What is Chapter 7 bankruptcy?

First, let’s talk about what Chapter 7 bankruptcy is. Chapter 7 bankruptcy is the most common bankruptcy chapter for consumers under the bankruptcy code. It is a legal process governed by federal law that helps individuals or businesses eliminate most of their debts by selling non-exempt assets, which are part of the debtor’s property, to pay creditors. Let’s break down what this means.

Your first question might be, “What are non-exempt assets?” Examples of these include:

Luxury items
Expensive vehicles
High-priced collectibles
Investments that are not for retirement
Property that is not your primary residence

These assets, as part of the debtor’s property, become part of the bankruptcy estate and may be liquidated by the bankruptcy trustee.

Your second question might be, “Who are creditors?”

Creditors are people or entities who have a claim against a debtor that was made before the debtor filed for bankruptcy. Creditors can be paid in a number of ways, and they can also file a proof of claim to register their claim and indicate how much they are owed.

Other names for Chapter 7 bankruptcy are “liquidation bankruptcy” and “straight bankruptcy.” Liquidation refers to the process of converting something of value into something of immediate cash value.

For example, if you have money tied up in the stock market, selling that stock for cash withdrawal means the money is now liquid. Chapter 7 bankruptcy is also referred to as “liquidation bankruptcy” because you must liquidate non-exempt property to repay a small portion of your debts.

Your third question might be, “How does the process work?” The filing process for Chapter 7 bankruptcy involves submitting required documents to the bankruptcy court. In Chapter 7 bankruptcy, a court-appointed trustee oversees the process of liquidating non-exempt assets to pay off creditors. The bankruptcy trustee is responsible for managing and selling the debtor’s property that is not exempt, and distributing the proceeds to creditors. The bankruptcy court oversees the case, processes claims, and issues the discharge at the end of the case. Debtors can keep exempt assets.

Most unsecured debts, such as credit card balances and medical bills, are discharged in Chapter 7 bankruptcy. However, certain debts, like student loans, child support, court-ordered payments, and some tax obligations, may not be discharged. After the process, you are no longer responsible for discharged debt, and creditors cannot attempt to collect on those debts.

Now that we’ve explained what Chapter 7 bankruptcy is, let’s get into the good stuff: what you can and can’t buy.

Understanding Bankruptcy Exemptions

Bankruptcy exemptions are a fundamental part of the bankruptcy process, designed to help individuals protect certain assets while seeking relief from overwhelming debt. When you file for Chapter 7 bankruptcy, not everything you own is at risk of being sold to pay creditors. Instead, bankruptcy exemptions—set by both federal and state law—allow you to keep specific types of property, such as a portion of your home equity, personal belongings, or retirement accounts.

These exemption rules are in place to ensure that you are not left without the basic necessities needed to rebuild your financial life. Depending on where you live, you may be able to choose between federal bankruptcy exemptions and your state’s own set of protections. The choice you make can have a significant impact on which assets you are able to keep during the bankruptcy process.

Understanding which exemptions apply to your situation is crucial, as it determines what certain assets you can retain and what may be used to pay creditors. By working with an experienced bankruptcy attorney, you can navigate these exemption rules and make informed decisions that protect your financial security as you move toward a fresh financial start.

What can I purchase with federal bankruptcy exemptions?

While filing for Chapter 7 bankruptcy, you can generally only purchase the following basics, as long as they are considered necessary:

Food
Utilities
Clothing
Groceries
Medication
Life insurance
Transportation
Household goods
Government benefits

You may only buy these items if they fall within your state’s exemption limits. The exemption limit determines how much equity in assets like a motor vehicle or personal property can be protected from creditors. Exemptions also typically have dollar ceilings on them, meaning they are only exempt up to a certain value. Personal property, such as clothing, furniture, and household goods, may be exempt up to the allowed limit. Some states also offer a wildcard exemption, which allows you to protect any asset of your choosing up to a specific amount. Additionally, unpaid wages and funds in a bank account may be protected up to certain limits.

In Chapter 7 bankruptcy, every state has different rules regarding property exemptions. In the state of Arkansas, you can choose between Arkansas exemptions (also known as Arkansas bankruptcy exemptions) and federal exemptions. Arkansas bankruptcy exemptions protect certain assets, such as your home, motor vehicle, and personal property, from creditors during bankruptcy.

