Chapter 7
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a federal court process that liquidates your debts. Both individuals and businesses can file for Chapter 7 bankruptcy.
Generally, Chapter 7 debtors optimally try to retain exempt property and obtain a discharge that covers as many debts as possible. A discharge releases the debtor from personal liability for discharged debts and prevents the creditors owed those debts from taking any action against the debtor, or his or her property, to collect payments.
In order to file a liquidation bankruptcy, debtor must meet all of these requirements:
- No prior chapter 7 bankruptcy filing within the last 8 years in which debtor received a discharge.
- Debtor has less income than the medium for your state or has less monthly income remaining after deducting allowable expenses to pay 25% of your total unsecured debt over a 5 year period.
One of the most immediate-felt effects of Chapter 7 bankruptcy protection is the automatic stay provision, which generally prevents creditors from collecting debts from you. Under the automatic stay, creditors are not allowed to call you or send you collection letters. They also cannot take or continue any legal action against you or repossess your car or other assets. Even if a garnishment order has been issued, the automatic stay stops garnishment of your wages.
For Individuals Filing Chapter 7 "Consumer" Bankruptcy:
Since October 2005, a new bankruptcy law has added new requirements to the bankruptcy process for individuals who wish to file. One of these requirements is passing the means test. The debtor's average income for the last six months is compared to their state's median income. If the debtor passes the means test (meaning that their income is equal to or less than this median), then he or she is allowed to file for Chapter 7 bankruptcy. If the debtor doesn't pass the means test, they may be asked to file under Chapter 13 bankruptcy. In California, the current median income is:
- Single Earners: $49,182
- A Family of Four: $79,971
Individuals filing for Chapter 7 or Chapter 13 bankruptcy must also take a credit counseling course within 180 days prior to filing for bankruptcy protection.
Companies Filing Corporate Bankruptcy Under Chapter 7:
When a company files for bankruptcy under Chapter 7, the company ceases all operations and shuts itself down. Unlike Chapter 11 Bankruptcy, no reorganization plan is put into place and the company is not allowed to continue doing business. An appointed trustee is tasked with liquidating the assets to pay its debts. Secured creditors are paid off first, followed by unsecured creditors, and stockholders are only paid if the other creditors are paid off completely. The bankruptcy law regarding the scope of a chapter 7 discharge is complex, and debtors should consult a competent legal attorney prior to filing.
Chapter 13
A Chapter 13 bankruptcy case is referred to as a wage earner plan as it can be filed only by an individual with regular income. Debts on the date of the petition must meet the following conditions;
- non-contingent, liquidated, unsecured debts must be less than $336,900 and
- non-contingent liquidated secured debts of less than $1,010,650.
When filing for bankruptcy under Chapter 13 of the Bankruptcy Code, the aim is to repay some or all the debts in the debtor's name with lower or no interest. Chapter 13 also allows debtors with equity in their property to keep the property and can stop the foreclosure proceeding. Unlike Chapter 7 which involves liquidation of assets, this process involves restructuring debts which allows the debtor to use whatever income they may have in the future to pay off the creditors. Filing Chapter 13 Bankruptcy is thus applicable to people with regular income who can afford to request for such adjustments or reductions.
The United States Bankruptcy Code gives the debtor a ceiling of 5 years, within which the creditors must be paid back. While the attorney will safeguard your interests, the entire process is carried out under the supervision of the courts.
There are many different options that debtors should consider prior to filing bankruptcy. If you are considering filing for bankruptcy protection it is important to understand these options. To find out if bankruptcy is right for you contact my office, at (925) 284-8700, for a free consultation.