Myths about bankruptcy
|Myth #1 Filing chapter 7 bankruptcy means you will lose all your property.|
Fact – Only non-exempt property is surrendered in Chapter 7. Most debtors are completely protected by California’s exemptions and don’t have any non-exempt property. That means most debtors don’t give anything up.
|Myth #2 If you file for bankruptcy it will ruin your credit rating.|
Fact – Filing for bankruptcy will affect your credit rating. However, your credit rating is already affected every time you miss a payment. Once you file for bankruptcy, you can wipe the slate clean and immediately start to rebuild your credit score. In fact, it’s often faster to rebuild your score through bankruptcy than through other debt management techniques.
|Myth #3 You can only file for bankruptcy once.|
Fact – You can file bankruptcy as many times as you need to file, but you may have to wait for a certain amount of time between filings.
|Myth #4 You will never be able to own anything again.|
Fact – Bankruptcy generally leaves debtors with all of their property and your credit score will rebound quickly with a little bit of effort. You’ll be able to go on and buy a car or a home.
|Myth #5 Everyone will know you have filed for bankruptcy.|
Fact – In general, no one but your creditors will know you’ve filed unless you choose to tell them. In some cases, your Chapter 13 payments may be deducted from your paycheck, in which case your employer will know, but Chapter 7 filers don’t have that concern. Bankruptcy filings are a matter of public record, but they’re not publicized.
What is Chapter 7?
In Chapter 7 bankruptcy, commonly referred to as a “liquidation” bankruptcy, the debtor will surrender their nonexempt assets to the Bankruptcy Trustee. The Trustee will sell those assets and pay the proceeds to the debtor’s unsecured creditors. At the end of this process, the debtor’s remaining unsecured debt will be discharged. The entire process takes 3 to 4 months. Chapter 7 bankruptcy focuses mostly on unsecured debts. Credit card debt and medical debt are common examples of unsecured debts.
Secured debts, such as mortgage loans and auto loans, are not fully discharged in bankruptcy unless you are surrendering the collateral. Secured creditors will still be able to repossess or foreclose on the property used as security if ongoing payments are not made. However, the debtor’s personal liability for secured debts will be discharged. This means that creditors won’t be able to sue the debtor if they repossess or foreclose on the property and sell it for less than the amount of the debt.
Will I lose my home or my car?
The Trustee can only sell nonexempt property. California offers a choice of two different sets of exemptions to protect a debtor’s property in bankruptcy. Under System 1, you can protect up to $75,000 of equity in real property (generally your home) if you’re single or $100,000 for a family, with more protection available for disabled and low-income debtors. System 1 also protects up to $2,900 of equity in a motor vehicle and 75% of the wages you earn in the 30 days before you file, plus a long list of other exemptions. System 2 allows you to exempt up to $26,925 of equity in your home and up to $5,100 of equity in a motor vehicle, among others. Your retirement accounts and state and federal benefits are always exempt. Chapter 7 debtors can generally use exemptions to protect most, if not all, of their important assets. The overwhelming majority of Chapter 7 cases are “no-asset” cases, meaning the debtors keep all of their property through the exemptions.
Who can file for Chapter 7 bankruptcy?
Not everyone qualifies for Chapter 7 bankruptcy. The first test that determines if you can file for Chapter 7 relief is called the Means Test. You automatically pass the Means Test if you earn less than the state median income. If you earn more than the state median income, you may still pass the Means Test but it gets more complicated. The Means Test takes into account your income and your expenses and compares them to standards in your state. The test is meant to objectively determine whether you’re capable of maintaining a Chapter 13 repayment plan. If you are, you’ll be required to file under Chapter 13. If you pass the Means Test you must also show the court that your monthly income is being completely used to pay your reasonable and necessary expenses. In other words, after you pay for all of your living expenses there is not any money left over to pay your creditors. If there is, you may be required to file a Chapter 13 plan of reorganization.
What debts aren’t discharged in Chapter 7 bankruptcy?
Chapter 7 bankruptcy wipes out most unsecured debts. However, you cannot discharge most student loan debt, child support debts, or spousal support debt. Personal injury debts, incurred while driving drunk, also are excluded from discharge.
Will bankruptcy protect me from foreclosure and repossession?
When you file for bankruptcy, you invoke the protection of the automatic stay. The automatic stay forces creditors to stop all collection actions. That includes foreclosure, repossession, bank levies, wage garnishment, and collection lawsuits. Once you file for bankruptcy, all of your creditors must work through the bankruptcy court. The automatic stay gives debtors time to reorganize their finances and ensures that all creditors are treated equally through the bankruptcy process.
How will a bankruptcy attorney help me?
The bankruptcy process is complex and a simple error can lead to dismissal of your case, leaving you at the mercy of your creditors. A bankruptcy attorney can help you navigate the bankruptcy process and protect what’s important to you. Your attorney will make sure you get the most out of your discharge so that you can move on with a clean financial slate. In addition, your attorney will help enforce the discharge if creditors try to circumvent it.
Is Chapter 7 bankruptcy right for me?
The answer depends on your unique set of circumstances and goals. If you’re struggling with debt, you can read more about your options on our blog. We have years of experienced and have filed tens of thousands of Chapter 7 cases. We know the courts, the judges, and the creditors. We can help you protect your important property and wipe your financial slate clean. Contact us online or give us a call for a free consultation to learn more about Chapter 7 and how we can help you get your financial life back on track