How will Filing Chapter 7 Change My Payments to Creditors?

Chapter 7 is known as a “liquidation” bankruptcy. This is because the bankruptcy trustee may sell the debtor’s nonexempt property and distribute the proceeds to creditors. However, filing Chapter 7 will eliminate some debt. Consequently, the debtor will no longer have to make payments to some creditors. The type of debt will determine whether the debtor will have to continue paying the creditor.

Payments to Secured Creditors

In Chapter 7, a debtor can keep secured property if the debtor continues making payments to the creditor. Secured debt is tied collateral, such as a house or a car. If a Chapter 7 debtor reaffirms the debt, the debtor has entered into a new agreement with the creditor. The debtor can keep the property, but must continue making payments to the creditor even after the bankruptcy discharge. If the debtor surrenders the property (gives it back to the creditor), the debtor will no longer have to make payments to the creditor. If the debtor is in default on the mortgage, the lender can foreclose on the home if the debtor fails to become current.

In some cases, the debtor cannot keep the property. If, for example, the equity in a debtor’s home exceeds the homestead exemption in their state, the bankruptcy trustee may sell the debtor’s home and use the equity to pay creditors. A homestead exemption allows a debtor to keep a certain amount of equity in a home. If the equity in the home does not exceed the homestead exemption, the debtor can keep the home and continue making payments to the lender.

Payments to Unsecured Creditors

Chapter 7 will eliminate most unsecured debt. Unlike secured debt, property is not attached to the debt. Unsecured debt eligible for discharge includes credit card debt and medical bills. Once the Chapter 7 bankruptcy wipes out a debt, the debtor is no longer legally obligated to repay the creditor.

Payments of Other Debts

Some debts will outlive a Chapter 7 filing. The debtor must continue making payments for the following debt:

• Child support
• Alimony
• Tax debt less than three years past due
• Student loans
• Debts not included in the bankruptcy petition
• Criminal fines and penalties
• Court judgment for personal injury or death caused by intoxicated driving
• Debt incurred by fraud
• Debt incurred from the purchase of luxury items
• Debt incurred from embezzlement
• Debt incurred from the willful and malicious injury to a person or a person’s property

Legal Help for Your Bankruptcy Case 

Filing for bankruptcy is a complex legal process. If you are considering whether you should file for Chapter 7, contact a local bankruptcy attorney in your area. An attorney can help you determine which chapter to file under, can help you complete the paperwork, and can help you navigate through the bankruptcy process.