What Specifically Does a Chapter 7 Bankruptcy Discharge Do?

June 25, 2011 by  Filed under: Bankruptcy 

A chapter 7 bankruptcy discharge releases you from personal liability for discharged debts and stops the creditors from contacting you or threatening you, or taking any action against you in an effort to collect those debts. The US bankruptcy court estimates that almost 99% of all chapter 7 bankruptcy filers receive a discharge if it is their first time, mainly due to their low incomes and high debt ratios. According to the Bankruptcy Code 4004(c), most bankruptcies are discharged within 60 to 90 days after the petition is submitted to the court and the meeting of creditors is held. Thus, there is very little chance you will not be granted a discharge under Chapter 7 bankruptcy. Among the reasons why a chapter 7 discharge may NOT be granted include:

* You did not explain clearly any loss of use of assets
* You failed to show financial records, credit card statements or other important evidence asked by the bankruptcy trustee
* You failed to appear at the bankruptcy court hearing or at the meeting with all creditors
* You fraudulently transferred property to your relatives/family, concealed or destroyed property that would have otherwise become the estate of the bankruptcy court under U.S.C. § 727; Bankruptcy Rule 4005.
* You made false statements or promises under the order of Oath.

Be aware that some states allow creditors to still retain rights to property that has been discharged under chapter 7 bankruptcy. A debtor that wishes to dispute such a right must be willing to ‘reaffirm’ the debt, meaning must be willing to make payments on the debt based on a modified repayment schedule with a lower interest rate and more principal down payment. Let’s take a simple example. You own a car worth $8,000 that you would like to keep after receiving your chapter 7 bankruptcy discharge. However, most states only allow a vehicle up to $5,000 value, thus you have a $3,000 excess value that can be re-affirmed by the creditors. If the creditors do wish to retain the rights to $3,000 in order to minimize their losses, the US bankruptcy trustee will ask you to sign a ‘reaffirmation agreement’ where you will have to make monthly payments to your creditors on this excess $3,000 value that you want the right to keep.

In summary, a reaffirmation is an agreement between you and the creditor that you will continue to make payments on certain debts even after receiving your chapter 7 discharge. In return, the creditor promises that so long as you keep making payments, he/she will NOT repossess the asset that you would like to keep after declaring bankruptcy. If you choose to reaffirm a debt, the reaffirmation agreement must be signed and finalized before a discharge is granted. A written agreement to reaffirm the debt must be signed and a copy filed with the bankruptcy court and if you do not have an attorney representing you, the agreement must be approved by a judge.

Learn how to discharge debts through filing Chapter 7 bankruptcy. Also an overview of the financial responsibilities after filing personal bankruptcy.

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