Chapter 7 bankruptcy is frequently referred to as a “fresh start,” because it allows most debts to be discharged – that is, wipe out all your debts entirely within a relatively short period of time. It is also known as a “liquidation” bankruptcy because any consumer assets that are not exempt or protected by law can be taken by the bankruptcy trustee (the individual that administers the bankruptcy) and used to pay off a percentage of the consumer’s other debts.
There are some restrictions. A consumer must fill out and pass a “means test” in order to file a Chapter 7 bankruptcy. This generally means a consumer must fall within a set group of guidelines within a particular income bracket in order to be eligible to file this type of bankruptcy.
Chapter 7 Eligibility in California
For bankruptcies filed after November of 2010, in California, the median income limit for a single filer is now $47,234, for a family of four, $77,596. Along with income requirements, the means test calculates other factors into a consumer’s eligibility such as transportation, food, health and clothing expenses. To be eligible, one must consult with someone not only familiar with the Means Test but is adept in handling some of the nuances that could render one eligible despite earning more than the median income limit.
Chapter 7 Bankruptcy Process
Beginning a Chapter 7 involves several steps. A consumer pays a filing fee to the Clerk of the Bankruptcy Court, submits certain documents, and the bankruptcy is commenced. Once the bankruptcy is initiated, an “automatic stay” is put in place. This essentially means that all creditor harassment and collections against the consumer must stop. However, lenders with liens on secured property, such as a car, can file a motion for relief from the automatic stay if you are behind on payments. If granted, this permits the creditor to repossess the vehicle.
Chapter 13 Bankruptcy; a Payment Plan
Chapter 7 is most often used by filers with limited or no assets. If a consumer has a home, a car that is behind on payments or other significant assets he or she wishes to retain, filing under a Chapter 13 bankruptcy is probably more appropriate. It is also an alternative to individuals who are not eligible from filing a Chapter 7 because they did not pass the means test.
Chapter 13 bankruptcy differs from Chapter 7 in that it revolves around a payment plan, which lasts from three to five years. The debtor’s payments to creditors are consolidated and the debtor makes one monthly payment plan to the trustee who distributes the money among the debtor’s creditors.
A Chapter 13 will also allow you retain your home or Automobile by curing the arrears while at the same time discharging all of your debt.
Bankruptcy protection can be a lifesaver for individuals struggling to pay a mountain of debt. While Congress has implemented changes to the bankruptcy laws within recent years, bankruptcy protection is still a viable option for most people.
If your debts have grown to the point of overwhelming your financial situation, speaking with an experienced Los Angeles, California, a bankruptcy attorney who can explain the process in further detail and help you determine which filing is best for your circumstances is recommended.