A Chapter 7 Is the Most Common Form of Bankruptcy for Individuals
The object of a Chapter 7 is to “discharge” debt. If qualified, the Court issues a Discharge Order which permanently prohibits creditors from taking any action to collect the debt against you personally. Your obligation to pay the debt is “discharged.”
When your agreement with a creditor allows the creditor to take specific property from you if you don’t pay, the debt is “secured” by the property which is referred to as “collateral.” Examples of secured debts are car and house loans, but also may include accounts with retailers who sell durable items like furniture, appliances, and jewelry. In a chapter 7, the secured debt is discharged, but the creditor does not lose its right to collect against the collateral. Therefore, you must decide whether you wish to surrender the collateral or retain it by paying for it. Usually, you can keep your house or car by continuing payments according to the terms of the contract.
Certain debts will not be discharged. They include but are not limited to: (1) certain taxes, (2) child and spousal support and other debts owed to a spouse or child arising from a divorce or separation, (3) most student loans, (4) debts incurred for personal injury or death resulting from operation of a motor vehicle while intoxicated, (5) debts incurred through fraud or use of a false financial statement, (6) debts incurred through willful and malicious conduct, (7) court-ordered fines, restitution and traffic citations, and (8) debts incurred specifically to pay a non-dischargeable tax.
When you discharge your debt in Chapter 7, you may not be entitled to keep all of your property. In most cases, the debtor loses no property. The Court assigns the case to a “trustee” whose job is to liquidate property to generate funds to pay your creditors. You are entitled to keep property that has no equity and “exempt property.” In order to allow the debtor to get a fresh start, the debtor is entitled to keep certain property that is exempt from the reach of the trustee. If you resided in California continuously for the last 2 years, there are 2 sets of exemptions that you may use to protect your property.
The California State Exemptions Allow You to Keep:
- Equity in your residence up to the county-wide median sale price for a single-family home in the prior year; minimum $300,000 to a maximum $600,000. However, if the residence was acquired in the last 1,215 days before the case was filed, the exemption may be limited to $170,350.
- Household goods of ordinary value.
- Equity in vehicles up to $3,325.
- Jewelry, heirlooms, and works of art up to $8,725.
- Tools of trade up to $8,725 or $17,450 if both spouses are engaged in business.
- Cash surrender value of life insurance policies up to $13,975 for each spouse.
- 75% of cash and bank balances traceable to earnings of an employee paid within the last 30 days.
- Most retirement plans.
The Cal Fed Exemptions Allow You to Keep:
- $30,825 of any kind of property (commonly referred to as the “catch-all” or “wild card” exemption) in addition to those below.
- Household goods, furnishings and supplies up to $725 per item with no maximum total.
- Equity in one or more vehicles up to $5,850.
- Jewelry up to $1,750.
- Tools of Trade up to $8,725.
- Cash surrender value of life insurance policies up to $15,650.
- Most retirement plans.
There are additional exemptions for other types of less common property. You can use one set of exemptions or the other, but you cannot use some from each set.
The trustee can recover certain payments you make to unsecured creditors before filing a bankruptcy. If the majority of your debt is consumer debt, the trustee can recover payments that total $600 or more made within the 90 days before filing to most creditors, or within 1 year before filing made to “insiders” like relatives or partners. If the majority of your debt is business debt, the trustee can recover the payments if they total $6,825 or more within those time periods. Payments of secured debts like house and car loans cannot be recovered.
If you sell, trade, or transfer property in the 2 years before the case is filed and do not receive equal value for the property transferred, the trustee can sue the transferee to recover the property to liquidate it to pay creditors.
If the majority of your debt is business debt, you cannot be denied a discharge based on your ability to pay. If the majority of your debt is consumer debt, the court can deny a discharge and dismiss the case, or you can convert it to a case under Chapter 13, if it appears that you can afford to pay a significant amount of your debt. The court looks at all of your income received in the 6 months before the month in which the case is filed, except social security. If your average income is below median income for a household of your size according to the Census Bureau, it is presumed that you are eligible for a discharge. If you are at or over median income, then your ability to pay is measured by a mathematical calculation called the “means test” which subtracts from your average income certain allowed expenses that are supposed to represent what you need to live on. If your average income is greater than the allowed expenses and shows an ability to pay a significant amount of your debt, then you can be denied a Chapter 7 discharge.
Do Not Self-Diagnose Your Case!
There are many more issues to evaluate, and many more exceptions to the general rules that may apply to determine whether a Chapter 7 is available or appropriate.
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