Many people are aware that Chapter 7 bankruptcy is one of the fastest and most efficient means to eliminate most types of unsecured debts. Secured debts can include credit card bills, hospital bills, store charge card bills, doctor’s bills, and basically, all other debts that are not secured debts. Secured debts are debts where the creditor’s interest is protected and strengthen by the property. While Chapter 7 bankruptcy is more amenable to eliminating unsecured debts, holding some secured debts doesn’t automatically mean that Chapter 7 bankruptcy is inappropriate for your situation.  

The experienced Sacramento bankruptcy attorneys of The Bankruptcy Group can guide you through the Chapter 7 bankruptcy process from start to finish. We understand that many people are anxious about bankruptcy because the process seems complex. To increase Californians understanding of the bankruptcy process, our bankruptcy lawyers will describe in this post how a Chapter 7 trustee will settle your debts with your creditors. To discuss how bankruptcy can provide you with a pathway out of debt and to a fresh financial start, call The Bankruptcy Group at 1-800-920-5351 today.

Will My Creditors Receive Any Compensation?

For people who are not engaged in bankruptcy practice on a day-to-day basis, it may come as some surprise that most people who come into our California law office want to do the right thing regarding their debt. More often than not, the individual did not choose to fall behind. Rather, difficult life events like the loss of a jobs  serious medical condition, or a divorce caused the person to fall into debt that became unmanageable.

bigstock Bankruptcy Chapter 116944355 - How Does the Trustee Handle My Debts in a Chapter 7 Bankruptcy?

While all bankruptcies are different, the key determination as to whether the creditor will receive compensation for the debt is whether assets are available. In many Chapter 7 bankruptcies, there are no assets. This may be due to the fact that the individual filing bankruptcy simply did not have assets. In other scenarios, the bankruptcy filer may be entitled to keep all of his or her property because it is fully covered by the California bankruptcy exemptions. Property that is exempt is the property you keep regardless of the bankruptcy.

Provided that property is available to compensate your creditors, the bankruptcy trustee will locate this property by consulting the Schedule A/B: Property that you or your lawyer provide. To determine what property can conceivably be sold, the bankruptcy trustee will compare the property listed on Schedule A/B with the property listed on Schedule C: The Property You Claim as Exempt. Property that appears on Schedule A/B but not Schedule C is not exempt property and therefore is subject to liquidation to compensate creditors.

How Does the Bankruptcy Trustee Determine Which Creditors Are Compensated?

Provided that the trustee was able to identify the non-exempt property, the trustee will liquidate this property and distribute the proceeds to creditors. Which creditors are compensated is dependent upon the bankruptcy code priority list. Therefore, the U.S. bankruptcy code requires the bankruptcy trustee to pay creditors in a certain order on the basis of the type of debt. While secured debts receive the highest level of treatment, it is perhaps more interesting and more relevant to look into how unsecured debts are prioritized.

Under U.S. Bankruptcy Code §507(a)(1) – (10) the prioritization for secured debts is set forth. Under this system of prioritization, child support obligations, alimony, and other domestic support obligations are given highest priority of all unsecured debts. Next in the priority list are debts incurred due to administrative expenses relating to the bankruptcy. Third, all claims for obligations that qualify under 11 U.S. Code § 502 are paid next. Additional and subsequent claims in the priority list include:

  • Unsecured claims, up to $10,000, earned as wages, salary, commission, and other forms of compensation within the last 180 days.
  • Unsecured claims for employee benefit plan contributions.
  • Certain unsecured claims made by fishermen or grain farmers.
  • Unsecured claims, up to $1,800, originating from purchase, lease, or rental of property.
  • Unsecured tax and other claims by governmental agencies.
  • FDIC obligations
  • Personal injury claims resulting from a motor vehicle accident casued by an intoxicated driver.

The foregoing captures the general prioritization of unsecured debts. In some cases determining the character of certain debts may be less clear than others. In other circumstances, creditors may petition for higher prioritization than the nature of the debt would permit. An experienced bankruptcy attorney can fight to protect you should creditors challenge your bankruptcy plan.

Bankruptcy Petition - How Does the Trustee Handle My Debts in a Chapter 7 Bankruptcy?

Work with Strategic Bankruptcy Lawyers

If you are considering filing bankruptcy to get out of debt, the Chapter 7 bankruptcy lawyers of The Bankruptcy Group can provide step-by-step guidance throughout the entire process. To schedule a free and confidential consultation, call our California bankruptcy law firm at 1-800-920-5351 or contact us online today.