The Drawbacks of Chapter 7 Bankruptcy

By Clint W. Smith | Published on September 12, 2011 | 0 Comments

If you think bankruptcy is the magical way out of debt, and that it’s only positive all the time, think again. Bankruptcy has its pitfalls, even if its farther-reaching consequences include unburdening you of stultifying debt. Clint W. Smith, P.C., is a Mesa, AZ, chapter 7 bankruptcy attorney. As much as he can use chapter 7 bankruptcy to help his clients out of debt, he’s also fully aware of the drawbacks of taking that kind of action.

When somebody files for chapter 7 bankruptcy in Mesa, AZ, they are taking a serious risk with any assets they have. Say they own a rental property, or they have fully paid off a car worth $20,000. Once their bankruptcy case begins to take effect, the bankruptcy trustee assigned to the case is charged with the duty to turn all such assets as the car and the rental property into hard cash. Some assets are protected, but certainly not all of them. Smith says that $5,000 of a car’s market value is protected in a Mesa, AZ, chapter 7 bankruptcy. Imagine a hardworking guy paid off his $20,000 truck a year ago with his home equity line. Now he’s going into bankruptcy, but he wants to keep his truck as a necessary asset in his business and family life. It’s too bad, because the trustee will snatch up the truck to sell off, and leave the owner with only the $5,000 that chapter 7 bankruptcy in Mesa, AZ, allows him to keep of that asset.

Not all vehicles automatically have a percentage of their worth as an asset protected. Smith reports that a fifth-wheel vehicle like an RV, or a yacht will not be protected assets. They’ll simply be added to the pile of assets the trustee has to liquidate. If somebody is considering chapter 7 bankruptcy in Mesa, AZ, and owns more than a few of those special vehicles, then filing for bankruptcy will pose a huge risk to retaining that property.

Sometimes, however, peoples’ financial situations won’t allow them the luxury of keeping any assets. Many times, a family is forced to sell off a vacation cabin that’s been in the family for generations. They have to sell it because if they don’t, and they file for chapter 7 bankruptcy, then the trustee will sell it off for cash the family won’t ever see. While filing for bankruptcy would force the family to use the money from the pre-filing sale of the cabin, that’s more preferable than handing the whole beautiful old thing over to the trustee for liquidation.

The lesson is that bankruptcy isn’t simply a fall back. It may remove the burdens of debt, but many beloved assets could become the casualties opting for bankruptcy.