Chapter 7 Personal Bankruptcy
The Basic Process
The details of bankruptcy are specific and can get complicated, but in general, in a chapter 7 bankruptcy, everything you own and owe is legally transferred to a Bankruptcy Trustee, who can then use your assets to pay your debts. If you have more debts than assets, then those debts are (usually) “discharged” or wiped out (there are exceptions for some debts, which is part of why bankruptcy law is specific and complicated). If you’re interested in reading the actual Bankruptcy code, go for it here.
The Bankruptcy Trustee is appointed by the Justice Department, is usually an attorney or an accountant, and is paid from the filing fees and (sometimes) commissions on the sales of assets sold. In a chapter 7 bankruptcy you are allowed to keep something: either the (1) “wildcard” exemption, worth $29,275 in assets and cash that you select (such as cars and checking accounts), or (2) the “homestead exemption” which allows you to keep $300,000 – $600,000 of the equity in your primary residence in California depending on the median sales price of a home in your county. And, you always keep all of your retirement accounts through bankruptcy: 401k’s, and 403b’s, and up to $1.3 million in IRAs.
Legal ownership of the assets you keep is transferred back to you when the bankruptcy is completed. When a chapter 7 bankruptcy is approved and completed, most debts are wiped out. Some kinds of debts, however, are impossible or tricky to eliminate with bankruptcy, such as student loans and certain kinds of tax debts. For this reason, it’s a good idea to educate yourself about bankruptcy, even before you hire an attorney, so that you have a sense of what questions to ask any attorney you’re considering hiring. That’s one of the reasons I have so much information on my web site.
Both of us are better off when you have the knowledge necessary to hire an attorney who’s the best fit for you.
Eligibility Requirements for Chapter 7
There are income thresholds to qualify for a chapter 7. If you, or you and your spouse have mostly consumer debt and make more money than the income threshold established by the law for your size and location, then you won’t qualify for a chapter 7. The income threshold to qualify for a chapter 7 bankruptcy is called the Means Test. This test looks at your income over the six months before you file for bankruptcy. If your annualized income is below the median income for a family of four (in California – this figure differs from state to state), which is $101,315 per year/$50,658 for six months (or below $60,360 per year for a single person), then you pass the means test and are eligible to file a chapter 7. If most of your debt is related to a business or to tax, then you don’t need to meet the Means Test. Yes, it’s complicated. You can get all the details at the U.S. Bankruptcy Court’s Website.
If your income is higher than this number, you may still qualify for a chapter 7 because we can deduct your regular “allowable” expenses such as mortgage or rent payments, utilities, car payments, food, and health care. If your expenses bring your income down below the median rate, then you likely qualify for a chapter 7. If your income minus allowable expenses puts you above the median income in California, then you may benefit from a chapter 13 bankruptcy, intended for people with somewhat higher incomes and more assets to protect. Learn more about chapter 13 here.
Please Educate Yourself and Reach Out for Guidance
The financial triggers that lead people to consider bankruptcy are stressful, emotional and often highly traumatic. As a result, many people avoid thinking about bankruptcy. But if you’re reading this, there’s probably a reason for it. Please do yourself a favor and call a bankruptcy specialist now. It doesn’t have to be me but call someone. You don’t need to do anything other than get accurate information on the alternatives for dealing with the financial circumstances that have caused you to be reading this. You don’t need to make a hasty decision. You don’t even need to make a decision.
Just educate yourself.
I believe decision-making is easier and better when people are informed. Please make yourself one promise right now: that you’ll speak with someone this week who has bankruptcy experience and can apply it to your situation, to give you a sense of the feasible alternatives available to you. Even if you then need lots more time to make an actual decision, or take a step forward, you will feel lighter knowing what your alternatives look like. I promise. Oh – my clients are the ones who have urged me to include this point. So, if you don’t want to listen to me, then take some advice from many people who’ve been in financial situations very similar to yours.
Call me. Call someone. But just call.
Contact California bankruptcy lawyer John D. Faucher for a consultation to get your questions answered and learn about your options.
Chapter 7 Personal Bankruptcy FAQs
Will Filing Bankruptcy Ruin My Life? At Minimum, It Feels Humiliating.
