Chapter 7 bankruptcy is otherwise known as a "straight bankruptcy," or the "debt liquidation" bankruptcy. A Chapter 7 bankruptcy is relatively simple, and it can be completed within 3 to 5 months on average.
With a Chapter 7 bankruptcy, the debtor is able to discharge the majority of their unsecured debt. Unsecured debt is not secured by any property such as a home, or a vehicle. The types of unsecured debt that can be discharged in a Chapter 7 include: credit cards, medical bills, utility bills, certain taxes (more than 3 years old), and personal loans.
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Not all debts can be discharged in a Chapter 7 bankruptcy. The debts that cannot be discharged in a Chapter 7 include: child support, spousal support or alimony, court ordered fines, recent taxes, student loans, and victim restitution.
In order for someone to file for Chapter 7 bankruptcy, they must first pass the "bankruptcy means test." This test compares your median income, for a family of your size, to the median income of your state. If your income falls below the median income for your state, then you automatically qualify for a Chapter 7 and can proceed with the filing.
If your income is greater than the median income of your state, then your bankruptcy attorney will calculate certain allowable deductions. If you still have too much income, then you will be diverted to filing a Chapter 13 (debt reorganization) bankruptcy instead.
Once you have the green light to file for Chapter 7, your attorney will file a petition with the bankruptcy court serving the area where you live. You will have to file a schedule of assets and liabilities, a schedule of your current income and expenditures, a statement of financial affairs, and a schedule of any executory contracts or expired leases. Furthermore, you will be asked to provide the trustee a copy of your recent tax returns.
You will be required to file a certificate of credit counseling with the court; however, this is a relatively inexpensive course and only takes a few hours to complete on-line, or in person. The California courts will charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. Most filers pay these fees upon filing, but if you can't afford to pay them, the court may arrange a payment plan with you.
Once you file a petition for Chapter 7, the "automatic stay" will stop most collection activity against you and your property. For the duration of the stay, which is until your bankruptcy is discharged, creditors won't be allowed to continue with any lawsuits, wage garnishments, or telephone calls demanding payments. The bankruptcy clerk will give notice of the bankruptcy case to all of the creditors that were provided by you. A court appointed trustee will work with you to liquidate any non-exempt assets. In most cases, the debtor doesn't have any non-exempt assets and they get to keep everything that they own. In the state of California exempt property includes: a percentage of the equity of your primary residence, your vehicles up to a certain value, jewelry, pensions, clothing, furniture, work related tools, social security or unemployment income, and money from a personal injury settlement.
You will have to attend one meeting, and it is called the meeting of the creditors. This meeting is typically held around a month after the filing. You will be placed under oath, and the creditors will have the right to ask you any questions. In most cases, the meeting is very brief and it is usually a forum where the trustee can confirm that all the information in the papers is accurate.
If there aren't any objections to the bankruptcy, you will receive your discharge notice in the mail from the court stating that your debts have been discharged. You can then wash your hands of most of your unsecured debt and start out with a clean slate. Your primary focus from this point forward should be developing a sound budget and sticking to it, and rebuilding your credit after bankruptcy.
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