Filing for bankruptcy can be a daunting prospect. Still, for many individuals and businesses drowning in debt, it’s a viable path toward financial relief and a chance for a fresh start. Chapter 7 bankruptcy, or liquidation bankruptcy, is one of the most common types filed in California and across the United States.
Bankruptcy is designed to help individuals and businesses resolve their debts. Understanding the requirements and process is essential before you file for Chapter 7 bankruptcy. Let’s delve into what happens when one files for Chapter 7 bankruptcy in California.
Understanding Chapter 7 Bankruptcy
There are many types of bankruptcy, with Chapter 7 being the most common for individuals and businesses. Bankruptcy laws are governed by federal law and the laws themselves do not vary from state to state. However, the median income needed to qualify for bankruptcy can vary by state.
Under Chapter 7, a trustee will sell your non-exempt assets to repay your creditors. However, it’s important to note that most Chapter 7 filings are considered “no asset” cases, meaning you will not have to surrender anything to the state.
Debts Not Eliminated by Bankruptcy
All debts cannot be discharged in bankruptcy. Here are some common debts that cannot be discharged:
- Child support
- Student loans
- Tax debts
- Wages owed to workers
- Damages for personal injury due to driving under the influence
- Fines and penalties owed to government agencies
Chapter 7 Eligibility Criteria
Not everyone qualifies for Chapter 7 bankruptcy. Eligibility is determined through a means test that evaluates income and expenses.
Determining Eligibility for Chapter 7 Bankruptcy in California
If an individual’s income falls below the state median, they might qualify for Chapter 7. If their income surpasses the median income for a “family of similar size,” further evaluation of disposable income and expenses will be conducted to determine eligibility. If this is the case, the following steps will then be taken.
Step #1 – Income Levels
If you make more than the median income level required, you must pass the “means test” to qualify to file Chapter 7. This test will compare your average monthly income over the last six months to that of a household similar to yours.
Step #2 – Determine Your Disposable Income
In step one, only your income is considered. In the next step of the means test, your expenses will be considered to determine if you will be able to pay back any of your debts.
To do this, take your monthly income and subtract allowable expenses. This will give you your disposable income. You can subtract out house and car payments that you make, as well as other allowable expenses such as health care costs, costs of living, and local standards for transportation and housing costs based on national standards.
Step #3 – Look at Your Disposable Income
If your disposable income under the means test is less than $128, you qualify for Chapter 7, and if it exceeds $214, you do not qualify. However, if you fall into the area between these two amounts, there is another step that you have to take.
Multiply your disposable income by 60, giving you the amount you would have to pay creditors over five years under a Chapter 13 plan. Then, add up your unsecured, non-priority debt, such as credit cards and medical bills, then divide the total by four.
If the first number is less than the second, you wouldn’t have enough disposable income to pay 25% of your unsecured debt over a five-year timeframe and would qualify for Chapter 7. If you have enough, you will have to file for Chapter 13.
It’s important to remember that the court has the final say in all bankruptcy filings and will examine the circumstances of your case. So, for example, if you qualify for Chapter 7 but drive expensive vehicles and have a luxury home, the court may consider this and deny a Chapter 7 filing.
The Process to File Chapter 7 Bankruptcy in California
After you decide to file Chapter 7 bankruptcy, the following will take place.
Credit Counseling and Financial Management Courses
To file for bankruptcy, you are required to complete a credit counseling session within 180 days of filing. These courses aim to provide education on budgeting, managing finances, and making informed financial decisions to avoid similar situations in the future.
Filing Your Bankruptcy
Before filing for bankruptcy, meeting with an attorney is beneficial to determine if this is the right course of action for your circumstances. If you decide to proceed, your attorney will file the necessary paperwork with the court.
Court Ordered AutomaticTemporary Stay
After filing for Chapter 7 bankruptcy, an automatic stay is issued. This stay prevents creditors from pursuing collection activities, including phone calls, letters, lawsuits, wage garnishments, or repossessions. It provides you some time to work through the bankruptcy process.
A Trustee Will Be Appointed
A trustee is appointed by the court to oversee the bankruptcy process. They will review your finances and oversee your case.
Liquidation of Assets
Non-exempt assets, if any, are liquidated by the trustee to repay creditors. However, it’s essential to note that in California, debtors can often retain a significant portion of their assets through exemptions provided by state law. For instance, California’s homestead exemption allows individuals to protect a certain amount of equity in their primary residence.
Discharge of Debts
The ultimate goal of Chapter 7 bankruptcy is to obtain a discharge, which relieves the debtor from the obligation to pay most types of debts. When the debts are discharged, you officially no longer owe creditors the money, so they can no longer try to collect from you.
While a Chapter 7 bankruptcy remains on one’s credit report for up to ten years, individuals can begin to rebuild their credit immediately after receiving a discharge. Responsible financial behavior, such as timely payments, prudent use of credit, and budgeting, can gradually improve creditworthiness.
Chapter 7 Bankruptcy and Businesses
LLCs and corporations can use Chapter 7 to discharge debts. If you are a business considering filing for Chapter 7 bankruptcy, it’s essential to understand that doing so will close your business. This would be the best option for someone who wishes to close their company instead of passing it on to a new owner.
Often, after a business closes, a former owner can have difficulty proving that the company has closed and will continue to be hassled by creditors. Filing Chapter 7 will show lenders that your company is legally out of business.
It’s important to note that the means test only applies to individuals. If your debt is primarily business debt, the means test doesn’t apply, and you can file Chapter 7 regardless of your income.
Let The Gorski Firm Help You Start to Rebuild Your Financial Life and Move Forward to a More Secure Future
Chapter 7 bankruptcy in California provides a legal pathway for individuals overwhelmed by debt to find relief and a chance to regain financial stability. Before considering bankruptcy, it’s advisable to seek guidance from a qualified bankruptcy attorney who can provide personalized advice and navigate the complexities of the process.
At The Gorski Firm, we’re dedicated to exceeding your expectations with our services. Vincent Gorki, our founder, is a State Bar of California Board of Legal Specialization Certified Bankruptcy Specialist and is ready to provide high-quality services to clients in need of financial relief.
Do you need a fresh start? Contact us today for a consultation.