Chapter 7 - Overview
Chapter 7 bankruptcy permits individual debtors to get a fresh start by discharging specific debts and wiping the slate clean. This means that the individual will no longer have any liability for those debts.
For the most part, if handled correctly, a Chapter 7 usually means a fast discharge of all dischargeable debts, as well as an end to those harassing calls from creditors and collection agencies. However, since the law allows for the sale of un-exempt property to help re-pay a portion of your debt, you should be aware that it is also possible that you may lose some of your property in a Chapter 7 bankruptcy if your case is not filed and completed correctly. However, no two bankruptcy cases are exactly the same. An experienced Los Angeles bankruptcy attorney like Devin Sawdayi can look at the facts of your situation and give you a personalized recommendation as to whether Chapter 7 bankruptcy is right for you and if so, how to make sure that none of your property is sold if you file your case as a Chapter 7.Who is Eligible?
An individual who hopes to qualify for Chapter 7 bankruptcy must pass the “means test,” which is designed to keep filers with high incomes from wiping out their debts entirely. The means test looks at whether your income is low enough to file for Chapter 7. The first step in this test is to figure out whether your current monthly income is less than the median income for a household that is the same size as yours in your state. If the answer to this is yes, you pass the test. If your answer is no, further calculations are necessary.
Next you must look at what your “allowed” monthly expenses are and whether you have enough disposable income to pay off your unsecured debts, such as credit card bills. If your disposable income exceeds a specific amount you fail the means test and cannot file for Chapter 7 bankruptcy, but you may still be eligible for Chapter 13 debt reorganization.
Assuming you do pass the means test, you are eligible for Chapter 7 bankruptcy. There are a few exceptions. For example, you cannot file under Chapter 7 if you willfully failed to appear before the court in a bankruptcy petition 180 days prior to your current filing or if you dismissed a previous case when creditors sought to recover property upon which they hold liens. You must have received credit counseling within 180 days of filing with certain exceptions. Most clients complete their credit counseling requirement over the internet, and do so a few days prior to filing their case. The course usually takes about an hour and a half to complete.Chapter 7 Bankruptcy Process
Once you pass the means test, your attorney can file a petition with the bankruptcy court for your residential area. The attorney must also file:
- A schedule of your assets and liabilities,
- A schedule of your current income and expenditures,
- A statement of financial affairs,
- A schedule of unexpired leases and executory contracts (those for which a performance is still pending),
- Additional documents related to your debt.
Among the schedules your attorney must file is a schedule of "exempt" property. Exempt property in California is an asset that a bankruptcy trustee is not able to sell off to pay creditors. Specific assets may be protected from creditors’ claims through one of two California exemption systems. You can choose the exemption system that you feel best protects the types of assets you own. Usually individuals with significant home equity prefer System 1, while those with more money or other valuable items prefer System 2.Effect of Filing Chapter 7 Bankruptcy
An advantage of filing for Chapter 7 bankruptcy is that most collection actions are “stayed” (stopped) automatically, at least for a short time, by operation of law. Creditors are not permitted to initiate or continue lawsuits or wage garnishments, or to continue making phone calls to you to demand payment. A bankruptcy clerk sends them a notice to this effect.
An impartial case trustee is appointed to administer your case and liquidate your nonexempt assets so that your unsecured creditors receive the maximum return possible. Between 21 and 40 days after the petition is filed, the trustee holds a meeting of the creditors identified in your paperwork.
During the creditors’ meeting, you are put under oath, and both the trustee and creditors may ask you questions concerning your financial affairs and property. If you filed a joint petition with your spouse, you must both attend the creditors’ meeting and answer questions under oath. The questions will also ensure you are aware of the effects of filing for bankruptcy.
Within 10 days the trustee will report back to the court. If the trustee determines you own some nonexempt property, you may be required to turn in the property or provide the trustee with its equivalent value in cash. However, if the property isn't worth a lot or it would be too difficult to sell for the amount of equity to be obtained, the trustee may "abandon" the property. In other words, you can keep abandoned property even if it is nonexempt.
At the end of a Chapter 7 bankruptcy process, the court discharges (“wipes out”) your debt, except for those debts which survive by operation of law, such as child support; certain tax debt(s); pre-petition judgments for fraud; student loans; debts resulting from driving under the influence of alcohol or drugs; or debts that are deemed non-dischargeable by the court because a creditor objected and prevailed in their suit. One example of this latter type of debt would be a debt that was incurred through fraud.