Being in extreme debt can feel like the weight of the world is on your shoulders. After you have explored the many options available to pay your creditors, you may ultimately decide that filing for bankruptcy is your only alternative.
If this is the case then a Chapter 7 bankruptcy might be right for you. The process gives you, the debtor, a “fresh start”, meaning you will be able to keep certain “exempt” property after the process is over. The good news is that all of your debts will be discharged, and you will no longer be on the hook to pay them.
What is Chapter 7 Bankruptcy?
Now, a Chapter 7 bankruptcy is also known as a “liquidation” bankruptcy. This means that you will be required to surrender most of your assets to a person known as the Bankruptcy Trustee. Remember, property that is deemed exempt is not transferred to the trustee and you maintain ownership.
The trustee then sells the property to pay back any creditors you have. Note that these creditors are referred to as “unsecured” because the debt is not tied to a particular piece of property.
Keep in mind that this process can take between 3-4 months to complete. After this time you will have most of your unsecured debts discharged. However, unfortunately, some debts cannot be discharged in bankruptcy (discussed below).
What is Chapter 13 Bankruptcy?
In addition to Chapter 7 bankruptcies, the law provides for what is known as a Chapter 13 bankruptcy. In this case, instead of your property being liquidated and your debts discharged, the process involves a “reorganization” procedure that requires you to pay off your creditors in a period of 3-5 years.
Note that unlike Chapter 7, you get to keep all of your property in a Chapter 13 bankruptcy. This option is generally for those that make too much money to file for Chapter 7 (see below).
Do I Qualify for Chapter 7 Bankruptcy?
That said, it’s important to note that not everyone can file for bankruptcy under Chapter 7. Instead, you need to meet the following criteria:
Residency requirement: you must have lived in California for at least 2 years. However, if you have lived in the state for less time you may still be able to file. In this case, speak to a qualified attorney.
Income limit: you can only file if your income is less than the state’s “median income” standards. This is based on household (family) size and is currently capped at $60,360 for one person, $79,271 for two people, and $88,235 and for three. The amount continues to increase with the more family members you have in your home.
Now, if your income is over the limit you are required to take what is known as the “Means Test.” This involves a complicated calculation that considers all of your income and expenses in order to determine whether or not you have sufficient money left over to pay your debts.
Bear in mind that if it is determined that you have enough disposable income to disqualify you for Chapter 7, you will need to instead file for a Chapter 13 bankruptcy.
What Property is Exempt Under Chapter 7?
You might be wondering what property you get to keep after a Chapter 7 bankruptcy. Here in California, the law provides two sets of exemptions and your attorney will help you decide which one is best for you.
That said, under Set 1, you are allowed to keep equity in your home up to $75,000 ($100,000 if you are married). This is referred to as the homestead exemption. You can also maintain ownership of a car worth up to $3,325, as well as 75% of your wages.
By contrast, under Set 2, the amount of home equity you can keep is limited to $29,275. However, your car exemption bumps up to $5,850 and you also get what is referred to as a wildcard exemption. The wildcard amount is determined by any equity you didn’t use for the homestead exemption plus $1,550.
Now, if you don’t own any real estate, a vehicle, or luxury goods, all of your property may be declared exempt. This means that you will be able to keep these items after the bankruptcy process completes.
What Kinds of Debts are Discharged in Chapter 7 Bankruptcy?
As mentioned above, most so-called “unsecured” debts are discharged in a Chapter 7 bankruptcy. These are financial obligations not backed by collateral. Examples include: credit card debt, medical bills, some personal lawsuit judgments, and personal loans.
By contrast, for secured debts, only the loan can be discharged. This means that the creditor can take back the underlying collateral. For example, as part of bankruptcy you would likely lose possession of a speed boat that was financed through a lending agency.
As you might imagine, this process can be helpful in cases where the amount of debt is greater than the value of the collateral. However, also keep in mind that certain types of debts cannot be discharged in bankruptcy. These include:
- Most student loans
- Child support obligations
- Spousal support payments
- Government fines (including speeding tickets or fines for felonies and misdemeanors)
- Personal injury awards resulting from drunk driving
- Homeowner association fees
- Debts for loans from a retirement plan
- Certain tax debts
The Automatic Stay
One of the major benefits to filing for bankruptcy is what is known as the automatic stay. The stay effectively stops most collections actions against a debtor and begins immediately after filing.
This means that you will no longer be subject to any lawsuits, wage garnishments, repossessions, evictions, phone calls, letters, etc. However, keep in mind that there are limitations and in some cases a creditor can ask the court to lift the stay.
How Can a Bankruptcy Attorney Help Me?
Bankruptcy matters are complicated and can have high stakes. If an error is made during the process you might not get all of your debts discharged. You may also lose property that you could have kept or even have your case dismissed.
A qualified attorney will fully evaluate your case and determine whether a bankruptcy is the best option. He or she will also help you choose between a Chapter 7 and Chapter 13 filing. The lawyer will take care of drafting all of the paperwork and complete the filing process, representing you from start to finish.
As part of representation, the attorney will also advocate on your behalf at all hearings, starting with the mandatory 341 meeting of creditors. These matters are far too important to not have an expert on your side. Contact us today for a case evaluation.