What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is the most common proceeding filed by individual consumers to obtain relief from the burden of paying back their indebtedness. It is is a federal court process in which you eliminate your legal obligations to pay back most types of unsecured debt when you do not have the means to pay your creditors back and provides a fresh financial start for individuals.
Who Can File?
Although the requirements of who can and cannot file a Chapter 7 changed in 2005, most people who could file a Chapter 7 Bankruptcy before 2005 can still file bankruptcy.
You can not file bankruptcy if:
- In the previous eight years, you have filed for Chapter 7 Bankruptcy and received a bankruptcy discharge;
- In the previous eight years you filed for Chapter 13 and paid less than 70% to your unsecured creditors;
- You earn more than the average household size in your state and do not pass the Means Test (Our experienced legal advisors will confirm this for you).
- Additionally, you may not want to file bankruptcy if your assets cannot be fully protected under the bankruptcy laws. It should be noted that in California most debtors are able to protect most if not all of their property under one of the two sets of statutes available.
What Happens To My Debts?
Most types of your unsecured debts can be eliminated or discharged in Chapter 7 bankruptcy. An unsecured debt is a debt not attached or secured on a piece of property. Credit cards, personal loans, payday loans and medical bills are the most common type of unsecured debts.
All of those types of debts can usually be eliminated in a Chapter 7 Bankruptcy. Even those debts that are subject to lawsuits and judgments can be discharged. There are some exceptions, however, and some debts in a Chapter 7 Bankruptcy will not be discharged.
A bankruptcy discharge legally releases the debtor from further liability and obligation to pay certain types of debts. This means that, after filing bankruptcy, the debtor is no longer required to pay those debts that are determined to be discharged. A bankruptcy discharge is an order that prohibits creditors of the debtor from pursuing collection of the debt. This means they cannot file or continue any legal action against the debtor or communicate with the debtor by telephone calls, letters, or other personal contact.
Not all debts are able to be discharged when a person files bankruptcy. These special debts may include student loans, court ordered restitution, recent taxes, debts obtained by fraud, child support, and most tickets and fines. Debts on secured property such as car loans and mortgages will also not be discharged unless you are willing to surrender the property.
You also can choose to continue to pay these debts if you intend to keep the property. If you are considering filing bankruptcy, it is important to get legal advice from an attorney if you have any questions regarding whether your debts are able to be discharged. This should be done before you file bankruptcy. Many attorneys offer free consultations.
What Happens To My Property?
As outlined in the Court's informational book entitled “Bankruptcy Basics,” the individual debtor is permitted to select specific laws to protect property they own. These laws are called exemptions and normally protect basic living- and work-related necessities including a house, car, retirement investments, clothing and other personal property up to a certain limit.
Statistically, most consumer debtors are able to protect and keep all of their personal property. California also offers the flexibility of two different sets of laws for people filing bankruptcy — the state law exemptions found in CCP §704 and a set of bankruptcy-only exemptions in CCP §703.140. Our licensed legal staff will confirm your exemptions before your case is filed to ensure your property is protected, and, if not, discuss strategies to protect your assets.
How Are My Creditors Affected?
Once the Chapter 7 bankruptcy is filed, all creditors, even those whose debts will not be discharged, must stop trying to collect their debt from you directly. This court order that goes into effect immediately upon the filing is known as the “Automatic Stay” and has the power to stop all types of various collection actions creditors may be pursuing such as garnishments, lawsuits, harassing phone calls and collection letters.
During your bankruptcy proceeding, creditors are not allowed to contact you directly or collect from you. This includes debts (such as a car loan) that you may want to continue to pay. You should continue to pay any secured debts you desire to keep even if you do not receive a monthly statement from that creditor. Once you have received a bankruptcy discharge, collection efforts of discharged debts cannot resume. If a debt is not dischargeable or you have agreed to continue to pay a particular debt, those creditors can continue collection efforts after your proceeding is concluded and monthly statements should resume.
Can I Exclude Any Creditors?
All creditors must be listed in your bankruptcy paperwork, even those you may choose to continue to pay. A debtor signs the Bankruptcy documents under penalty of perjury pledging that all information is accurate, complete, true and otherwise correct to be best of their knowledge.
A debtor can continue to pay certain secured creditors such a car or furniture loan, with court approval; however, a court will not approve a debtor paying an unsecured credit card merely because they want to “keep a credit card.” A debtor may be able to unilaterally work out an agreement with a particular unsecured creditor to keep a particular credit card; however the court will not formally approve such agreements.
What If I Want to Keep Paying For My Car?
If a person filing wants to keep a car or furniture and they can afford the payments, a debtor can negotiate with that creditor to allow them to to keep these items by agreeing to continue to make the loan payments. This is very common and is known as a “REAFFIRMATION” of the debt. A debtor will have to agree to keep the contractual payments current, and the court will have to approve the agreement. If the debtor later fails to make the payments, then the creditor can repossess the item and the debtor may be responsible to pay for the remaining unpaid loan amount (loan deficiency).
Another alternative to keeping furniture and cars that have secured loans is through “Redemption.” In order to “redeem” the property and keep the item, a debtor can pay the creditor a lump sum during the case based on the replacement value (rather than the loan balance) of the item. With some exceptions, household goods that a debtor has pledged as security for a loan can be retained and the lien avoided without any payment. Speak to an attorney if you have questions concerning the best options in your particular situation.