Chapter 7 bankruptcy is a liquidation of debts and is for individuals, married couples or businesses that wish to dissolve their operations. It allows debtors to eliminate or discharge certain unsecured debts such as credit cards, personal loans, payday loans and medical bills.
Eligibility for Filing
Not all debtors can file under Chapter 7. If you previously filed a Chapter 7, you have to wait 8 years from discharge before you can file again. If you had filed a Chapter 13 previously, then you must wait 4 years from the date your case was discharged to file again.
To otherwise qualify, a debtor must meet a means test, which is based on your income and is compared to the median income for your state as it pertains to the size of your household. You qualify if your average monthly income for the past 6 months does not exceed the state median standard. If it does, one of our attorneys can still see if you have disposable income to pay off your creditors. We will want to examine your tax returns for the past 2 years, all current credit statements, household equity records and a list of your monthly expenses.
If you do not qualify, you still might be able to file under Chapter 13 provided your debts are not too substantial. In some cases, our attorneys might discuss a Chapter 11 with you.
Before You File
Before you file, you should meet with one of our attorneys to review your finances, expenses and debts. We will also inquire about payments made to creditors over the past 90 days and up to one year for some payments, if recent credit cards were just obtained or if property was sold or transferred recently. If bankruptcy is your best option for your situation and you meet the means test or otherwise qualify, then you need to complete a short credit counseling class that is about 60 minutes in length, which is approved by the US Trustee’s office. Our attorneys will find a course for you and if you are low income or indigent, request that the fees, which are generally around $50, be waived.
This class is designed to explain the bankruptcy process, what options are available and give you a personal budget plan as well. The course can be taken online, in-person or by phone. Once completed, your certificate of completion must be submitted with your petition. Your petition will include certain schedules to be completed, listing your assets and liabilities, income and expenses, financial affairs and other disclosures.
Selection of Exemptions
California law requires debtors to choose the state exemptions and not the federal ones, however, there are two sets of state exemptions. One is targeted at those with substantial equity in their homesteads so that they can retain it, while the other has a generous wildcard exemption that can protect other property that might otherwise be subject to seizure by the trustee. The exemptions can enable you to retain your clothes, furniture, car, money in your bank and retirement accounts, tools and life insurance.
The Automatic Stay
As soon as you file, an automatic stay goes into immediate effect. Any court proceedings and creditor actions including phone calls and other collection activities must cease. This remains in effect during the pendency of the bankruptcy. However, a secured creditor such as a mortgage company may file for relief from the automatic stay on the basis that their collateral, such as your house, is being damaged by your failure to pay them. If granted, as it typically is for this case, the mortgagor can pursue foreclosure.
Meeting of Creditors
After filing you will have to attend a 341(a) meeting held before the trustee. This is largely a perfunctory meeting where you will provide valid identification before the trustee will ask you basic questions about your petition and if all information that you provided is truthful. Creditors may ask you about the status of any collateral secured with them but these are generally handled by your attorney outside of the hearing. Following the hearing and for the next 60 days, any creditors can file objections to a discharge of their debts if fraud is alleged. A not uncommon allegation is that a debtor maxed out a credit card with no intention of paying it back, or that false information was provided on the petition or certain property was transferred to another person to avoid its inclusion in the bankruptcy.
Before you are granted a discharge, you have to take another class called a debtor education class and submit the certificate of completion. In the majority of cases, there are no objections to discharge or other motions that can delay discharge. You can expect to receive a notice of discharge from the bankruptcy court about 3 to 4 months after filing. When received, all of your unsecured debt will no longer be your obligation. You do have to continue paying on your secured loans or debts, such as car or other loans secured by collateral, though you do have the option of returning the collateral or paying its fair market value.