What Happens to Creditors During Chapter 7 Bankruptcy?

Chapter 7, also known as liquidation bankruptcy, is the most common form of insolvency with 69% of bankruptcy cases in 2021. While insolvency has a negative connotation and drastically impacts your credit score, it can be a great opportunity to regain control of your finances. If you are considering filing chapter 7 bankruptcy, you should learn about the process to ensure it’s the right option for you. In this article, we will cover what happens to your creditors during Chapter 7 bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves liquidating your assets to pay off your debts. The remaining qualifying debts are discharged. The insolvency will remain on your credit score for the next seven years.

Debts that will not be discharged due to Chapter 7 include:
• Child Support
• Alimony
• Student loans
• HOA fees
• Civil rulings involving intoxication or fraud
• Undisclosed debts

Who Should File Chapter 7

Chapter 7 bankruptcy is a great option for anyone drowning in qualifying debt without the required income to pay back those debts. When done strategically, insolvency can prevent late payments and defaulted debts from appearing on your credit score.

You will be required to sell your assets during chapter 7 bankruptcy, which may mean selling your home. You may want to consider another option if you want to keep your house.

Certain assets are exempt, including:
• Vehicles
• Necessary clothing and household goods
• Jewelry
• Pensions
• Vocational tools
• Public benefits
• Personal injury judgments

What Happens to Creditors During Chapter 7?

During insolvency, secured creditors receive first priority. Secured creditors are creditors with collateral.

Examples of secured creditors include:
• Mortgage lender
• Lien holder
• Receivables or equipment lender

Unsecured debt will not be paid. The creditor will not receive any additional payment unless they have insurance that covers insolvency.

Filing for Chapter 7

Step One: Filing Initial Forms
The first step in filing Chapter 7 is to complete the initial paperwork. You will need to present detailed information regarding your finances, including debtors, income, assets, and more. The information in the paperwork must be inclusive. If you fail to list certain assets, you can be found guilty of committing fraud. If you fail to list certain debtors, they won’t get discharged.

Step Two: Pre-Bankruptcy Credit Counseling
Pre-bankruptcy counseling involves a financial professional examining your situation to determine if there are less radical courses of action. If there is no obvious solution, the counselor will approve of the process moving forward.

Step Three: Filing
Once you get approval from the financial counselor, you will finalize the filing. This process includes paying fees. Ask your bankruptcy attorney if you qualify for a fee waiver.

Step Four: Trustee Appointed
The court will appoint a trustee to your case. The trustee will verify the information you presented and liquidate all applicable assets. They will also negotiate payments with your secured debtors.

Step Five: Debts Paid
Secured debts will get paid from the sale of your assets. You will also be required to fulfill agreements related to the secured debt. For example, you may have to relinquish your home to your mortgage lender.

Step Six: Debtor Education
The last step in the process is to go through debtor education. Debtor education aims to prevent future financial problems.

Alternatives to Chapter 7 Bankruptcy

Before you file Chapter 7, you should know your options. Ask your bankruptcy lawyer about how other bankruptcy options will impact you differently. For example, chapter 11 bankruptcy may allow you to keep your home, whereas chapter 7 won’t.