Yes, the circumstances that cause most of my clients to end up in my office (divorce, job loss, business set-back, disability, supporting kids and aging parents) are emotionally and financially draining. Many people are embarrassed and blame themselves. And most clients say they waited way too long to look into bankruptcy because they were ashamed or embarrassed by their situation. Don’t be like them. First, I’m not here to judge you. I’m here to help you. Because I have helped so many people go through chapter 7 bankruptcy, I know only too well that bad luck is most often involved in bringing clients to my door. Bad luck that could easily visit me, or anyone, one day – witness what the Covid-19 pandemic has done to so many people’s jobs and businesses. Second, and most importantly, for almost all of my clients, bankruptcy is one of the best things they’ve ever done. They get out from under debts they cannot pay and gain the invaluable opportunity to start over again on fresh financial footing. Indeed, this is exactly what Congress envisioned when writing our bankruptcy laws. The ability to file bankruptcy (under many strict income and asset conditions – after all, chapter 7 bankruptcy is only available to people who have come very close to depleting most of their resources) is a substitute for the very generous social safety-nets available in most other industrialized countries. We don’t have free healthcare, or years of unemployment benefits, or extensive vocational retraining, or virtually-cost-free college tuition in the U.S., like countries such as Canada or most European countries do. Instead, when U.S. citizens find themselves owing money than they cannot pay off, they can discharge crushing debt, and return to full and healthy participation in our economy. There is no shame in this. That’s what bankruptcy is for. That’s why our legislators established it.
Bankruptcy will do the opposite of ruining your life: it will allow you to restart your life.
Call me and let’s discuss your situation and whether bankruptcy is an option. No judgment here, just sympathy for what you’re going through.
Will My Credit Score Be Ruined If I File Bankruptcy?
One of the biggest concerns most people have about filing bankruptcy is the hit their credit score will take as a result. The anxiety that their credit score will go down even stops many people from filing for bankruptcy altogether. Don’t be one of them. Those ads that scare people about their credit score (“Let us help you repair your credit score!!!”) are irrelevant to most people facing bankruptcy. Credit scores impact the interest rate you can obtain from lenders: the higher the credit score, the lower your interest rate. But, if you’re considering bankruptcy to cancel excessive debt, you have no business borrowing more money. You have a much bigger problem than how expensive future loans will be. Deal with your existing bad debt first. That’s your current and real problem. Moreover, almost everyone considering bankruptcy has already taken the biggest hit to their credit score, from the failure to pay their bills that got them considering bankruptcy in the first place. Indeed, many lenders see filing bankruptcy as a “good” thing: you are finally taking concrete steps to deal with the inability to pay your bills. Yes, your credit score may continue to decline slightly after filing bankruptcy. Yes, the bankruptcy will remain on your credit reports for 7 years. Yes, you may have brief difficulty getting anyone to give you a loan or new credit card. However, most of my clients begin receiving solicitations for new credit cards and other offers of credit just a few years after filing bankruptcy. Read about one client’s success story. And chances are you wouldn’t be in a reasonable financial position to take on new debt until a few years post-bankruptcy anyhow. Don’t obsess about your credit score. That is NOT the issue to focus on. Call me so I can help you understand if and how bankruptcy will help your overall financial well-being. And remember: a call to get information is not the same as actually filing for bankruptcy.
Will I Lose Everything In Bankruptcy?
Many people are very concerned that filing for bankruptcy means losing everything they own. This is not true. In a chapter 7 bankruptcy, everything you own and owe is legally transferred to a Bankruptcy Trustee, who can then use your assets to pay your debts. However, you always keep all of your retirement accounts through bankruptcy: 401k’s, and 403b’s, and $1.3 million in IRAs. Then you are also allowed either the (1) “wildcard” exemption, worth $29,275 in assets and cash that you select, or (2) “homestead exemption” which allows you to keep $300,000 – $600,000 of the equity in your primary residence in California depending on the median price of a home in your county. Legal ownership of the assets is transferred back to you when the bankruptcy is completed. However, the reality for most people considering bankruptcy is that they already owe more than they own, or close to it. Which is, of course, the whole reason bankruptcy is something you’re considering! Stop fixating on what you might “lose” in bankruptcy. Keep the focus on the good that will come from filing for bankruptcy: a chance to eliminate the debts you owe and make a fresh financial start. Let’s talk about your financial situation (good, bad, and worse), so we can accurately determine whether filing bankruptcy will improve or worsen it.
What are the Steps in This Process? What Will Going Through Bankruptcy Look Like?
Once you’ve hired a bankruptcy attorney, you will need to give them details and documents about all aspects of your personal finances. At Faucher Law, you receive a 23-page Bankruptcy Questionnaire you need to complete and return with a whole lot of substantiating documents, such as tax returns for the past 3 years and paystubs. Here it is, if you’d like to take a look. It usually takes my clients a few weeks to pull together all the information required. During this time, if your creditors are hounding you for payment, I tell you to have them call me and let me deal with them.
