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Chapter 7 Bankruptcy

In a Chapter 7 case the Court issues a Discharge Order, which permanently prohibits creditors from taking any action to collect most debts against you personally. In a Chapter 7 bankruptcy, most DEBTS are ELIMINATED completely. This is called a “discharge.” Medical bills, credit cards, judgments from car accidents, personal loans and other unsecured loans can usually be eliminated or “discharged” in full. Once a debt is discharged, the creditor is forever prevented from taking any action to collect the debt.

Can I File Chapter 7 Bankruptcy?

To determine if a person is eligible for a discharge of their debts through a Chapter 7 case, the first qualifying factor is their income. The court uses an income calculator called the Means Test that factors a person’s gross monthly income, and then takes into account their expenses. The idea is that if you have a lot of disposable income each month, then you have the ability to pay back your debt over time and, therefore, are not eligible for a Chapter 7 discharge. Clients who have this disposable monthly income do not pass the means test and are usually good candidates for Chapter 13 bankruptcy (a repayment plan) or debt settlement. If you do not have disposable monthly income, then you are likely eligible to file a Chapter 7 bankruptcy Petition. A good bankruptcy attorney will run your Means Test numbers and be able to tell you your eligibility with certainty.

How Can A Chapter 7 Case Help?

Chapter 7 cases offer lots of relief to someone struggling with debt. The follow are examples of how Chapter 7 bankruptcy can provide relief:

  • Stop a pending foreclosure.
  • Wipe out all credit card debt, medical bills, HOA dues, and some taxes.
  • Decrease monthly car payments.
  • In a Chapter 13 case we can often help wipe out second mortgages and can help clients get caught up their existing mortgages.
  • Stops creditor harassment.
  • Stops all debt collection efforts.
  • Postpones foreclosure proceedings, giving you time to figure out an alternative to foreclosure.
  • Successfully completed, discharges all eligible debt.
  • No maximum limit to the amount of debt that can be discharged.
  • No minimum amount of debt that can be discharged.
  • Chapter 7 proceedings take approximately 3 to 6 months to complete, meaning your debt can be discharged in a relatively short amount of time.
  • No monthly payments to the court.

If I file Chapter 7 Bankruptcy, Do I Have To Give Up Anything That I Own?

Maybe, but with a good attorney you will know before you ever file the case. Remember that a Chapter 7 bankruptcy is allowing you to wipe out all of your debts without paying anything back at all. Because this is such a big benefit, the Court has limits to what you are allowed to own and still get your debt wiped out. For example, it’s not fair for you to own an original Picasso painting and not have to sell that to pay down your debt. That being said, the vast majority of our clients do not own anything that is of such large value, and generally keep everything they own. When everything you own falls under the protected allowances of the laws of your state and you can keep it all, that is called being a “no asset” case. 98% of all cases handled by this office are “no asset” cases, meaning the client gets their debt wiped out and does not have to give up anything they own.

How Do I Know If My Assets Are Protected?

In a Chapter 7, the court assigns your case to a “trustee” whose job is to liquidate property you own to pay your creditors. You are entitled to keep “exempt property” so you can get a fresh start. This is one of the reasons that having a good attorney for your bankruptcy is so important – they will be able to guide you in the best way to protect your assets to make sure that they are not taken by the Court to pay down your debts. And, if you own anything that is not protected, your attorney can clearly explain the process of surrender that assets so you have no surprises in your case.

If you resided in California continuously for the last 2 full years, there are two sets of “exemptions” to choose from to protect your property. The exemptions establish the amount of equity in your property that is protected from liquidation by the trustee. After reviewing your case thoroughly, we will identify the set that best protects your property.

The California State exemptions allow you to keep, among other things:

  • Residence—up to $75,000 equity for a single individual, $100,000 equity for a married couple or head of household, and $175,000 for certain disabled individuals or persons over 65 years of age. The exemption may not exceed $125,000 if you have acquired your residence within the last 1215 days (approx. 3 years + 4 months) unless you acquired it by using proceeds of the sale of your previous residence in California acquired before the 1215 days. The exemption may also be reduced to the extent that the value of the property is attributable to property you disposed of in the last 10 years with intent to hinder, delay or defraud creditors if the property disposed of could not have been claimed exempt.
  • Household goods, furnishings and supplies—an unlimited amount of items ordinarily found in a household and not of extraordinary value.
  • Vehicles—$2,725 total equity.
  • Jewelry, heirlooms, and works of art—$7,175 total equity
  • Tools of trade—$7,175 or $14,350 if both husband and wife are engaged in business.
  • Cash on hand or funds in bank accounts—75% of earnings of an employee paid in the last 30 days. Funds traceable to self employment are not exempt.
  • Cash surrender value in life insurance policies–$11,475, or $22,950 for a husband and wife.

There are additional exemptions for retirement plans, personal injury claims and other less common property.

The Cal-Fed exemptions allow you to keep, among other things:

  • Household goods, furnishings and supplies—an unlimited amount so long as no single item is worth more than $550 liquidation value.
  • Vehicles—$3,525 equity in one vehicle
  • Jewelry—$1,425 total equity
  • Tools of trade—$2,200 total equity
  • Cash surrender value in life insurance policies—$11,800 total.
  • Catch all—$23,250 to protect equity in any kind of property including your residence, other real property, cash and bank accounts and any extra equity in items under 1-5 above.

There are additional exemptions for retirement plans, personal injury claims and other less common property.

The trustee is paid a flat fee to review your case and a small percentage (approx. 10%) of any non-exempt property liquidated. Most trustees do not spend the time to come to your house or otherwise chase after property of minimal value, since the costs of doing so are usually not worth the effort.

All of your property must be disclosed to the Court. If you have property that is not exempt, good pre-filing strategy may require that you sell certain property before we file to maximize what you can keep. It is also possible to pay the trustee for non-exempt property in order to keep it. These strategies should be coordinated with us to avoid preferences or fraudulent transfers. Remember not to sell or transfer any major item of property or large amount of cash prior to filing bankruptcy without talking to your attorney first. Otherwise, you give up your right to non-exempt property.


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