How to Qualify for Chapter 7 Bankruptcy in California

To qualify for relief under bankruptcy 7 or chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. 101(41), 109(b). Subject to the means test and other specific requirements, for consumer bankruptcy chapter 7 debtors, relief is available under chapter 7 notwithstanding the amount of the debtor's debts or whether the debtor is solvent. Additionally, no consumer may be a debtor under chapter 7 bankruptcy or any chapter of the Bankruptcy Code unless that individual has received credit counseling from an approved credit counseling agency either in an individual or group briefing within 180 days (six months) prior to the chapter 7 bankruptcy filing. 11 U.S.C. 109, 111. There are certain narrow exceptions in emergency or unusually chapter 7 bankruptcy situations. If a debt management plan is prepared during the credit counseling course, it must be filed with the bankruptcy court.
One of the important purposes of bankruptcy is to allow consumers to discharge certain debts to give them a "fresh start." The debtor has no personal liability for discharged debts after the filing and completion of the chapter 7 bankruptcy case. In a chapter 7 bankruptcy case, however, a discharge is available only to individual consumers, not to partnerships or corporations. 11 U.S.C. 727(a)(1). Although an individual chapter 7 bankruptcy case usually results in a discharge of all unsecured debts, the right to a discharge is not absolute, and some types of debts are not dischargeable. Additionally, a chapter 7 bankruptcy filing or chapter 7 discharge does not extinguish or wipe out a lien on property (secured debt).
FILING CHAPTER 7 BANKRUPTCY
A chapter 7 bankruptcy case begins with the debtor filing a bankruptcy petition with the US Bankruptcy Court (Federal Court) serving the area where the consumer lives or where the corporation or legal entity debtor is organized or operates its principal place of business or principal location of assets. In addition to the bankruptcy petition itself, the chapter 7 bankruptcy debtor must also file with the court various schedules and financial disclosures as required by the chapter 7 bankruptcy regulations. Fed. R. Bankr. P. 1007(b). When filing chapter 7 bankruptcy, debtors must also provide the assigned chapter 7 bankruptcy trustee with a copy of their tax return or tax transcripts for at least the most recent tax year. 11 U.S.C. 521. Individual chapter 7 bankruptcy debtors with primarily consumer debts or non-business related debts have additional document filing responsibilities. Such chapter 7 bankruptcy debtors must also file, among other things: a certificate of completion of credit counseling (and a copy of any debt repayment plan); evidence of payment from employers (pay stubs), if any, received within the 60 days prior to the chapter 7 bankruptcy filing; and possibly additional documents depending on the chapter 7 debtors circumstances. Even if filing jointly, a husband and wife are subject to all the document chapter 7 bankruptcy filing requirements of individual debtors.
IN ORDER TO COMPLETE AND FILE CHAPTER 7 BANKRUPTCY, THE DEBTOR MUST PROVIDE THE FOLLOWING INFORMATION:
1. A list and some background detail on all creditors (amount owed, date incurred);
2. Information and detail regarding the chapter 7 bankruptcy debtor's income;
3. A list of all of the chapter 7 debtor's property; and
4. A detailed list of the chapter 7 debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals must provide this important information for their spouse regardless of whether they are filing chapter 7 bankruptcy as a joint petition, separate individual petitions, or if just one spouse is filing chapter 7. In a situation where only one spouse file chapter 7 bankruptcy, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the entire household's financial circumstances.
Filing chapter 7 bankruptcy petition under chapter 7 "automatically stays" (stops) most, collection actions against the debtor or the debtor's property. 11 U.S.C. 362. However, filing chapter 7 bankruptcy does not permanently stop all collection actions and the stay may be effective only for a limited period of time in some narrow and unusual situations. The chapter 7 bankruptcy stay is essentially a civil restraining order precluding creditors from taking any collection action without specific permission from the bankruptcy court. As long as the bankruptcy stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk generally is the one to formally give notice to creditors by serving on them the Notice of Bankruptcy Filing.
