions. While many people understand that a significant portion of their debt will be eliminated if they file Chapter 7, they are not quite sure if they will be required to pay anything or if they will lose their property. Many Chapter 7 bankruptcies in California are no-asset cases. If this is the case, a debtor will not lose any property. However, if a debtor has non-exempt property, the Chapter 7 trustee will take the property and sell it to pay back a portion of the debtor’s creditors.
The experienced Sacramento bankruptcy attorneys of The Bankruptcy Group can guide you through the Chapter 7 bankruptcy process from start to finish. We understand that many people are anxious about bankruptcy because the process seems complex. To increase Californians’ understanding of the bankruptcy process, our bankruptcy lawyers will describe in this post how a Chapter 7 trustee will settle your debts with your creditors. To discuss how bankruptcy can provide you with a pathway out of debt and to a fresh financial start, call The Bankruptcy Group at today.
Will My Creditors Receive Any Compensation?
For people who are not engaged in bankruptcy practice on a day-to-day basis, it may come as some surprise that most people who come into our California law office want to do the right thing regarding their debt. More often than not, the individual did not choose to fall behind. Rather, difficult life events like the loss of a jobs, serious medical condition, or a divorce caused the person to fall into debt that became unmanageable.
While all bankruptcies are different, the key determination as to whether the creditor will receive compensation for the debt is whether assets are available. In many Chapter 7 bankruptcies, there are no assets. This may be due to the fact that the individual filing bankruptcy simply did not have assets. In other scenarios, the bankruptcy filer may be entitled to keep all of their property because it is fully covered by the California bankruptcy exemptions. Property that is exempt is the property you keep regardless of the bankruptcy.
Provided that property is available to compensate your creditors, the bankruptcy trustee will locate this property by consulting the Schedule A/B: Property that you or your lawyer provide. To determine what property can conceivably be sold, the bankruptcy trustee will compare the property listed on Schedule A/B with the property listed on Schedule C: The Property You Claim as Exempt. Property that appears on Schedule A/B but not Schedule C is not exempt property and therefore is subject to liquidation to compensate creditors.
Understanding California Exemptions in a Chapter 7 Bankruptcy
A concern many people have when they file for bankruptcy is whether they will be able to keep their property, especially their car and home. Above we briefly discussed the requirement to list your property on Schedule A/B of the bankruptcy documents. Next, we reviewed the importance of Schedule C, or the list of your exempt property. However, what determines what property is exempt or not?
Exemptions are laws in place to determine what property, including cars, homes, and other personal property, a filer is entitled to retain while still discharging their debt. Congress designed bankruptcy as a means of obtaining a fresh start. That would not be possible if you lost everything.
Federal and State Exemptions
Bankruptcy exemptions come in two flavors: federal and state exemptions. Currently, twenty states and the District of Columbia allow a debtor to choose between their state exemptions and the federal ones. California is not one of the twenty that permits a debtor to elect a set of exemptions.
However, California does offer its residents something no other state does, two sets of state exemptions: 703 and 704 exemptions. More importantly, California exemptions are typically more generous than the federal ones. Additionally, Californians are permitted to use federal non-bankruptcy exemptions if they have qualifying assets.
California Bankruptcy Exemptions
As stated above, California law allows filers to choose between two lists of exemptions. Both sets will allow you to exempt clothing, furniture, cars, homesteads, pensions, and other valuable assets.
Because you must pick one set of exemptions, the devil is in the details. Our California Chapter 7 bankruptcy lawyers will help you determine which set of exemptions would be most beneficial for you, given your property and financial situation.
704 Exemptions
California’s Section 704 exemptions are also referred to as the “homestead” exemptions because they allow homeowners to protect a substantial amount of equity in their property. By picking the 704 exemptions, a filer could protect up to $600,000 of equity in a home, mobile home, condominium, community apartment, planned development, or boat. Additionally, a debtor could exempt $3,325 of their car, truck, motorcycle, or another vehicle.
The 704 exemptions also cover other personal property, including household furniture, jewelry, health aids, bank deposits, personal injury claims, burial plots, wages, certain retirement and pension plans, public benefits, life insurance, homeowners’ insurance proceeds, and other property. Our California bankruptcy lawyers will review the complete list of exemptions when evaluating your assets.
