Bankruptcy is a fundamental right that is guaranteed under the Constitution.
If you are caught in an endless cycle of debt, it is not your fault. Exorbitant interest rates on credit cards, medical bills and job loss are a few of the many reasons that cause financial hardship and can happen to anyone. A few unfortunate events can lead to a cycle of debt which quickly becomes impossible to overcome. But, you do not have to continue to drown in debt. The law offers a solution by providing a way for you to eliminate some or all of your debt. Designed to provide honest but unfortunate debtors a “fresh start”, bankruptcy protection is a powerful tool which can allow you to clear insurmountable debt and begin rebuilding your credit.
The Chapter 7 Liquidation Process
Chapter 7 is the most common type of bankruptcy filing for individual debtors and is titled “Liquidation”. Liquidation means that property will be sold in order to pay back creditors. However, property will not be sold if:
- It has no value and cannot readily (easily) be sold on the open market;
- It is exempt (this is typically determined by state law although federal law is also applicable), or
- It is fully or over-mortgaged
If property does not fall into one of the above three categories, it will be sold by the U.S. Trustee. Typically, chapter 7 cases are “no asset” cases, meaning the debtor(s) has/have no property which will be sold.
There are various reasons property is not sold. Real property (e.g. your home) is often fully or over mortgaged. The trustee will not sell this property because there will be no money from the sale with which to pay off creditors. Where there is equity, the property can often be claimed as exempt. State law provides for various exemptions which allows for people to keep property if they were sued in State court. In California, there are two sets of exemptions (State and Federal) and it is important to find a law firm which can help you best choose the best set for your situation.
Personal property is typically not sold because it has little or no value. Household goods, pets, pictures, and costume jewelry are all items which are highly unlikely to be sold.
Most Debts Eliminated Completely
A Chapter 7 bankruptcy allows debtors to eliminate (“discharge”) most debts. This means that you will no longer be obligated to pay, and creditors will no longer have the rights to enforce, these debts. There are three notable exceptions to debts which are discharged in a Chapter 7 bankruptcy:
Non-dischargeable debts. These are debts that Congress had determined cannot be affected by bankruptcy filings. You will be obligated to pay, and creditors will retain rights to enforce, these debts after the bankruptcy. Here is a partial list of the most common non-dischargeable debts:
- Most, but not all taxes
- Child, spousal and family support debts
- Non-support debts which are related to a divorce or separation
- Most, but not all student loans
- Damages caused by driving, flying or boating under the influence
- Debts related to false statements (such as loan applications) or fraud
- Damages caused by intentional injuries
Debts which are reaffirmed. Bankruptcy allows for certain debts (e.g. car loans or loans from family members) to be “reaffirmed”. Reaffirmation is a process whereby you can agree to continue being responsible for a debt which would be otherwise discharged by the bankruptcy. Choosing to reaffirm a debt is complete voluntary, although payments will likely need to be made in order to retain property post-bankruptcy even if the debt is not reaffirmed (e.g., if you have a car loan and do not reaffirm the debt, you would likely need to make payments post-bankruptcy or the lender will seize the car).
Secured debts. These are debts which are secured to property such as your home or car. While the debt is technically eliminated through bankruptcy, payments to the lender will be required in order to retain the property post-bankruptcy.
Compliance with the bankruptcy court’s requests for information and financial records is essential to one’s ability to discharge debts. If the court finds a debtor to be non-cooperative, discharge may be denied.
Filing Provides Breathing Room from Harassing Creditor Collections
Filing for bankruptcy will immediately stop all collections, wage garnishments and lawsuits. Upon filing, an automatic court order is entered which places into effect the “automatic stay”. The automatic stay prevents creditors from collecting on a debt in any manner—that is, they may not call, write, e-mail or in any other way contact you or any other person to collect on any debt.
The Means Test
In 2005, the credit industry convinced Congress that too many people who could pay their debts were filing for bankruptcy instead of doing so. The result was the requirement that debtors pass the “Means Test”. If your household earns less than the average household of your size in your area, then the Means Test does not apply. If your household earns more than this average, the Means Test must be performed. The Test essentially compares your household’s income and expenditures with standards set by the IRS. If the Means Test is not passed, a presumption arises that you can pay back your debts. However, the inquiry does not end there and special circumstances can convince a judge that you qualify for bankruptcy despite the presumption.
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