Don’t be intimidated by the bankruptcy questionnaire. Many sections are entirely irrelevant for most of my clients. But the questions are there because it’s what the law requires: in order to get rid of your debts, you are required to disclose everything about your finances and that’s what 23 pages of questions is designed to do. Recall that the basic transaction in bankruptcy is this: you walk up to a table, empty your pockets onto the table staffed by the bankruptcy Trustee, and walk away neither owing nor owning anything (with the exception of either $29,275 in assets or up to $300,000 – $600,000 in equity in a primary home).
The Bankruptcy Petition. Once I receive your completed questionnaire, one of my ace paralegals (Sebastian the Feline Paralegal, for instance) enters the information into a computer program that generates the actual petition that will be filed with the court. Before I file the petition, however, I send you a draft and ask lots of questions about anything that doesn’t make sense, or missing information, or things that I need to know more about in case the Trustee raises questions. I want to be aware of potential problems before the petition is filed and we step into the courtroom. After we’re both satisfied with the information in the petition, I upload the petition to the U.S. Bankruptcy Court’s website (here it is, if you’re curious casb.uscourts.gov).
As soon as the petition is filed, the bankruptcy court issues an injunction to all your creditors – a court order that forbids them from phoning or otherwise contacting you anymore to collect what you owe them. In reality, many creditors and especially collection agencies will continue those annoying calls. If they do, then you tell me, and I remind them that the law prohibits them from hassling and provides for sanctions if they do.
341 Hearing. Within hours of filing a petition with the bankruptcy court, I receive a date for the 341 Hearing, also known as the Meeting of Creditors. The 341 Hearing usually occurs 4-6 weeks after a petition is filed. You and I will attend this meeting, where the bankruptcy Trustee assigned to your case is reviewing several dozen bankruptcies that day, including yours. That means we sometimes wait up to an hour before the Trustee calls your case. Any of your creditors can also show up to the 341 Hearing and object to your receiving a discharge. But this does not happen often in chapter 7 bankruptcies. Credit card companies, for example, treat the wiping out of debt as a routine cost of doing business. It would be prohibitively expensive for them to appear at all the 341 hearings of all the people filing personal bankruptcy annually. How do creditors know you’ve filed for bankruptcy? The injunction that goes out as soon as your petition is filed with the court, goes to all the creditors listed on your petition. What happens if a creditor shows up to the 341 Hearing to object? That’s one of many things I try to get a feel for before the 341 Hearing. But understand that creditors can only ask questions, not object, at the 341 Hearing. Unless the creditor objects in some other fashion, the debt gets wiped out in bankruptcy.
Discharge. After the case is filed, the Trustee looks further into your finances. But the investigation is usually completed quickly. In most chapter 7 bankruptcies, the debtor is granted a discharge (erasing of debts) within four months of filing the petition. The discharge is also another injunction that now permanently prevents collection of the debts that arose before the bankruptcy petition date. Sometimes, however, creditors continue to hassle a client, in which case I contact the creditor with a copy of the court-ordered discharge and remind them of the sanctions they face if they keep it up.
Shouldn’t I Draw Down My Retirement Accounts Before Considering Bankruptcy?
NO! Bankruptcy law lets you keep your retirement accounts through bankruptcy (in most cases)! The retirement funds you have in 401k accounts are safe – no matter how much is in them. Yes, you read that correctly. However, the funds in IRA accounts are treated a little differently. You are allowed to keep the first $1.3 million in IRAs in most cases. When writing our bankruptcy laws, Congress did not want to jeopardize people’s ability to take care of themselves as seniors and thus wrote the laws to protect retirement savings. Furthermore, the amounts in your retirement accounts (either 401k or IRA) do not count toward the means test (the income threshold above which you no longer qualify for a chapter 7 bankruptcy, but rather must file a chapter 13 bankruptcy, where you are put into a 5-year plan to repay your debts). Many of my clients cannot believe they keep their retirement savings through bankruptcy and need a lot of reassurance that this is the case: if that sounds like you, give me a call and let me put your mind at ease.
How Much Should I Pay for A Bankruptcy? I See Some Ads for $1,000 or Less.