For example, Arkansas law distinguishes between rural homestead and urban homestead exemptions: a rural homestead protects a larger parcel of land outside city limits, while an urban homestead protects a home and limited land area within a city or town. Married couples filing jointly, or filing jointly, can double exemption amounts, providing greater protection for their assets. In Oklahoma, you must abide by the state’s exemptions. This article contains a list of federal and state exceptions in Arkansas.

A bankruptcy attorney can help you determine what you can and can’t have. In addition to consulting with a lawyer, you will want to keep your receipts. This ensures that the trustee can see that the items you bought are basic essentials. Document all purchases, especially if you’re spending money from your savings account or a recent tax fund. Personal loans, along with credit card debt and medical bills, are examples of unsecured debts that can be discharged in Chapter 7 bankruptcy.

What personal property can I not purchase?

You may not purchase excessive items such as:

a second car
designer items
vacation homes
high-end jewelry
stocks and bonds

Discretionary spending when it comes to non-essentials is off the table. Basically, anything you want that doesn’t meet a need is off limits. There may be some gray area depending on the monetary value of the item.

For example, a watch your father gave you may be considered unnecessary, but to you it holds sentimental value. This may be up for discussion depending on how much money the watch is worth and whether or not it is considered exempt by your state. When filing for Chapter 7 bankruptcy, avoid pre-paying large bills without first consulting with a lawyer. Steer clear of making any large purchases that significantly exceed your usual living expenses.

You also cannot sell property or transfer property after filing for bankruptcy without trustee or court approval. Attempting to do so can result in serious legal consequences, including denial of discharge. If you receive life insurance proceeds after filing, you may need to report them to the trustee.

Filing for Chapter 7 bankruptcy triggers an automatic stay, which generally halts collection efforts, wage garnishments, and foreclosure proceedings. However, secured creditors, such as your mortgage lender or auto lender, may still enforce their rights to repossess or foreclose on secured property if you do not stay current on payments. To keep your home, you must stay current on mortgage payments, and your mortgage lender may require you to sign a reaffirmation agreement.

A repayment plan is not available in Chapter 7, but if you want to keep certain assets and catch up on missed payments, a repayment plan is an option in Chapter 13 bankruptcy.

Certain specific debt types cannot be discharged in bankruptcy, including criminal fines and child support. Student loans are also generally not dischargeable unless you can prove undue hardship.

Although there are many desirable items you can’t buy, you are a human being with rights. The courts can’t take that away from you. You deserve to have your basic needs met while still abiding by the law. An attorney can make sure you know what you are and aren’t allowed to have in your possession.

Evan’s Story

Evan experienced significant financial problems after losing his job due to getting COVID-19, leaving him with little disposable income and making him eligible for Chapter 7 bankruptcy. To complete his bankruptcy filing, Evan needed to gather and organize his financial documents, such as tax returns and bank statements. His qualifying debts included medical bills from his illness, which were eligible for discharge under Chapter 7.

After filing, Evan had questions about what he can and can’t purchase.

There were two things he wanted to buy: the lakehouse that belonged to his grandfather (where he could peacefully recover from his long-haul symptoms), and a test from the COVID clinic to check his IL-6 levels.

Because the lakehouse was not a basic essential, his lawyer denied this request. However, the blood test was deemed medically necessary. His lawyer granted him permission to buy the test and recover from Long COVID in the home he already had.

How we can help

Our lawyers can teach you about property exemptions so you can make informed decisions about your purchases. We are here to protect your rights and make sure you’re complying with the law to ensure smooth payback of your debts.

Filing for Chapter 7 bankruptcy can help you become debt free and regain financial stability. We also provide guidance on financial planning and rebuilding credit after bankruptcy, so you can establish a solid financial foundation for the future. Completing debtor education is a required step for discharge and long-term financial health, and we can help you navigate this process.

Here at The Law Offices of Craig L. Cook, we have over 40 years of combined experience serving clients in need of a bankruptcy lawyer. We understand money challenges can be scary, and the laws involving bankruptcy can be confusing. Your financial security and peace of mind are of utmost importance to us. Everyone deserves to get the help they need in repaying their debts. Book a free consultation with us if you have questions about filing for Chapter 7 bankruptcy. We are here to help!

What purchases can I make and not make while filing for Chapter 7 bankruptcy?