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How Does Bankruptcy Work?

In sum, Chapter 7 bankruptcy is a legal proceeding where a consumer can discharge many forms of unsecured debt after liquidating eligible assets to pay off creditors. In the Florida business environment, you may encounter this form of bankruptcy in one of two ways:

  1. You’re a creditor seeking payment from a debtor who’s filing Chapter 7, and your bottom line is at stake; OR,
  2. You’re a company owner – especially a sole-proprietor – wanting to eliminate some of your personal and professional debts.

Each of these scenarios puts you in a very different position comparatively, so it’s critical to understand the requirements, process, and consequences. In addition, some basic information about Chapter 7 bankruptcy may be useful.

Overview of Chapter 7 Bankruptcy Proceedings:

For individuals who qualify, Chapter 7 of the US Bankruptcy Code can wipe out most forms of financial liability, enabling them to emerge from the process debt-free. When the petitioner files the relevant paperwork, the court imposes an automatic stay that applies to creditors. They cannot attempt to collect on any debt and are prohibited from:

  • Calling the debtor to request payment;
  • Initiating collection efforts;
  • Filing a lawsuit in court to recover the debt;
  • Putting a lien on property;
  • Garnishing wages; and,
  • Any related conduct.

Shortly after filing, a bankruptcy trustee is assigned to the case to manage the debtor’s assets, with a goal to liquidate property and pay off creditors. Whatever amount the trustee collects goes to creditors, though it may not be enough to satisfy all debts. Some assets are exempt, as described in more detail below; other property may not bring much value to pay the debtor’s outstanding accounts. Any remaining debts, after application from funds collected in liquidation, are discharged at the conclusion of Chapter 7 proceedings.

Exemptions in Chapter 7 Bankruptcy Cases:

Bankruptcy laws don’t want to leave the petitioner in a destitute situation, so the trustee cannot take control over the exempt property and attempt to liquidate it for Chapter 7 bankruptcy purposes. As such you may be allowed to keep certain assets or equity in them. Some examples of exemption under Florida law include:

  • The homestead exemption, which includes equity in real estate or personal property that you use as a residence;
  • Up to $4,000 in any property of your choice, if you don’t use the homestead exemption;
  • Up to $1,000 in a motorized vehicle;
  • Such personal property as prepaid health and medical savings accounts;
  • Federal income tax refunds;
  • Some of your wages, depending on whether you’re the head of the household.