Chapter 7

Process of Chapter 7 Bankruptcy?

In a Chapter 7 liquidation bankruptcy, an individual (or married couple jointly) files a petition and related papers with the Bankruptcy Court to start their case.  Individuals are required to disclose all relevant debt, asset, financial and related information to the court, and are also required to take a short online credit counseling course before filing.

After that, attendance at a Meeting of Creditors is required, which is a short interview confirming the information already provided to the court.  The meeting is held about 30 to 40 days after the initial case filing.  However, due to the recent Covid-19 pandemic, these meetings are temporarily being held over the phone.

Generally, about 90 days after the case is filed, most individuals and couples will receive a discharge of their debts if they meet the requirements of the Bankruptcy Code. 

Benefits of Chapter 7 Bankruptcy--Kick-Start Your Financial Future

Instead of wasting money paying minimum monthly payments, excessive car payments and other predatory debts that may never go away, bankruptcy allows individuals and families the opportunity to eliminate these debts, and start saving that money for the future.

Lenders are keen to offer credit cards and auto financing to individuals after complete bankruptcy because those individuals no longer have their old debt dragging them down, and they will not be able to seek another bankruptcy discharge for at least eight years.  This makes people recently discharged in bankruptcy excellent prospects for consumer credit.

Also, bankruptcy will generally improve an individual’s credit score remarkably.  If an individual uses credit responsibly after a bankruptcy discharge, they can easily obtain top-tier auto and mortgage financing within two years.  That is, if after discharge, an individual opens only one or two revolving credit accounts, keeps the balance at 10% to 15% of the available limit, and otherwise maintains good credit, they can have remarkably good credit within a short period of time. 

The Process—Timeline

The entire Chapter 7 process usually takes about three months from the date the case is filed until Discharge is entered, and the case is closed.  About one month after the case is filed, the Meeting of Creditors is held, where the appointed Chapter 7 Trustee personally examines the filing individual(s) under oath.  The Meeting may take an hour or two, but the actual interview with the Trustee often lasts less than five minutes.  Creditors may appear at this Meeting, but very rarely do so.           

After the Meeting of Creditors is concluded, the individual is required to take another short online Debtor Education course.  Thereafter, Discharge is entered and the case automatically closes about ninety days after it was filed.

The vast majority of Chapter 7 bankruptcy cases are considered to be “no asset” cases, meaning that there will be no assets to liquidate and no funds to distribute to creditors.  The laws of exemption allow individuals to keep most household goods and furnishings, equity in cars and trucks, substantial equity in a primary residence (or a substantial wildcard exemption covering over $28,000 of property of any kind) and other property.  In most cases there are no assets to liquidate, administer or return to creditors.

This process allows certain debtors to eliminate unsecured and undersecured debt while at the same time keeping possession of key assets such as an automobile or family home. At the end of the process, the successful debtor obtains a discharge of all non-dischargeable unsecured debts. Generally, past debts for child/spousal support, back taxes, criminal restitution, debts incurred as a result of fraud or malicious behavior, and certain other debts may not be discharged, except sometimes under hardship or other limited principles.

In cases where assets will be available to be liquidated by the Chapter 7 Trustee, the matter may not close for much longer than three months, and may remain open for as long as it takes for the Trustee to liquidate any non-exempt assets, and distribute them to creditors.

You should consult with the Cate Legal Group, or another qualified attorney before filing a Chapter 7 bankruptcy case to determine if you have property that may be subject to being sold to satisfy your debts.

Reaffirmation Agreements—Can I Keep My Car In Bankruptcy?

Yes.  Individuals regularly keep one or more of their cars while filing for Chapter 7 bankruptcy.  The Bankruptcy Code allows individuals to “Reaffirm” their secured auto loans if they meet certain basic criteria.  Reaffirmation Agreements are standard, and allow for both individuals and secured lenders to enter into a court ordered agreement, and continue with their current financing arrangement on the secured vehicles.  Under a Reaffirmation Agreement, an individual continues to make the loan payments as they become due in their regular course, and is allowed to keep the vehicle.  However, if the regular monthly payments are not paid as agreed after bankruptcy, the auto may be repossessed and the individual can be held responsible for any deficiency balance still owing. 

