Chapter 7 is often referred to as a “straight” bankruptcy. This is the type of bankruptcy that is often thought of as the quick and easy kind – a) file the case, b) keep all of your property and c) then get a discharge of debt in about 3 months. In and out. Simple. In fact, a Chapter 7 “is” simple in many, if not most cases. However, Chapter 7s can get very complex and difficult in many circumstances.
For instance, in some cases, assets in the case are borderline or not exempt. To keep property, everything must be considered including community property in a spouse’s name, retirement funds, inherited and foreign property, property titled in other names but “owned” by the debtor, stock options, etc. Having said that, California has pretty generous exemptions and, most of the time, debtors are surprised to find just how much they are permitted to keep under the law.
Income can be a complicating factor. In the typical consumer case, we apply a “means test” where we take all the income in the household for the prior six months and then consider other factors such as household size, mortgage debt, car loans, back taxes, child support, to name a few. If the excess hits a certain mark then such a debtor is not eligible for a Chapter 7. The means test is VERY complicated and a thorough analysis may be required to determine if someone with high income can still pass the means test – and they often do!
To file a bankruptcy case, a “petition” and schedules are prepared and then filed with the court. A bankruptcy filing is typically about 50-60 pages in total length. These documents disclose assets, liabilities, exemptions, contracts, co-debtors, income, expenses, financial affairs, lawsuits, transfers or property, businesses, garnishments, etc.
After the filing, a “meeting of creditors” is scheduled about 30 days later. The meeting usually consists of the assigned case trustee quizzing the debtor on the accuracy of the bankruptcy papers as it is rare that a creditor shows. The trustee’s main job is to look for assets that they can liquidate and distribute to creditors.
Once the case is filed, a deadline of about 90-days is established for interested parties to make objections. For instance, a creditor might object if debt was the product of fraud or willful and reckless injury. The United States Trustee might object if it believed the debtor failed the means test given a false statement in the bankruptcy in the case.
Once the deadlines have passed with no objections, then the court enters the “discharge.” The discharge is the magic order that says the debtor is no longer liable for his or her debts! Not all debts are discharged; surviving debts include recent taxes, most student loans, child support, criminal restitution and debts for death or personal injury for drunk driving. Although you are not personally liable, a car lender can still repossess and a house lender can still foreclose. But you can usually say goodbye to credit card debts forever!
By: Marty Courson