You may have experienced financial hardship recently and wonder whether you should file Chapter 7 bankruptcy.
You are not alone.
Many people are looking at Chapter 7 bankruptcy due to financial hardship from COVID.
You probably have many questions like, “Can I qualify for a Chapter 7 bankruptcy?”, “Can I afford a Chapter 7 bankruptcy?” or “What happens to my car or house in a Chapter 7 bankruptcy?
We will cover all of those questions and much more in 3 parts
This will be the shortest section because you may already know some about Chapter 7 bankruptcy from your search, but it is important to understand the differences between Chapter 7 and Chapter 13 Bankruptcy.
Chapter 7 Bankruptcy:
You must qualify. More about this later.
Chapter 13 Bankruptcy:
Now that we covered the basics between Chapter 7 and Chapter 13 bankruptcy, let’s dig into Chapter 7 qualification as it’s a very important element about a Chapter 7 bankruptcy.
An important measure of whether you qualify for a Chapter 7 bankruptcy is based on what’s called the means test. There are two main parts of the means test.
The first part to measure qualification uses the bankruptcy form that compares your average monthly income and compares it to a set median income based on household size and income limit.
You can take the calculator below to estimate whether you qualify based on the most recent means testing data for California for cases filed on or after May 15, 2021 Before you take the calculator, you may want to get a sense of your average income for the last 6 months. You can use this average income calculator to help you estimate your average monthly gross income for the past 6 months.
Once you take the calculator, you will get the results that show a Chapter 7 bankruptcy qualification estimate like the one below. If you are below the median, you may have a good chance to qualify for a Chapter 7 bankruptcy. If you don't, let's cover that next.
Not necessarily. There are chances that you could still qualify for a Chapter 7 bankruptcy even if your income is greater than then the state's median income for means-testing.
What's next? There's part 2 of the means test that uses this bankruptcy form. We just built an above-median Chapter 7 bankruptcy calculator to help you estimate whether you qualify even if you are above the median. Send us a message if you're interested to try the calculator.
Let's say the calculator estimates that you may qualify for a Chapter 7 bankruptcy. Well, you may be thinking of how you can afford a Chapter 7 bankruptcy if you can't afford your current monthly obligations.
The Chapter 7 filing fee is consistent across the state. The Chapter 7 bankruptcy attorney fee however in California often is based where you live. This is why we built a Bankruptcy Lawyer Fee Calculator to help you estimate the cost based on your zip code.
We will cover California legal aid options below, but all of the bankruptcy attorneys we partner with throughout California will offer payment plan options that will help you be able to afford a Chapter 7 bankruptcy.
Let's discuss the Chapter 7 bankruptcy process to help you understand the mechanics of filing for bankruptcy.
Among the parties that are eligible for a Chapter 7 bankruptcy include partnerships, businesses, corporations, and even individuals. But there are two particular scenarios in which individuals can’t file for any type of bankruptcy:
Besides, one of the primary objectives is to give debtors a second chance by discharging their debts and doing away with responsibilities for the said debts. It's vital to remember that with Chapter 7, only individuals can have their debts discharged and not businesses and corporations. You may remember that some debts are dischargeable and some others are not dischargeable.
Further reading: Which Debts Can Be Included in Bankruptcy
For the process of filing for a Chapter 7 to begin, the debtor should file a petition at the bankruptcy court near their residence or business premises. You will need to include personal financial documents, including statements such as unexpired leases. Besides, they should provide the trustee assigned to the case a copy of the tax returns from the past tax year, plus all returns during the period of the case.
It’s crucial to note that individuals have to file extra documents. Such documents include copies of any debt repayment arrangement from credit counseling, a certificate of credit counseling, and evidence of payment from employers from two months before the filing. You can find the full list of documents needed here.
Before you can file, there are some filing process fees that you have to pay to the bankruptcy court. If necessary, individual debtors can pay these fees in up to four installments, although there are exceptions to that figure. To finish filling in the Official Bankruptcy Forms, you have to provide the information below:
You need to include your spouse's information irrespective of that person filing. The primary objective of such an action is to enable the bankruptcy court to determine the financial state of the household accurately.
You can provide a list of exempt assets. Federal or state bankruptcy laws protect exempt assets. The best way of finding out what properties are exempt in your state is to consult a bankruptcy lawyer.