In addition to Reaffirmation Agreements, other options also exist, including special court orders that allow individuals to keep their vehicles. Individuals in bankruptcy can request an order requiring that so long as the monthly payments are kept current after the bankruptcy, the vehicle may not be repossessed.  However, the order also states that if there is any post-bankruptcy default, the lender can only repossess the vehicle, but cannot charge the borrower with the deficiency balance.

722 Redemption Financing

If the loan for an individual’s vehicle is more than 910 days old, they may take advantage of Section 722 of the Bankruptcy Code, which allows a cram-down of the vehicle’s loan, to the vehicle’s current fair market value.  The current auto loan can be paid off during the Chapter 7 case for the vehicle’s fair market value, which is oftentimes much less than the existing loan balance.  Special bank loans exist, referred to as “722 Redemption Financing,” that allow individuals with these qualifying loans in bankruptcy to obtain a new auto loan that pays off the existing financing.  The end result is a new auto loan, with a much lower loan balance, and reasonable interest rate.  A borrower can exit bankruptcy with a new, replacement, car loan that has a much lower monthly payment.

Can I Keep My Real Estate?

Yes. Many people who own real estate pass through the Chapter 7 process and keep their real estate.  Under the laws of exemption, as of January 1, 2021, individuals (or married couples) may exempt up to $600,000 of equity in their primary residences.  This is commonly known as the Homestead Exemption.  If the equity in an individual’s primary residence does not exceed his or her Homestead allowance they may keep their property unaffected by the bankruptcy.  Furthermore, investment properties may also be retained by individuals, and pass through Chapter 7 bankruptcy unaffected, if the borrower does not have any equity in the property, or the equity in the property is covered by the borrower’s exemptions.     

Emergency Filings--Foreclosures, Repossessions and Evictions

We regularly help individuals file bankruptcy on an emergency basis, even hours before a pending foreclosure sale to save their property.  Filing can also stop repossession efforts against a car or truck, or stay certain eviction proceedings.  The electronic filing system used by the Bankruptcy Court allows for cases to be filed at just about any time, 24 hours a day.

When necessary, we file cases on an emergency basis, and notify banks, foreclosure trustees, and auto lenders directly via phone and fax of the Automatic Stay issued by the Bankruptcy Court upon filing.  We follow-up and make sure that these creditors comply with their obligations under the Bankruptcy Code and immediately cease any enforcement activities against the filer.

In the past, Cate Legal Group has successfully petitioned the Bankruptcy Court to affirmatively void foreclosure sales taken against our clients in violation of the Automatic Stay. 

Automatic Stay

Immediately after a bankruptcy petition is filed, the Automatic Stay goes into effect, which is a court order broadly preventing all enforcement actions by creditors against the individual until either the end of the case, or the creditor obtains relief from the Automatic Stay by petitioning the court.  The Automatic Stay instantaneously stops any foreclosure, repossession, wage garnishment, bank levy, eviction, judgment debtor examination, lawsuit, or other enforcement action.

While in effect the Automatic Stay also prevents pending lawsuits from continuing. This gives individuals a break from creditor harassment while they obtain a permanent discharge of these debts.  However, individuals who have filed one or more bankruptcy cases within the past year may only be eligible for a limited Automatic Stay, or no Automatic Stay at all.

Eligibility and Means Testing—Do I Qualify For Bankruptcy? Too Much Income?

The Chapter 7 Bankruptcy Process imposes certain income limitations on most individuals filing for bankruptcy.  The Bankruptcy Code requires that individuals with primarily consumer debts pass certain means testing requirements.  Individuals must either be eligible for specified exemptions (e.g. recent military, disability, bona fide need, etc.), or they must show income beneath the limits imposed under the Bankruptcy Code.   

