What is Chapter 7?
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 Chapter 7 bankruptcy?
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 (See Qualifications and Means Test).
- 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. For more information regarding the protection laws click here.
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.
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.
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. For more specific information regarding how the bankruptcy laws allow you to protect certain property, click here.
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.
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.
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.