When Things Go Wrong in a Chapter 7

Sketch of Richard Mentor Johnson freeing a man...

Sketch of Richard Mentor Johnson freeing a man from debtors' prison. Johnson was an advocate of ending the practice of debt imprisonment throughout his political career. (Photo credit: Wikipedia)

Probably the only thing worse than losing your home in a Chapter 7 bankruptcy is actually going bankrupt to begin with. The reason people file for bankruptcy protection is to get a fresh financial start while protecting what assets they can. Sometimes, it just does not work out that way, but regardless, when things go wrong in a Chapter 7, there is still the hope things will be better on the other side of filing, and they usually are.

A man blogged on a bankruptcy forum website today and had this to say about when things have gone wrong for him in a Chapter 7, “I initially reaffirmed my primary residence, but apparently it is too valuable to be exempt. I have already lost an adversarial proceeding and the Chapter 7 trustee won the right to transfer the property. It was not possible to pay the mortgage; my home and a rental house were on the same mortgage, and the Trustee seized the rent long ago. What are they required to do by law to force me out? Required notice and service? At this point I am simply trying to get enough time to find a new residence and get everything out.”

This particular debtor is currently frustrated with the bankruptcy process. An adversarial proceeding, often referred to as an AP in bankruptcy talk, is one of the hardest events to go through during a simple Chapter 7 bankruptcy. Any creditor or the trustee can file an AP if there is a legal question about a particular debt. That means the bankruptcy court judge will have to decide what the law says about a particular question raised on a debt during an AP. In this case, the trustee filed the AP because the property in question had enough equity to be liquidated to pay off the unsecured debts of the filing debtor. The AP had to be filed because the debtor was trying to reaffirm the debt, and he lost his case to the trustee.

The property, the filing debtor’s home with rental property, must be sold and the equity used to pay off unsecured debts. The debtor may not like the ruling because he wanted to keep his property, but bankruptcy laws, especially for a Chapter 7, are designed to do exactly that- liquidate non-exempt assets in order to satisfy unsecured debt.

Evidently in this particular case, there was not enough homestead exemption on the property to cover the equity the filing debtor had in the property. Therefore, the trustee will seize the property, sell it at market value, pay off what is left on the loan, and give the homeowner the homestead exemption value of the property. The trustee will take the money that is left, including any rental money seized, and pay off what unsecured debts he can with the money.

The homeowner must vacate the property as laid out by either the bankruptcy court rules or state law, just as if the property was being foreclosed. Even though it seems things have gone bad in this particular Chapter 7 for these particular debtors, they still get a fresh chance at starting financially over. Sometimes, it might become obvious you will lose your home to bankruptcy. When things do go wrong in a Chapter 7, it might be best to cut your losses, vacate, and completely start over.

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