Monday, October 31, 2016
Can An Unsecured Creditor Get Paid In A Chapter 7 Bankruptcy?
Most unsecured debt is wiped out entirely in a Chapter 7 case, which is why most people prefer to file a Chapter 7 rather than a Chapter 13 case. Unsecured debt, like credit cards and medical debts can reach astronomical balances, making it almost impossible to ever pay in full. But if you were not tied to having to make minimum payments that get you nowhere on the debt, you could free up a large part of your monthly disposable income. When your paycheck is no longer being used to service insurmountable debt, you can put your money to use on other needs such as groceries and car insurance.
The likelihood that unsecured debt would get entirely discharged in bankruptcy was one of the motivating factors behind the change to the Bankruptcy Code in 2005. The laws were changed then, to include a more in depth look at the finances of a person filing bankruptcy and how their bottom line related to the amount of secured debt owed. If the ratio was a certain amount, indicating that even after paying secured loans like home and auto notes there remained any amount that could be paid to unsecured lenders; a debtor would have to file a Chapter 13 case. But if the computation showed no funds available for unsecured debt, a Chapter 7 would be allowed.
As you might imagine, credit card companies much prefer to be paid something toward their debt rather than receiving zero. So, if a Chapter 13 bankruptcy is the way you are required to go when filing your case, your unsecured lenders will get paid something. But what about a Chapter 7, where the whole point is to eliminate your unsecured debt all together? A lender can get paid in a Chapter 7 if they are unsecured, and here is how:
• If there are assets available that are not exempt or encumbered by a lien, those assets can be sold and the money made given to unsecured lenders.
• You can opt to reaffirm a debt, even an unsecured debt. If you do, that lender will get paid.
Most debtors do not reaffirm unsecured debts, because there is little benefit to doing so. If you reaffirm a debt it is like signing a new contract, and that makes the debt still due even after your discharge is entered. It is critical to discuss these options with your attorney before and during your case, so you can make a choice that best meets your needs.
For more information about how lenders get paid during bankruptcy, call us today or reach us online at www.law-ri.com. We will help by looking at the facts of your case and giving you options to reach your financial goals.