Means testing is based on median income figures that are maintained and adjusted regularly by the Department of Justice.  Generally, individuals making less than the state’s median income, based on household size, will qualify for Chapter 7 bankruptcy.  Additionally, the Bankruptcy Code requires that an individual’s actual monthly budget not have a significant surplus in order to qualify. 

Certain individuals filing to obtain discharge of primarily “business debts,” and corporate entities, are not required to pass means testing, based on their income.  For these individuals and entities, there is no maximum income qualification.  For the purpose of determining exclusion from the means test, business debts can include individuals who have primarily past tax debt.

Due to the complex nature of bankruptcy means testing, and because the numbers used in the computations are always changing, it is best to consult with qualified legal counsel to determine whether or not you may be eligible to file for bankruptcy. Call today for professional means testing analysis to determine if you qualify for Chapter 7 bankruptcy. 

What Happens If I Don’t Pass The Means Test?

Generally, if an individual cannot pass the income-based means test, there are a number of options available.  If there are extreme financial hardship circumstances (e.g. long-term, ongoing medical care for a family member) the presumption created by the Means Test can be rebutted by way of declaratory evidence.  Many individuals whose income under the means test disqualifies them from Chapter 7 bankruptcy file their cases as Chapter 13 personal reorganization matters.  

What Debts Are Discharged In Chapter 7 Bankruptcy?

Most all consumer debt, credit cards, medical bills and other unsecured obligations are dischargeable in Chapter 7 bankruptcy.  Medical bills and credit cards are the most common reasons people file for bankruptcy.  Chapter 7 bankruptcy also eliminates lawsuits and judgments that are based on dischargeable debts.

The Bankruptcy Code specifically excludes certain categories of debts from discharge.  These include the following: most taxes (however older personal income tax debts may be discharged), debts based on fraudulent activity, domestic support obligations, debts based on willful injury to another, debts to governmental units, student loans (except in certain extraordinary circumstances), and related debts.

Secured debts are also discharged unless they are one of the categories of debt that is specifically excepted from discharge.  However, reaffirmed debts, commonly a car or truck with a secured loan, are not discharged, but the party gets to keep the vehicle so long as the payments are continued.  Reaffirmation Agreements are also subject to court approval.  Many home loans are not reaffirmed, and thus discharged, but mortgage lenders generally will not foreclose on real estate unless the payments are not kept current, or there is some other default under the deed of trust. 

Exempt Assets—No Asset Cases

Through the Chapter 7 process, the non-exempt assets of the debtor, if any, are liquidated by the court appointed trustee, and any remaining proceeds are used to satisfy creditor claims. The debtor's exempt property in California includes many household and personal items (up to a certain dollar amount), certain retirement accounts, automobiles (up to a certain dollar amount), and others.

In practice, a vast majority of Chapter 7 cases are considered to be "no asset" cases, where the trustee does not liquidate or sell any of the debtor's property.  Pre-bankruptcy planning is crucial to ensuring that individuals will not unknowingly have their property seized and sold.

Adversary Proceedings & Objections

Creditors or other interested parties may object to an individual’s discharge for a number of different reasons.  However, these objections are relatively rare, and can only be based on certain legally recognized bases.  Generally, objections and suits for non-dischargeability of particular debts (adversary proceedings) must be filed before the deadline set by the court at the beginning of the case.  Excepting certain irregularities, objections not formally raised with the court before that deadline are barred forever.

California Contractors State License Board Issues

If you are licensed by the Contractors State Licence Board (CSLB) in California, your contractor’s license will be automatically suspended if you have any unpaid construction related judgments issued against you, for longer than 90 days, without being resolved.  You only have 90 days after the entry of a civil judgment against you to either pay or resolve the civil judgment, or to file bankruptcy.  If the civil judgment remains unresolved for more than 90 days, your license can be automatically suspended by the Contractors State Licence Board.

Bankruptcy can help contractors who have construction related judgments resolve these judgments so that they can continue to maintain licensure with the CSLB.