If you’ve started to do any research on bankruptcy firms, then you already know there’s a huge number and variety of people and firms who prepare bankruptcy petitions. In fact, it’s not even necessary to be an attorney to do so. Indeed, there are folks out there who act like they’re an attorney even though they are not, and who will not tell you the truth unless you ask them directly. There are also bankruptcy attorneys who are highly visible until you’ve been signed up as a client, but then disappear and you end up dealing only with their paralegal for the duration of your bankruptcy proceeding. In fact, I get a lot of the former clients of $1,000 bankruptcy attorneys, after the first bankruptcy is thrown out of court for errors. I know what I’m doing. I’ve filed hundreds of chapter 7 bankruptcies, and the State Bar Association of California has given me the rare designation of Specialist in Bankruptcy – something fewer than 5% of attorneys have earned (click here to learn more about how this works). You will be interviewed about the specifics of your situation by me, because only I have the expertise to discern whether there are minefields in, or creative ways to address, your situation. I have a great paralegal who enters all the information necessary for me to file your bankruptcy, but she doesn’t have the legal and financial judgment and experience necessary to spot the red flags and creative alternatives that your situation may require. It would be cheaper if she primarily interacted with you, but then we’d run the risk that she’d miss something unique about your situation that I will drill down and ask more about. As a result, you will rarely speak with her. I go over every bankruptcy petition with my clients, and I attend every Trustee meeting with my clients, except in the unusual case that there’s a scheduling conflict. Filing bankruptcy tends to be a stressful experience for most folks. Don’t compound an already-difficult experience by hiring someone who becomes unavailable as soon as you’ve paid. Make sure you’re choosing an experienced attorney who won’t ghost you. Unless you really, really like clerks and paralegals, in which case you should avoid calling me.
Will I Lose My Credit Cards In Bankruptcy?
Short answer: yes. And so what? Chances are credit cards are part of what got you to the point that you’re needing to educate yourself about bankruptcy. When your bankruptcy is filed, your social security number is automatically sent to all credit agencies. The standard practice among credit card issuers is to cancel all cards associated with a person who’s filed for bankruptcy, even if the card has been paid off. There is no way around this. But, in exchange for the inconvenience of living within your means (no credit), you will have your debts wiped out. It’s worth it. Moreover, most people filing bankruptcy begin receiving offers from credit card companies within 1-2 years of their bankruptcy discharge. Yes, your interest rate will be higher than if you hadn’t filed bankruptcy, but you will have hopefully moved beyond the circumstances that had you taking on so much debt to begin with.
Will I Lose My Car In Bankruptcy?
It depends on how much your car is worth and how much other property you have. While most people keep their cars through bankruptcy, some give up cars they can’t afford. If you are still paying a car note, you will probably keep the car if you want to – or you can decide to turn it in and walk away from its expense. If you fully own a car with low resale value, you can protect some of the equity with an exemption ($3,350 or $5,850 depending on your other exemptions), and include the rest in the “wildcard” exemption ($29,275, not always available). If you have a lease or car payments on a vehicle you can afford, then there’s an easy process to reaffirm your lease or car loan through the bankruptcy. But, if you have car payments or a lease that you can no longer afford, bankruptcy is a good time to turn that car in. Don’t let worries about what will happen to your car stop you from speaking to an attorney about your situation – get educated on what’s possible.
What Kind of Assets Exactly Must I Declare to The Bankruptcy Trustee?
Everything. That’s right: in exchange for cancelling most or all of your debts, bankruptcy demands you reveal everything that you own. Most people understand they need to declare all their financial accounts, real estate, cars, jewelry, collectibles, RVs, boats, and other items of obvious value. But here’s some of the items the bankruptcy court views as assets that clients often overlook: royalties, accounts receivable, whole life insurance, vintage cars, patents, the private company that you own 1/15th of with college buddies, business tools & equipment, a large tax refund coming your way, the security deposit your landlord is holding, the contents of the storage unit. A good attorney will ask you about all kinds of assets in order to determine whether a chapter 7 bankruptcy is a good fit for your financial circumstances. Take a look at my questionnaire to get a full picture of what you’re required to disclose. They must know what your assets are worth, and what you stand to lose, in order to advise you properly. If you can’t find a bankruptcy attorney who wants to know about all sorts of different assets you may have, then call me.
Can I Get Rid of Student Loans In Bankruptcy?
Student loans are one of the few types of common debt that are usually not dischargeable in bankruptcy. If your student loans went to pay tuition, room & board, or school supplies, then that debt is almost certainly not dischargeable in bankruptcy. However, in the uncommon case that you have loans that were for living expenses in excess of what it cost to attend school, then that amount may be dischargeable. The specific language on those loan documents is critical here. Give me a call: I have helped several people get rid of student loan debt, when they had the type of loans that can be discharged in bankruptcy.
Can I Get Rid of Tax Debt In Bankruptcy?
