A Chapter 7 bankruptcy, commonly called liquidation, is a type of bankruptcy where a filing debtor petitions a bankruptcy court to protect their exempt assets from creditors. In a Chapter 7, a bankruptcy trustee will take what non-exempt assets a filing debtor has, liquidate them, and take the proceeds from the sell to pay off the debtor’s unsecured creditors. Any unsecured debt not paid off during the process will be discharged. Most Chapter 7 bankruptcies are no asset cases where the debts are discharged 100 percent.
In a Chapter 7, all secured debt will be discharged at the conclusion of the bankruptcy unless an affirmation agreement is entered into between the creditor and debtor. Entering into an affirmation agreement is a serious thing for the debtor because the debtor literally gives up his or her rights to bankruptcy discharge when they enter into one. Many bankruptcy attorneys will not sign off on an affirmation agreement because of its serious nature for their clients.
Once a petitioner files for Chapter 7 bankruptcy protection, the automatic stay of bankruptcy automatically goes into effect. The stay order of the bankruptcy court legally and immediately prevents any collections activity from creditors including foreclosures and repossession.
In a Chapter 7, the automatic stay will prevent the creditor from seizing assets, but a creditor has the option to file a petition for a motion of relief of the automatic stay. A secured creditor is usually successful in filing the motion of relief if they can show the debtor is in default of their current payments. That is the reason why it is important to stay current on your secured asset payments during a Chapter 7 if you want to have any chance of keeping them.
Although many creditors of secured assets have clauses built into the contract where you are considered in default if you file bankruptcy, most secured creditors will not seek a motion of relief of the bankruptcy stay unless you get behind on your payments. They have the right to file a motion of relief in this case even if you are up to date on your payments, but most will not. Filing a motion of relief can be an expensive proposition for the creditor if a debtor decides to defend against the petition.
There are a variety of reasons unsecured creditors will file a motion of relief of the automatic stay but fraud is the most common reason. It is illegal for a filing debtor to try to conceal assets from the bankruptcy court, run up debts knowing that you are going to file bankruptcy, and for a variety of other misconducts as described in bankruptcy law. Fraud is a serious crime that can land the accused in prison for up to five years and/or have to pay a fine up to $250,000.
A motion for relief from the automatic stay concerning accusations of fraud by creditors does not always end up in successfully convicting a debtor of fraudulent activity. For a debtor to be criminally convicted of fraud, the debtor must be tried in a criminal proceeding. A motion of relief from the automatic stay is heard by a bankruptcy court judge. The outcome of a motion of relief is made on the preponderance of evidence in the proceeding. So, a bankruptcy judge may allow the motion of relief whether the debtor is convicted of fraud.
- A Chapter 7 Requires a Debtors Statement of Intention (betterbankruptcy.com)
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