What is Chapter 7?
Chapter 7 is the most common, most popular kind of bankruptcy; it’s what most people think of when they think of bankruptcy. Chapter 7 is often the easiest and least expensive way for people to achieve a fresh start. Basically, Chapter 7 is a four-month process that allows people to wipe out their unsecured debts. The most common types of unsecured debt are credit cards, medical bills, repossession deficiency claims, and personal loans.
Is Chapter 7 Right for Me?
When analyzing whether a Chapter 7 is the best route for a particular client, we look at three main areas: income, assets, and type of debt.
Income: In order to qualify for Chapter 7, one must pass the Means Test, which is designed to filter out people who can afford to pay their creditors through a plan of reorganization. The Means Test determines whether a debtor’s income is presumptively too high by comparing the debtor’s income to the median income for a family with the same household size. If the income is over the median, it’s possible that a debtor will still qualify, but it’s important to talk to an attorney about your budget in detail. Only then can we determine whether a Chapter 7 is a possibility for a particular client.
Assets: The next consideration is assets. If someone has more assets than we can protect, a Chapter 7 might not be the best option for that client. Although bankruptcy is based on Federal law, it is state law that determines what assets can be protected in bankruptcy. Fortunately, California offers generous exemptions that allow the great majority of debtors to protect all of their assets. Therefore, it is typically not a problem for debtors to keep their homes, vehicles, household goods and electronics, retirement plans, and other typical assets. In the unlikely event that certain assets cannot be protected, an attorney can often put together a plan that allows debtors to legally shift assets into exempt sources before they file for bankruptcy. But this type of exemption planning requires a skilled attorney who has extensive bankruptcy experience.
Type of Debt: Lastly, the type of debt one has is important in determining whether Chapter 7 is the right option. While most unsecured debts (credit cards, medical bills, repossessions, judgments, personal loans, payday loans, etc.) are dischargeable, certain types of debts cannot be wiped out in Chapter 7. Examples of debts that cannot be discharged in Chapter 7 are student loans, recent tax debt, and domestic support obligations. If the majority of one’s debt is non-dischargeable, Chapter 7 may not make sense; however, Chapter 13 may be a great option. Also, certain debts such as car loans and mortgages are considered secured debts because the creditor can recover the collateral if the debt is not paid. So, if a debtor would like to keep his vehicle or house, he must continue to make those payments. But, bankruptcy does allow a debtor to surrender the collateral and wipe out any personal liability that would otherwise result.
In short, it’s very important to have a proper consultation with an attorney regarding your Chapter 7 options. The attorneys at Wadhwani & Shanfeld have over 40 years of collective experience and can definitely steer you in the right direction.
Chapter 7 Bankruptcy Video
Chapter 7 FAQ
Q: I’ve already filed a Chapter 7 before. Can I do it again?
A: Yes, but you cannot file a Chapter 7 case until at least eight years after the filing of your prior Chapter 7 case. If you are still in the eight-year window, you may have other good options, such as Chapter 13 or Debt Settlement.
Q: Can I keep my house?
A: California has very generous laws when it comes to allowing debtors to protect their assets. Unless you have a significant amount of equity in your home, you can generally keep your home as long as you make your mortgage payments. When you meet with an attorney at Wadhwani & Shanfeld, we will discuss the specific exemptions that apply to your situation. In addition, we are happy to discuss alternatives to keeping your home, including short sales, foreclosures and deeds in lieu of foreclosure.
Q: Can I keep my car?
A: Generally, if you want to keep your car, you can do so. If your car is paid off, protecting the equity is typically not a problem. However, there are limits on what you can protect in a Chapter 7, so if your car has a lot of equity, you will need to discuss with an attorney whether there is any exposure. If you still owe money against your car, you will have to continue to make payments if you want to keep your car. Often, it is advisable to reaffirm the car loan to ensure that the car cannot be repossessed if payments are current. A reaffirmation agreement re-obligates you to the original contract. Therefore, before signing a reaffirmation agreement, you should make sure that you can comfortably afford the payments. One benefit to reaffirming a car loan is that the lender will typically continue to report payments to the credit bureaus, therefore making it easier to reestablish credit.
Q: How much does a Chapter 7 cost?
A: Wadhwani & Shanfeld charges a reasonable and competitive fee that can vary depending on the complexity of the case. We offer a free in-office or telephone consultation. During our consultation, we will explore your options and discuss the fees associated with each option. For those who cannot afford to pay our fee up front, we offer affordable payment plans.
Q: Will Chapter 7 hurt my credit score?
A: A bankruptcy stays on your credit report for 10 years, but you are generally able to re-build you credit much sooner than that. In fact, many of our clients receive credit card offers within months. Also, based on today’s lending standards, it is possible to qualify for a mortgage within two years of the bankruptcy discharge. It is impossible to predict exactly how a bankruptcy may impact your credit score, but it is important to note that a bankruptcy is often what is needed to allow you to rebuild your credit.
Q: I feel really badly about doing this? Can’t I just wait to see if things get better?
A: Absolutely! However, it’s really important to be realistic and create a plan. We can definitely help you come up with a plan to help eliminate your debt. Financial problems can’t be solved by hoping so call us and we’ll review all possibilities.
Q: Will creditors stop harassing me?
A: Yes! You may begin referring all creditor calls to our office as soon as you get us on board. In addition, the filing of a Chapter 7 case imposes an automatic stay that stops all creditor actions against a debtor. This means that while the stay is in effect, creditors must cease any lawsuits, wage garnishments, foreclosures, etc.
Q: Who will know?
A: Bankruptcy filings are public records. The Credit Bureaus will record your bankruptcy, which will remain on your credit record for ten years. Nonetheless, as a practical matter, your friends, family and employers will not know you filed unless you tell them.