Chapter 7 Bankruptcy: 3 Things You Need to Know

1) Understand Chapter 7 Bankruptcy

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:

Chapter 7 Bankruptcy: Chapter 7 bankruptcy is also referred to as “liquidation bankruptcy” although you can often keep your home and keep your car. Here are 5 quick facts.

You must qualify. More about this later.

• Liquidation may occur or may not
• It’s less expensive than a Chapter 13 bankruptcy
• You can receive a discharge within 90 days
• It stays on your credit report for 10 years. That often doesn’t mean you have to wait 10 years to get access to credit. See how bankruptcy affects your credit for more information.
  

Chapter 13 Bankruptcy:

Chapter 13 Bankruptcy: Chapter 13 is also known as a wage-earner bankruptcy. It’s a voluntary reorganization of debt in a payment plan. Here are 5 quick facts.

• Most people qualify. There is a debt limit, but it is high.
• Liquidation often does not occur.
• It’s more expensive than Chapter 7
• You receive discharge often within 3 or 5 years.
• It stays on your credit report for 7 years.

2) Estimate Chapter 7 Bankruptcy Qualification

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.

Do You Qualify for 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.

My Chapter 7 estimate was over the median income. Does that mean I don't qualify?

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.

What does Chapter 7 bankruptcy in California cost? Can I afford it?

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.

3) Will You Lose Valuables from Filing for Bankruptcy?

This is an important question. You can take the bankruptcy exemptions calculator below or read how the Chapter 7 bankruptcy process works.

Let's discuss the Chapter 7 bankruptcy process to help you understand the mechanics of filing for bankruptcy.

Chapter 7 Bankruptcy Eligibility

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:

• In the case in the 180 days preceding the filing, a debtor’s bankruptcy petition was turned down because the debtor failed to comply in one way or another.
• If in the 180 days before filing, the debtor didn't sign up for approved credit counseling.

 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

How Chapter 7 Bankruptcy Works

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.

Understand the Fees

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:

• Full list of all the creditors, plus the nature and amount of the debts
• Frequency, source, and amount of the debtor's earnings
• List of the entire debtor's assets
• A well-detailed list of the individual's living expenses every month, including shelter, food, utilities, clothes, taxes, medicine, transport, among others

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.

Understand Keeping Assets and Filing Process

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.

Understanding a Chapter 7 Bankruptcy Discharge

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.

Reaffirmation of debt

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.

4) Should file Chapter 7 bankruptcy?

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.

Chapter 7 Bankruptcy Exemptions

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.

How Chapter 7 Bankruptcy Affects Your Credit

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?

Pros and Cons of Chapter 7 Bankruptcy

There are definite pros and cons of a Chapter 7 bankruptcy. We covered a little of this information above, but I'd like to make sure you are aware of the pros and cons of bankruptcy.

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:

• Debt relief is obtainable within three months after filing.
• It is usually the least expensive of options, with the entire costs ranging from $1,000 to $2,000.
• You will obtain legal protection meaning creditors can't sue you.
• Zero taxes on unpaid debt.
• Chapter 7 will eliminate most of your unsecured debt.
• Chapter 7 has an impressive success rate. This means that debtors who file stick with the process until the end. With debt settlement and Chapter 13, the success rate is much lower.

Chapter 7 Bankruptcy Cons

Similar to all other debt-relief alternatives, Chapter 7 also have its drawbacks:

• Your credit report will take a massive beating. A Chapter 7 bankruptcy will stay on your credit report for up to a decade (ten years).
• The damage to your credit report will make it more challenging to get credit services in the future.
• After filing, low availability to credit is a possibility.
• Above the state exemption figure, there is no asset protection, meaning that liquidation of property to pay off creditors is a likelihood.
• Chapter 7 will appear on your public record.

Below is a visual of the pros and cons of Chapter 7 bankruptcy.

Chapter 7 Bankruptcy Alternatives

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:

• Chapter 13 Bankruptcy
• Debt Settlement
• Debt Management
• Debt Payoff Planning

The Chapter 7 Calculator above estimates the costs, and pros and cons of Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt settlement and debt management.

5) What Chapter 7 Bankruptcy Questions Do You Have?

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.

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