703 Exemptions
California’s 703 exemptions are sometimes called the “wildcard” exemptions. While homeowners are not offered the same level of protection, the 703 exemptions offer debtors more flexibility.
If you pick the 703 exemptions, you could protect up to $29,275 of equity in your primary residence or burial plot. Additionally, there is a $5,850 exemption that could be applied to your vehicle.
Debtors could protect their clothing, jewelry, wrongful death and personal injury claims, certain retirement accounts, unemployment compensation, Social Security, alimony, child support, life insurance, and disability benefits.
The wildcard exemption is $1,550 plus any unused portion of the homestead exemption. Therefore, your wildcard exemption could be as much as $30,825. Because the exemptions are very specific, a wildcard exemption allows a debtor to protect property that would otherwise be non-exempt. Furthermore, many of the listed exemptions have statutory limits. If a particular item exceeds the exempted value, the wildcard exemption could be applied to the non-exempt portion.
Abandoned Property in a Chapter 7 Bankruptcy
If you have non-exempt property, the trustee will take possession of the property, oversee the sale of the property, and distribute the proceeds to your creditors. However, all non-exempt property is not created equally. Part of the trustee’s job is to determine if liquating the bankruptcy estate’s property will yield proceeds for the creditors. Should the trustee decide that the property will not generate enough profits or is difficult, the property could be abandoned.
For example, imagine you had a non-exempt vehicle. The fair market value of the car is $5,000. However, you still owe $2,500 on your car loan. The trustee would incur $2,000 in costs to sell the vehicle at auction, including storage, pick-up, and the auction fees. Finally, the trustee’s commission on the sale of the car is $500. Once you pay the lender $2,500, subtract the cost of the auction, $2,000, and pay the trustee’s commission of $500, there is nothing left for the creditors. In this case, the trustee would likely abandon your vehicle.
If the trustee abandons property, the debtor typically retains possession as if the property was exempt. However, if there is a lien on the property that is greater than its value, the trustee could transfer the property to the lienholder. For instance, if owed $6,500 on a non-exempt car that was worth $5,000 and had stopped making monthly payments on the vehicle, the trustee might abandon the property to the lienholder.
If you have non-exempt property that you wish to keep, you might be able to pay the trustee the amount equal to the cost of the property. However, this is usually only possible if the value is relatively low. If the value of the non-exempt property is significant, it is unlikely that you have the available funds to pay the trustee.
How Does the Bankruptcy Trustee Determine Which Creditors Are Compensated? Provided that the trustee was able to identify the non-exempt property, the trustee will liquidate this property and distribute the proceeds to creditors. Which creditors are compensated is dependent upon the bankruptcy code priority list. Therefore, the U.S. bankruptcy code requires the bankruptcy trustee to pay creditors in a certain order on the basis of the type of debt. While secured debts receive the highest level of treatment, it is perhaps more interesting and more relevant to look into how unsecured debts are prioritized. Under U.S. Bankruptcy Code §507(a)(1) – (10), the prioritization for secured debts is set forth. Under this system of prioritization, child support obligations, alimony, and other domestic support obligations are given highest priority of all unsecured debts. Next in the priority list are debts incurred due to administrative expenses relating to the bankruptcy. Third, all claims for obligations that qualify under 11 U.S. Code § 502 are paid next. Additional and subsequent claims in the priority list include:
Unsecured claims, up to $10,000, earned as wages, salary, commission, and other forms of compensation within the last 180 days.
Unsecured claims for employee benefit plan contributions.
Certain unsecured claims made by fishermen or grain farmers.
Unsecured claims, up to $1,800, originating from purchase, lease, or rental of property.
Unsecured tax and other claims by governmental agencies.
FDIC obligations
Personal injury claims resulting from a motor vehicle accident caused by an intoxicated driver. The foregoing captures the general prioritization of unsecured debts. In some cases, determining the character of certain debts may be less clear than others. In other circumstances, creditors may petition for higher prioritization than the nature of the debt would permit. An experienced bankruptcy attorney can fight to protect you should creditors challenge your bankruptcy plan.