FUNDAMENTALS OF BANKRUPTCY FOR LENDERS
Chapter 7 Bankruptcy
1. THE BASICS OF CHAPTER 7 BANKRUPTCY
a. The debtor surrenders to the Trustee all non-exempt assets and in return is discharged from most debts.
b. The Chapter 7 discharge removes the debtor’s personal liability for dischargeable debts, but does not affect the status of any liens.
c. The Trustee has a duty to examine all of the debtor’s property to find nonexempt, unliened (or under-liened) assets, which may be converted to cash and distributed to unsecured creditors according to a priority scheme established by Congress in the Bankruptcy Code.
d. The Trustee may develop assets by challenging the debtor’s exemptions, locating and selling the debtor’s property (while paying valid liens on the property), suing to recover property fraudulently transferred by the debtor to others, recovering payments made by the debtor in preference of one creditor over others, prosecuting lawsuits and causes of action which the debtor may have, and taking other actions that turn assets of any form into cash payable to the unsecured creditors.
e. In spite of the Trustee’s best efforts, most Chapter 7 cases are “no asset” cases, meaning the debtor’s assets are exempt or subject to valid liens and cannot be liquidated for the unsecured creditors.
f. The Trustee regularly abandons the estate’s interest in property that has no equity. For example, a Trustee would abandon a house worth $250,000 and subject to a $240,000 lien, because the $10,000 of apparent equity would not cover the Trustee’s cost of selling the property.
g. Even after a Trustee has abandoned property, the automatic stay may remain in effect as to the debtor and preclude a creditor from proceeding against the property. Under current law, the automatic stay against the debtor ceases once the debtor is discharged. Under BAPCPA, as discussed later, the automatic stay terminates more speedily as to personal property.
For more information or to request a presentation regarding BAPCPA, please contact Spotts Fain attorneys, Robert H. Chappell, III (804) 697-2025 or Jennifer J. West (804) 697-2094.