About 30 days after the chapter 7 bankruptcy petition is filed, the bankruptcy trustee will conduct a meeting of creditors. During this meeting of creditors, the chapter 7 bankruptcy trustee asks the chapter 7 bankruptcy debtor questions about assets, liabilities, income, and expenses. The chapter 7 debtor must attend the meeting and provide truthful answers to the bankruptcy trustee's questions (and questions from creditors if applicable). 11 U.S.C. 343. If the chapter 7 bankruptcy filing was a joint petition (husband and wife filing chapter 7 together), both must attend the meeting with the bankruptcy trustee.
It is mandatory for the chapter 7 bankruptcy debtor to cooperate with the bankruptcy trustee as well as the US Trustee, and to provide financial records and documents that the trustee may request. The Chapter 7 Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is familiar with of the chapter 7 bankruptcy filing and to verify the chapter 7 debtor's identity. As a practical matter, this requires the chapter 7 debtor to present a picture id (such as a driver's license) as well as proof of entire social security number (social security card, tax document the debtor did not produce themselves). Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is familiar with this information. Bankruptcy Judges are precluded from attending these (informal) meetings.
THE CHAPTER 7 BANKRUPTCY DISCHARGE
After the chapter 7 bankruptcy debtor has his or her meeting with the bankruptcy trustee, and the trustee is satisfied the information contained in the chapter 7 bankruptcy file are true and correct, the individual debtor becomes eligible for a chapter 7 discharge. A discharge releases individual or consumer chapter 7 debtors from personal liability for most indebtedness and makes it unlawful for creditors (previously) owed those debts from taking any collection actions against the debtor. Since a chapter 7 bankruptcy discharge is subject to so many exceptions (under certain circumstances), debtors should always consult competent legal counsel, such as McFarlin & Geurts,, LLP before filing a chapter 7 bankruptcy to discuss the scope of the discharge. Excluding cases that are dismissed or converted, individual consumer chapter 7 bankruptcy debtors receive a discharge in more than 99 percent of chapter 7 bankruptcy cases. In most cases, unless a party in interest files a complaint objecting to the discharge all eligible unsecured debts are discharged in chapter 7 bankruptcy including credit cards, medical bills, lease or car loan deficiencies, lawsuits, judgments, and many other types of consumer debts.
Secured creditors do typically retain their right to seize property which was used as collateral (car loan, mortgage) even after a discharge is granted. Depending on circumstances however, if a debtor desires to keep certain secured property (such as an automobile or a house), he or she may continue to make payments to the secured creditor and be able to keep the collateral. Generally, a secured creditor can not repossess or foreclose on property only because the borrower is elected to file chapter 7 bankruptcy.
If the chapter 7 bankruptcy debtor decides to reaffirm a debt, that individual must do so before the discharge is entered. The process consists of a chapter 7 bankruptcy debtor signing a written reaffirmation agreement and filing it with the court. 11 U.S.C. 524(c). The Bankruptcy Code requires that the chapter 7 bankruptcy reaffirmation agreements contain an extensive set of disclosures described in 11 U.S.C. 524(k). The disclosures, among other things, must advise the debtor of the amount of the debt being reaffirmed and how that amount is calculated. Reaffirmation means the chapter 7 debtor is personal liable for that debt and the debt will not be discharged in the chapter 7 bankruptcy filing. The reaffirmation agreement disclosures also require the chapter 7 debtor to sign and file a statement of his or her current income and expenses demonstrating that the balance of income (after paying living expenses) is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the bankruptcy court may decide to deny the reaffirmation agreement. McFarlin & Geurts, LLP generally advises chapter 7 bankruptcy debtors not to sign reaffirmation agreements, but rather to simply keep payments current if possible after the chapter 7 bankruptcy filing.
An individual who file chapter 7 bankruptcy receives a discharge for most debts in a chapter 7 bankruptcy case. Creditors may no longer initiate or continue with any legal or other adverse action against the chapter 7 bankruptcy debtor to collect on a discharged debt. Even after filing chapter 7 bankruptcy, some debts may not be discharged including, but not limited to, debts for alimony and child support, certain taxes, debts qualified student loans or loans guaranteed by a governmental unit, among others. The chapter 7 bankruptcy debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case. It is impossible to explain all the nuances of filing chapter 7 bankruptcy here. However, McFarlin & Geurts LLP does offer prospective clients a free consultation to discuss the process to file chapter 7 bankruptcy and answer questions about an individual situation.