Yes, bankruptcy will allow you to get rid of most state and federal income tax debt. In fact, this why I practice tax and bankruptcy law – bankruptcy can be used in some cases to get rid of tax debt. There are a few exceptions to this, the most frequent being failure to file a timely tax return. For example, if you owe $10,000 on 2015 tax debt, but didn’t file your 2015 return, you can never discharge those taxes with bankruptcy. The government really, really wants you to file your tax returns. The most frequent exclusion is for back payroll taxes, which business owners are personally liable for, and cannot be discharged in bankruptcy (because this was employee’s money that the employer kept rather than turning over to state or federal tax agencies as is required by law). How does the IRS know what you owe if you haven’t filed? They’ve either calculated it from the W2s or 1099s your employers filed with the IRS, or the IRS is making a guess. The IRS’ guess, by the way, never includes deductions, so you are always coming out worse off than if you filed your own return. There are also some very picky and complicated timing issues involved with getting rid of taxes in bankruptcy that are too boring go into now, but which are vital to know about in order to actually get the taxes discharged. Many bankruptcy attorneys and preparers don’t understand how and when taxes can be discharged. Make sure yours isn’t one of them if you have back taxes you owe. Better yet, give me a call if you have a lot of tax debt since this is my expertise.
I’m Expecting An Inheritance: Should I File Bankruptcy?
Probably not. But, as is the case for most things in bankruptcy, the answer depends on the specifics of your financial situation. If the inheritance puts your total assets significantly above $29,275, then it’s likely the Trustee will use it to pay off your debts. However, if the amount of debt that will be discharged in bankruptcy is significantly greater than the inheritance, then perhaps the peace of mind of no longer having creditors at your heels is worth losing what you’ve inherited. But the Trustee can also take an inheritance you receive up to six months after the bankruptcy petition. Alternatively, an attorney may counsel you to postpone bankruptcy for a few years, while you use up what you’ve inherited. A good bankruptcy attorney will examine the “big picture” of your financial condition and goals and recommend ways bankruptcy can further your goals and when. I do exactly this when we first meet to discuss whether bankruptcy is a good alternative for you.
Will I Pass the “Means Test” That Indicates Whether I Qualify for a Chapter 7 Bankruptcy? What If I Don’t?
In 2005, Congress added the “means test” to all chapter 7 bankruptcies to limit this form of bankruptcy to the most financially-needy people, thus reducing “abusive” bankruptcies. The means test examines a debtor’s income to see if the debtor really should pay off some of their debts in a chapter 13, rather than getting to wipe debts out in chapter 7. If a debtor fails the means test, they have the option of filing a chapter 13 bankruptcy – a three or, more typically, a five-year plan in which the trustee strictly scrutinizes the debtor’s income and expenses, collects the debtor’s disposable income, and repays the debtor’s creditors with the disposable income during that time. The vast majority of chapter 13 plans are five years. The means test only applies to “consumer debtors.” This means that if more than 50 percent of the debt in a case relates to personal rather than business or tax liabilities, the debtor is a consumer debtor. Home mortgages, credit card and medical debts almost always fall into consumer debt. Tax debt and business debt does not.
Consumers living beyond their means are subject to the means test. A high-earning corporate officer who owes $100,000 on credit cards and has a mortgage will need to submit to a five-year court-disciplined payment plan, or deal with the credit cards in some other way (we have solutions for this situation). If your annual income, in the six months before you file bankruptcy, is above $101,315 for a family of four per year, or $60,360 for an individual, then the means test produces a number called “monthly disposable income.” If that number is sufficiently low, you may still qualify for a chapter 7; if that number is too high, then you are eligible only for a chapter 13, in which you will pay your creditors over five years, your monthly disposable income. Unfortunately, I cannot tell you what this number is because it is driven by formulas so complex the only way to determine whether you pass the means test is to plug your specific financial information into a software package that does the calculation. This is one of many reasons I urge people considering bankruptcy to speak with an attorney sooner rather than later: qualifying for a chapter 7 bankruptcy which will wipe out most or all of your debts is very different than qualifying for a chapter 13 bankruptcy where you will pay a court-determined amount of excess, disposable income to your creditors over a 5-year period. In some cases, someone who does not qualify for a chapter 7 today (they just received a big commission check) will qualify in six months because they expect their commissions to be much lower in the immediate future (maybe Covid-19 has dramatically lowered their sales).
An overextended entrepreneur does not need to submit to the means test. In the wake of the 2008 crash, I saw janitors and other low-wage employees who had taken out second mortgages on their houses to purchase rental properties they could barely afford. When the crash happened, they lost the rental properties and needed to avoid foreclosures on their own homes. These debtors often didn’t need to meet the means test because more than half of their debt was related to a business rather than consumer debt. The bankruptcy system favors entrepreneurs in this manner.