What Is Chapter 7 Bankruptcy?
Chapter 7, also known as liquidation bankruptcy, is the most common form of bankruptcy. It is usually the best option for individuals who do not have the ability to pay their existing debts. If you pass the means test and qualify for Chapter 7 bankruptcy, you can erase all eligible debt in 3-6 months. This is as opposed to re-organizing your debt in a Chapter 13, and repaying your debt over 3-5 years.
You may claim certain property exempt (that is, you can keep the property) and a trustee may take possession of the remaining assets in order to liquidate them and pay your creditors according to priorities set forth in the Bankruptcy Code. In most cases, you do not lose any property. See the United States Trustee’s Bankruptcy Information Sheet.
Do I Qualify? What Is the Means Test?
The means test determines whether your disposable income is low enough for you to qualify for Chapter 7 bankruptcy. It was designed to make sure that only people who are truly unable to pay their debts actually file. In other words, if your income exceeds median annual income for other California families, then you need to pass the means test, which first determines how much disposable income you have after expenses, and then determines whether or not you can pay off your debts.
Before you take the means test, your annual income will be checked against the median annual income for families of your size in your state. If your income is lower, then you automatically pass and you, therefore, qualify to file for Chapter 7 bankruptcy. If not, then you will be required to pass the means test.
Your income must be lower than the median in California for a household your size in order for you pass the test. If your income is too high, you can only file Chapter 13 bankruptcy, in which you have to make monthly payments over a three-to-five year period.
What to Expect When Filing for Chapter 7 Bankruptcy
Filing for bankruptcy is a complex process. It certainly helps to have a bankruptcy lawyer who can guide you through the process of filing the correct paperwork. One misstep and your debts may not be discharged. Worse still, you won’t be able to file again for another 8 years.
The first part of the process involves filing a petition. The petition includes a number of forms that need to be filled out. On them, you will list your assets, income, and each of the debts that you want to have discharged. You’re also going to need to identify which property you will claim as exempt from liquidation.
The Automatic Stay
The major benefit of filing for any kind of bankruptcy is that it gives you an automatic stay from the continual harassment of creditors. This means that they cannot garnish your wages. They cannot dip into your savings. They cannot repossess your car. Instead, they simply have to wait.
Deferring Control of Your Finances
When you file for bankruptcy you are technically leaving your personal finances in the hands of the bankruptcy court. The court manages your finances through the agency of a “trustee”. The function of the trustee is to see that creditors with claims against you are paid as much as they possibly can be. While the trustee is technically a neutral party, they also get paid a portion of whatever assets they can find of yours to liquidate.
The Creditors Meeting
The next step in the process is the creditors meeting. This will occur a couple of weeks after you file. The trustee will swear you in and then ask you a series of questions concerning your bankruptcy, your income, and your assets.
How Long Will It Take for My Debts to Be Discharged?
It will take 3 to 6 months before your debts are completely discharged. In most cases, trustees do not find much (or anything) to liquidate. What debts can be discharged, are. You will be free to begin again without the debts listed in your paperwork.
What Property Can I Keep?
In California, you get to keep almost all of your property. This includes your:
- retirement account
- other personal belongings
After valuing your assets, you can protect your assets by claiming the allotted exemptions. An experienced Chapter 7 bankruptcy attorney will advise you as to which assets are exempt in addition to how you can use to correct exemptions to protect your property.
Debts That Are Not Discharged
In California, non-dischargeable debts in Chapter 7 include the following:
- child support
- student loans
- income tax debts
Speak to a Chapter 7 bankruptcy attorney to see what other debts may not be discharged in your case, as well as what options are available to you.
The Pros and Cons of Filing for Chapter 7 Bankruptcy
Even for those who qualify, Chapter 7 bankruptcy is not always going to be the preferred choice. In most situations it will be, however, which is why the majority of those who file for bankruptcy at least attempt to file for chapter 7.
For instance, those who are behind on their mortgage or business-related payments won’t be able to discharge those debts via Chapter 7 bankruptcy. They can only either file for Chapter 13 or attempt to repay on their own.
In addition, Chapter 7 bankruptcy is called liquidation bankruptcy for a reason. It means that if you have valuable assets, those will be liquidated in place of repaying your creditors. Chapter 13, on the other hand, does not require you to liquidate your assets. It allows you to catch up on your payments my prorating the overdue debt into a new agreement. Hence why Chapter 13 is called reorganization bankruptcy.
However, for those who want a fresh start and to eliminate their debt burden without paying it back, Chapter 7 bankruptcy remains the most attractive option.
Advantages of Chapter 7 Bankruptcy
- Chapter 7 affords you a fresh start for a wide variety of debts.
- Chapter 7 gives you instantaneous protection from creditors attempts to collect on overdue claims.
- Wages and property you get after the filing cannot be claimed by creditors (with the exception of inheritances).
- Unlike Chapter 13, Chapter 7 debts can be discharged no matter how large they are.
- Chapter 7 bankruptcy can be executed quickly. Debts can be discharged in under 6 months.
Disadvantages of Chapter 7 Bankruptcy
- You will lose any property that is non-exempt to pay off your creditors.
- Chapter 7 cannot discharge all debts. That includes foreclosures.
- If you filed Chapter 7 bankruptcy already, you will have to wait 8 years before you eligible to file again.
What Happens to Your Credit After Filing Chapter 7 Bankruptcy?
After filing Chapter 7 bankruptcy, make sure that you monitor your credit reports. That way you can check that your creditors have updated their reports to reflect any discharged debts.
Rebuilding credit after bankruptcy is not as big of a problem as you might think. You should be able to get a credit card, as most credit lending companies know they’re not facing a risk (since you can’t file for a Chapter 7 twice in 8 years).
A good idea is to get a secured credit card. This will allow you to rebuild credit but without the temptation that comes with an unsecured credit card. If you need a new car, great – a car loan can be very useful in rebuilding credit after bankruptcy.
Are There Alternatives to Filing for Bankruptcy?
There are pros and cons to filing for any kind of bankruptcy. For those who do not qualify for Chapter 7 bankruptcy, on alternative might be debt consolidation. Debt consolidation entails taking all of your debts and lumping them into a single debt. The debt consolidator will guarantee you a fixed interest rate and you can begin making payments against that.
Speak to a Knowledgeable Chapter 7 Bankruptcy Attorney Today
Filing bankruptcy can be one of the most difficult decisions you face in your life. Don’t go through it alone. Chapter 7 bankruptcy lawyer Diane Anderson will analyze the facts of your case and advise you as to which option is best for your situation. If you have questions about bankruptcy, the means test, or how to rebuild credit after bankruptcy, call the Law Offices of Diane Anderson at (530) 626-6441 today.