Chapter 7 Bankruptcy

Thu, Jun 18, 2015


Some rights reserved by sherwoodrealestateIndividuals and businesses can file chapter 7 bankruptcy. It is typically for those who owe for numerous debts and are not interested in keeping their homes/vehicles or keeping their businesses open. Chapter 7 filers may lose a significant amount of personal property, since there is a limit of how much personal property you may keep. Thus, it is important to decide if Chapter 7 bankruptcy is the right kind for you to file.

In a Chapter 7 bankruptcy, you must file bankruptcy under the state where you have been a resident for the past 2 years. Any debt that was accrued before those two years would be filed in accordance with that state’s laws, and not Florida’s.

Most bankruptcy laws are straight forward. For instance, when filing for bankruptcy under the Chapter 7, the law requires you receive credit counseling  and financial education. Your bankruptcy filing will not be complete until your counseling and education is complete.

Chapter 7 makes some types of property exempt from the bankruptcy. However, there are many types of property that are not exempt. This blog post on our website tells more.

However, Chapter 7 bankruptcy was in a bit of a blurry area for a while. The muddy waters involved the idea of lien strip downs and strip offs. Chapter 13 allows for strip offs, and Chapter 7 had not. However, in 2012 a court decision made it possible for the strip offs to happen in Chapter 7 bankruptcies. And debtors rejoiced, especially since the economy had made numerous junior loans underwater.

A little more information:

  • Strip down of a loan is when you make the value of the loan equal to the actual value of the property, rather than the full amount of the loan. This is quite helpful for reducing the amount owed because the actual value of the car (or home) is left on the bankruptcy as a secured loan and the remaining amount that is not secured by the value of the car (home) is an unsecured loan. This is also sometimes referred to as “cram down”.
  • Strip off of a loan means you remove secondary loans on property if the value of the property is less than what is owed on the first loan. This makes the second loan an unsecured debt and it can be “stripped” like other types of unsecured debts.


There was some excitement in 2012 when a decision by the Eleventh Circuit Court, re McNeal No. 11-11352, stated that unsecured debt should also be able to be “stripped off” in Chapter 7 bankruptcies—not just Chapter 13 cases. (Many people were filing Chapter 13 for reasons that relate to stripping off a second loan.) This was the first circuit court to uphold this decision, though many cases relating to this issue had been brought to circuit courts of appeal before. The 2012 decision differed from previous court decisions because this 11th Circuit Court decision said that a completely unsecured loan could be stripped off within the wording of 506(d).

So the issue finally made it to the United States Supreme Court and a decision was made this month (June 2015) regarding lien strip offs in Chapter 7 bankruptcies. And it wasn’t good news for those filing Chapter 7 bankruptcy, but instead good news for mortgagees. That’s because Bank of America v. Caulkett  found that lien stripping off of a junior loan should not be allowed in Chapter 7 bankruptcies. In fact, since a junior loan exists it therefore should not be able to be stripped off. And bankruptcy lawyers across the country are not pleased, including SmithLaw.

This is a link to the Supreme Court’s decision on this matter. Interestingly, it seems that perhaps the argument presented to the court was part of the problem in the decision…the decision referenced that the term “secured” was a big part of the argument and the Court was not interested in debating this meaning. This is unfortunate for the others relying on this decision in the favor of the debtor, for cases past and present could be reevaluated.

Attorney Christopher D. Smith, Sr. is designated a Board Certified Consumer Bankruptcy Lawyer by the American Board of Certification.  SmithLaw is located in Lakewood Ranch, Florida.  Attorney Smith concentrates on bankruptcy, civil litigation, probate, estate planning, and elder exploitation cases in the Sarasota and Bradenton area.  Call 941-202-2222 to learn more.  SmithLaw offers free consultations in certain areas, including consumer bankruptcy, probate, and personal injury matters.

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