When it comes to filing for bankruptcy, you must decide whether or not to seek relief through Chapter 7 or Chapter 13. Each year, Chapter 7 is the most commonly filed form of bankruptcy. Governed by Chapter 7 of Title 11 of the United States Code, assets are liquidated and sold to provide the trustee with money to pay back your creditors. Once your case has concluded, the Court issues a Discharge Order, legally eliminating certain debts.
Chapter 7 varies from Chapter 13 in many ways. Unlike Chapter 7, Chapter 13 does not liquidate your assets. Instead, a reorganization plan is established to set up monthly payments to your trustee, who then makes payments to creditors.
To begin the process, you first must file a Bankruptcy Petition with the Court, along with other required documents. These documents include contain a list of all of your creditors, summary of your assets, current budget, etc. This will provide the Court with background regarding your financial status and allow them to make decisions accordingly. All reported information must be accurate, otherwise you may be punished for committing perjury.
WHO IS ELIGIBLE TO FILE A CHAPTER 7?
Individuals and debtors who are involved in a partnership or corporation are eligible for relief under Chapter 7 regardless of the amount of debts owed by the debtor. If you and your spouse are both filing, you have the option to either file a joint petition or file individually. Regardless of whether or not you are filing jointly, you must still report information regarding your spouse’s finances in order for the court to fully evaluate your household’s financial status. If the debtor has had a previous petition dismissed in the past 180 days after failing to appear in court or follow the court’s orders, he/she will not be able to file for relief under any chapter. In addition, individuals must have completed credit counseling up to 180 days prior to filing.
Income alone does not determine whether or not Chapter 7 is appropriate for your circumstance. For example, consider the following scenario:
A couple is married with two children, ages 3 and 5. Both the husband and wife work full-time, each earning $50,000 annually.
Based on this information alone, it is not possible to determine whether or not the couple qualifies for filing under Chapter 7. Consider the additional information:
The couple has the following monthly expenses:
- Two car payments of $520 per car
- $3,400 home mortgage
- $1,800 daycare expenses for children
- $800 child support paid for by the husband for another child residing outside of the home.
With this information, it can be concluded that the couple qualifies for filing a Chapter 7 case.
In contrast, consider the following information about another couple:
- A couple is married with one child, age 4.
- The husband works part-time, earning $30,000 annually. The wife works full-time, earning $48,000 annually.
- The couple owns one car, with no additional payments being made on it.
- The couple rents an apartment for $750 per month.
Unlike Couple #1, Couple #2 would not qualify for a Chapter 7 filing. While it may seem like Couple #2 would qualify since they receive a lower income, this is not the case. The only way to determine whether Chapter 7 is an option for you is by examining your specific financial situation in full.
WILL MY ASSETS BE LIQUIDATED?
An impartial trustee is appointed by the court to each case. 11 U.S.C. 704 lays out the duties of a trustee, stating “The Trustee shall collect and reduce to money the property of the estate for which such trustee serves, and close such estate expeditiously as is compatible with the best interests of the parties in interest.” In other words, the trustee is responsible for selling all nonexempt assets. The Bankruptcy Code allows for a certain amount of assets to be protected and remain ineligible for being liquidated by the Trustee.
Consider the following:
John is filing for Chapter 7 bankruptcy. He owns a home valued at $200,000 with a secured loan (i.e. mortgage) of $195,000. He also owns 2 vehicles. His primary vehicle is valued at $10,000, secured against a loan of $8,000. The second vehicle is valued at $5,000 and is fully owned by John. In addition, John has a boat valued at $3,500 and 100 shares of stocks valued at $2,500.
If the local exemptions allowed for up to $16,000 of assets to be protected, John’s Trustee would liquidate $2,000 of assets. Why $2,000? The total value of John’s assets is $18,000 ($5,000 in the home, $2,000 in the primary vehicle, $5,000 in the second vehicle, $3,500 in the boat, and $2,500 in stocks). By subtracting the allowed exemption limit ($16,000) from the total assets, the Trustee is left with $2,000 worth of assets to liquidate, which is paid to John’s creditors.
Consider the additional example:
Kelly is filing for Chapter 7 bankruptcy. She owns a home valued at $600,000 with a mortgage of $615,000. She also owns two vehicles. The first vehicle is worth $45,000, secured against a loan of $50,000, while the second vehicle is worth $25,000, secured against a loan of $27,500. In addition, Kelly owns a boat valued at $10,000, which is secured against a loan of $12,000. She also has 100 shares of stocks valued at $15,000.
Similar to before, local exemptions protect up to $16,000 worth of assets. However, Kelly’s Trustee will not liquidate any assets. Once Kelly’s loans are taken into consideration, the only asset with equity are the stocks valued at $15,000. When subtracting the value of Kelly’s limit of exemptions ($16,000) from her value of equity ($15,000), the Trustee is left with -$1,000. In this case, the Trustee is unable to liquidate Kelly’s assets and she is allowed to keep her assets.
341 MEETING OF CREDITORS
By 11 U.S.C. 341, you are required to attend a meeting of creditors with your Court appointed Trustee after filing for Chapter 7. Creditors and the Trustee are given the opportunity to ask you any questions outside of the presence of a judge. You are expected to answer honestly, otherwise facing the penalty of perjury. The purpose of this is to determine whether all information reported in your documents is accurate and if there are assets available for liquidation.
When filing for Chapter 7 bankruptcy, the end goal is to receive a discharge. A discharge is a court order that no longer requires the debtor to make payments to certain creditors. Discharges are only an option for individual debtors and those filing as a partnership or cooperation. Once payments have been discharged, creditors can no longer demand that you continue making payments. In addition, creditors cannot make threats, file lawsuits, report a lack of payments to credit bureaus, or take any action against you. The court holds the power to revoke a discharge if any fraudulent activity is found to have occurred.
Hiring a local Sacramento Bankruptcy Lawyer with an expertise in the Chapter 7 process is highly recommended. Since 2010, Mr. Bains has handled hundreds of Chapter 7 cases, gaining the knowledge, experience, and skill necessary to ensure the best outcome for his clients.
Do not let another day go by without speaking to our office. Call 916-800-7690 to set up a free consultation with our dedicated Chapter 7 Attorney. By calling our office, you will speak directly with an attorney who specializes in Chapter 7 bankruptcies and will handle your case through the entire process instead of being passed onto another staff member.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.