Chapter 7 Bankruptcy
Are you overwhelmed with debt? Are creditors constantly calling and sending collection notices? A Chapter 7 will give you a fresh new start. You are given the opportunity to start over financially. A Chapter 7 allows you to discharge most, if not all of your debt in about three months without having to pay back any of the debt. Contrary to what many think you are able to keep your possessions by exempting them under California's exemption laws. You will want to review all of your assets with your bankruptcy attorney, however, normally people are able to keep all of their household items, electronics, vehicles, and even cash savings and their tax refunds. Retirement accounts are also fully protected, up to any amount.
It is important to make sure you qualify under the "Mean's Test" which analyzes your income (or household income, if you are married) over the last 6 months. The test takes into account any dependents you have as well as payments on secured debt and to priority creditors such as past due child support or taxes. You pass the mean's test if your income is below the median income for your household size and county. Median income numbers are released by the Department of Justice and are frequently revised. If your income has been lower than normal over the last 6 months now may be a good time to consider Chapter 7 if you believe your income may increase in the near future.
Automatic Stay Protection
The minute your case is filed the automatic stay goes into effect. This means creditors must stop collection activity and those annoying calls as soon as the case is filed. This also mean's creditors are not allowed to proceed with a repossession, lawsuit, bank levy, foreclosure, wage garnishment, and other similar actions.
Do you owe the IRS or California Franchise Tax Board? If your tax debt is three years old or older you will likely be able to discharge your tax debt in a chapter 7. You will want to make sure your returns were timely filed and that there were no findings of fraud. Unfortunately, payroll taxes are not able to be discharged in a bankruptcy.
California Benefit Over-payment
Did you recently receive benefits from the State of California in the form of disability or unemployment and now the State of California is asking you for repayment of these benefits? This is an all too common scenario and, yes, you can discharge this type of debt in Chapter 7. As long as there was no finding of fraud (like you intentionally misled the State of California), which there almost never is in most cases, you can eliminate this debt.
Can I Keep My Vehicle that I am Making Payments On?
In short, yes, you can keep your vehicle. You have some options:
- Reaffirmation Agreement: If you want to keep the vehicle the lender may ask you to sign a Reaffirmation Agreement. You can sign this, however, you reaffirm your liability on the debt meaning the lender can sue you in the future if you fall behind on payments and there is a deficiency balance, so of course the lender would like you to sign it. The positive to signing the reaffirmation agreement is the lender will continue to report on-time payments to the credit bureaus. You want to be sure you will not fall behind on payments in the future if you sign the reaffirmation agreement. If you chose not to sign the reaffirmation agreement you can still keep the vehicle by continuing to make on-time payments to the lender. The negative is the lender will probably not report on-time payments to the credit bureaus any more. This is because you are no longer personally liable for the debt, so if you ever fall behind in the future, and the lender repossesses the vehicle, you will not be liable for any deficiency balance. My advice is if you think you may want to give the car back in the future, do not sign the reaffirmation agreement and just keep making payments to the lender for as long as you want to keep the vehicle.
- You can surrender a vehicle to the lender in a Chapter 7. This means you will simply give the car back to the lender and you will not owe them another dime. Any balance owed will be discharged through the Chapter 7.
Can I keep My Home?
The first question is whether your home has equity? If you sold your home today, after all the mortgages/liens are paid, would you pocket anything? If there is equity then you want to make sure you can protect that equity through California's 704 exemptions. If you are single you can exempt up to $75,000, if you are married, or live with another family member, you can exempt up to $100,000. You can exempt up to $175,000 if any of these apply to the debtor or his/or her spouse:
- A person 65 years of age or older.
- A person physically or mentally disabled who as a result of that disability is unable to engage in substantial gainful employment.
-A person 55 years of age or older with a gross annual income of not more than $25,000 or, if the debtor is married, a gross annual income, including the gross annual income of the debtor’s spouse, of not more than $35,000.
If you want to keep your house you need to stay current on your mortgage payments in a Chapter 7. A Chapter 7 will not eliminate any past due mortgage payments and allow you to keep the house.
If you want to surrender the house to the bank and allow them to foreclose, you can do that and you will not be liable for any deficiency balances on any mortgages. Your personal liability will be discharged in the Chapter 7.
A chapter 7 is usually quick and simple, however, there are pitfalls to watch out for. It is important to have an experienced attorney to guide you on what to do before filing your case, prepare your court paper work for filing, and, if necessary be your advocate when it comes to discussing your case with the bankruptcy trustee and creditors.