C is for Chapter 7

Published May 6, 2021 | By Cate Eranthe

Chapter 7 is a complete liquidation of your debt through a process in Federal Bankruptcy Court.

If you cannot afford to meet your monthly living expenses and pay your debts, you may be able to liquidate your debt. Not everyone will qualify to file Chapter 7 under the Bankruptcy Code’s “means test” which looks at your income level and certain types of debt cannot be discharged or wiped out (such as most federally guaranteed student loans, many taxes, government fines and any outstanding family support obligations).

Means Test

At its simplest, the means test is based on the average California median income according to family size. The median income levels are regularly adjusted to reflect the state of the economy. For a single person it is currently $62,938 a year and it goes up as family size increases. See the United States Department of Justice Census Bureau Median Family Income.

There is a long form of the means test that factors in secured debt payments such as your mortgage or auto payment and other necessary expenses like union dues, transportation, medical bills and insurance. This is a complex form best undertaken by a knowledgeable local bankruptcy professional. Completion of the long form will let you know if you pass the means test even though you have above median income.

Required Courses

You are also required to take two courses from approved credit counseling providers. You can consider these courses as your ticket in and your ticket out of the bankruptcy proceedings. The first course must be completed no less than 180 days before you file and the second course is completed after filing and before you can obtain a discharge. I recommend taking the second course before the 341 hearing.

Chapter 7

After you file for bankruptcy, most of your assets become property of the estate and subject to sale and distribution to the creditors. However, in most consumer cases all the assets are exempt and are not available for liquidation.

The debt liquidation is called a discharge. You cannot get a Chapter 7 discharge of your debts more often than every eight years. Only individuals obtain a discharge of their debts. If a corporation or partnership files for Chapter 7 relief the entity is dissolved.

The entire process of a Chapter 7 from beginning to end is generally four to six months. If there are any non-exempt assets to be sold it will take at least several months longer. If assets are to be sold and distributed it can even take several years.

A Chapter 7 will stay on your credit report for 10 years from the date of filing. The impact on credit is generally minimal because most people who need to file a bankruptcy already have low credit scores. Also there are ways to rebuild credit without going into debt after you have filed.

Check out consumer protection attorney Jay Fleischman who thinks C is for Creditor. He provides a thorough explanation of who your creditors are.

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