I like to think of this hidden bankruptcy chapter as “Chapter 9.5.” You will not find chapter 9.5 in the bankruptcy code, but it could be a viable solution to your financial woes.
Chapter 7 bankruptcy is a complete liquidation meaning all non-exempt assets must be turned over to the bankruptcy trustee. In exchange, any qualifying debts are forgiven (discharged).
Chapter 13 bankruptcy is a “reorganization” where you (the debtor) maintain control over your assets throughout the duration of your case. The chapter 13 plan will require repayment of either 100% or a smaller percentage of your total debt. A chapter 13 repayment plan will last between 3 to 5 years. Sometimes, the length of time discourages people from filing chapter 13.
What if you want to keep your assets but repay your debt over a shorter period of time? Chapter 7 (or 9.5) may give you that ability.
Typically, if you do not want to lose your non-exempt assets to the bankruptcy trustee, you must file chapter 13. However, assuming that you meet the income requirement and pass the dreaded means test, a chapter 7 repayment plan could be an option.
When a chapter 7 case is filed, a bankruptcy “estate” is created. The bankruptcy trustee becomes the owner of your assets whether you like it or not. After obtaining possession of your property, the trustee will arrange an auction and the proceeds will be distributed to your creditors.
Alternatively, you could “settle” with the trustee for cash and “buy back” your interest in the property.
Bankruptcy’s Buy Back Program
It is possible in chapter 7 to make a reasonable offer to the bankruptcy trustee to buy back your assets from the estate.
As an example, a recent debtor I represented owned a vehicle worth approximately $16,000. After all exemptions were applied, including the $4,000 New York vehicle exemption, he was left with $12,000 of non-exempt equity in his vehicle.
Instead of losing the vehicle, an offer was made to the trustee to buy back the estate’s interest for $12,000. Many trustees will structure the settlement agreement to allow monthly payments over a period of time.
Often times, it is in the best interests of all parties to reach a settlement as auctions are unpredictable, time consuming and can be costly.
In the example above, the chapter 7 liquidation became a repayment plan lasting only 12 months.
A Word of Warning
While a chapter 7 repayment plan may be right for you, it may not be right for the trustee. The trustee is appointed to represent the creditors and he/she acts in their best interest.
Your trustee may not think an extended repayment plan serves the best interest of the creditors and may refuse this option. He/she may be willing to agree to a lump sum settlement or a shorter repayment plan.
Either way, it is important to explore this strategic option if you have non-exempt assets and see if it could work for you.
Image courtesy of Flashy Soup Can (Flickr).