In the process of filing for Chapter 7, you should keep a few things in mind. The moment you file, you will immediately put a halt to most collection agencies and creditors. After you file, the bankruptcy clerk will notify all creditors you have mentioned in the filing about the process. Also, between 21 and 40 days after you file, the case trustee will call a meeting involving the debtor and the creditor. In this meeting, where the debtor will be under oath, the creditors and case trustee will ask questions and note that being cooperative is in your best interest.
The trustee may require financial documents from you. One of the meeting's objectives is to make sure that the debtor fully knows about the process, the outcome of Chapter 7, and the options. You may be eligible to change a bankruptcy to a Chapter 11 or Chapter 13 in certain situations.
Chapter 7 bankruptcy discharge only applies to debtors filing for Chapter 7 bankruptcy. After discharge, creditors cannot pursue you for debts that have been discharged in the bankruptcy. From information by the United States Courts, barring the exceptions, debtors obtain this discharge 99% of the time. Usually, this takes place within two to three months after the initial meeting with the creditors.
As far as being denied a discharge is concerned, it is not that common. Still, you can check out the reasons for being denied a discharge here. Some of the reasons include lack of adequate financial records or not following stipulations from the bankruptcy court.
In other circumstances, creditors can still go after underlying debt and take away assets even after debtors obtain a discharge. In case the debtor needs to avoid such a scenario, they should 'reaffirm' the debt. It means that they have to agree to settle some or all of the debts owed that would, in other circumstances been waived through bankruptcy. Note that as long as the debtor keeps honoring the debt, their assets cannot be touched.
It is imperative that reaffirming occurs before obtaining a discharge by presenting a written agreement to the bankruptcy court. In this agreement, particular disclosures have to be filled, for instance, the amount of debt being reaffirmed, plus evidence that the debtor has enough income to cater for the debt. If these requirements are not met, the court may deny the reaffirmation agreement.
Nevertheless, in case the debtor has no legal representation, the bankruptcy judge may approve the agreement. A lawyer involved would establish that reaffirmation would not bear negative consequences to the debtor. But the essential requirement is that the debtor should be paying the debts voluntarily.
You may still have debt after bankruptcy. Such situations include debts from education loans and personal injury resulting from driving while intoxicated. It is a guarantee that some debts will be discharged except when creditors file to make the debts dischargeable. The bankruptcy court reserves the right to remove a discharge when requested by a creditor, trustee, or federal trustee in exceptional circumstances, for instance, when the discharge is obtained illegally.
You may qualify for a Chapter 7 bankruptcy, and you may be able to afford the fees, but should you file for a Chapter 7 bankruptcy in California? In this section, we will cover the California bankruptcy exemptions, how bankruptcy affects credit, pros and cons, and alternatives.
If you are like most people, you care most about your home, your vehicle, and potentially cash on hand. Let's cover those exemptions. Each state has different homestead bankruptcy exemptions. You can check those homestead bankruptcy exemptions by state.
One of the many questions we receive is how Chapter 7 bankruptcy affects your credit. It's an important question, so we will address the common questions and provide another resource if you'd like to dig deeper.
When you file a Chapter 7 bankruptcy case in California, you cannot incur new debts without the bankruptcy court's approval. Your creditors will be notified of the bankruptcy filing, and companies will close your credit accounts based on the Chapter 7 bankruptcy filing. Therefore, you can expect not to have access to credit during the bankruptcy case. Once complete, you may get access to credit at a very high price. You may look into a secured credit card to start rebuilding credit.
For further questions about how soon can you purchase a home or how soon your credit will improve, you may want to read our article titled: How Does Bankruptcy Affect Credit?
Chapter 7 Bankruptcy Pros
Despite Chapter 7 being one of the severe bankruptcies, there are still some benefits to take into account when deciding whether this debt option suits you. Let's check out the benefits:
Chapter 7 Bankruptcy Cons
Similar to all other debt-relief alternatives, Chapter 7 also have its drawbacks:
Below is a visual of the pros and cons of Chapter 7 bankruptcy.
There are alternatives to Chapter 7 bankruptcy. Often a debt consolidation loan or a mortgage refinance is out of the question when you experience financial hardship. Alternatives include:
The Chapter 7 Calculator above estimates the costs, and pros and cons of Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt settlement and debt management.
Hope this article helped you understand a Chapter 7 bankruptcy and can even be a resource for you in the future when you decide whether to pursue a debt relief option.
If you have made it this far, you probably have some questions about a Chapter 7 bankruptcy. Please reach out to us directly with any and all questions, and we will make sure they get an answer quickly. If you haven't done so already, check out whether you qualify for a Chapter 7 bankruptcy below and compare your debt relief options.