Common Questions
What is a Chapter 7 Bankruptcy?
A chapter 7 is the fresh start bankruptcy. Consumer debt is wiped out, and you move on with your life.
Most kinds of debt can be wiped out in a Chapter 7, such as credit cards, medical bills, and personal loans. There are other categories of debt that can not be wiped out in a bankruptcy. These kinds of debt include most taxes, student loans, child support/alimony, and debt incurred through fraud.
The court will look at a person's income and expenses to see if they qualify for a Chapter 7. The court looks at actual income and expenses, and if your income is higher than average, the court will also compare your expenses to average expenses of people in your area. That procedure is called the Means Test. If you do have above average income, you definitely want an experienced bankruptcy attorney getting you through the Means Test.
State law determines which assets you can protect when you file bankruptcy. In most Chapter 7 cases filed in California today, the homeowner keeps his house and his car, but of course he needs to keep paying his mortgage and car payments. The amount of equity you can protect in your home varies under California law depending on your age, marital status, and a few other factors. This is why it is absolutely critical to speak to an experienced bankruptcy attorney to see if your home and other assets can be protected when you file bankruptcy. Most people I speak to are able to keep their homes if they file Chapter 7, but sometimes I'll speak to people that have so much equity in their home that the home would be at risk if they file a Chapter 7. Sometimes a Chapter 13 bankruptcy is the best option for a homeowner in that situation. I cannot stress enough the importance of speaking to an experienced bankruptcy attorney; I have seen homeowners get into trouble by following the advice of paralegals or attorneys that just dabbled in bankruptcy.
A Chapter 7 will delay a foreclosure, but only temporarily. The lender is unable to proceed with the foreclosure until it gets a court order from the bankruptcy court authorizing it to proceed, or until the bankruptcy case is closed.
A Chapter 7 is obviously not a permanent solution, but it can give a homeowner some temporary breathing room. Chapter 7 can be very advantageous to a homeowner giving up a home. Not only does the Chapter 7 wipe out credit cards, but it also prevents a second mortgage lender from coming after a homeowner for a deficiency after a foreclosure.
A chapter 7 bankruptcy can be filed once every 8 years.
What is Chapter 13 Bankruptcy?
Chapter 13 is the payment plan bankruptcy. In a Chapter 13 you keep everything you own while you make payments on your debt. The payment is based on many factors, including your income, your assets, and the amount of your debt.
Different kinds of debt are treated differently in a Chapter 13. Recent tax debt must be paid in full through the plan; so do mortgage arrears if you are keeping the house. Other kinds of debt don't necessarily need to paid in full (depending on your income and assets). In some Chapter 13 cases the court will approve a payment of 0 cents on the dollar to the credit cards.
Chapter 13 was created for individuals with regular income. Chapter 13's are often filed to stop a house from being foreclosed. A classic case for a Chapter 13 would be someone that fell behind on house payments after losing their job. Although the homeowner has just found a new job, he is still way behind on payments, and can't get caught up in time to prevent a foreclosure. A chapter 13 is ideal for that situation because it allows the homeowner to keep the house by making regular mortgage payment, and payments to the bankruptcy trustee; those trustee payments will bring the Debtor current over the next 3 to 5 years. In some cases (depending on how far the value has dropped), a second mortgage can be wiped out in a Chapter 13. However, the court has no power to force the lender to reduce the current mortgage payment in a Chapter 13. If a mortgage payment was unaffordable prior to the 13, it will continue to be unaffordable during the 13.
There is a Debt limit in a Chapter 13. The limit is $1,081,400 for secured debt or $360,475 for unsecured debt. If you are over either limit, you aren't eligible to file a Chapter 13. You can file a Chapter 13 even though you have filed another bankruptcy recently.
How does a typical Chapter 7 work?
Once you hire an attorney, it becomes illegal under California law for a creditor or collection agency to call you. When you file for bankruptcy, there are about 50 pages of documents that are filed with the court; we prepare all of the paperwork for you. There is a hearing that you'll attend about 5 weeks after your hearing. The hearing is not before a judge, just a bankruptcy trustee. (The bankruptcy trustee is an attorney or accountant appointed the bankruptcy court.)
You'll bring your driver's license and social security card to the hearing. We'll have an attorney with you at the hearing, so you're not on your own. A reaffirmation agreement is sometimes negotiated with your auto lender, typically after the hearing. A discharge is typically received 3 to 6 months after the hearing.
Can I keep my house if I file Chapter 7 bankruptcy?
If you have no equity and are current on your mortgage payments, you'll have no problem keeping your house after you file bankruptcy. What if you do have equity in your home? California law allows you to protect a certain amount of equity in your home when you file for bankruptcy; that amount varies on your age, as well as your marital and disability status. Let's say a homeowner qualifies for the $75,000 exemption. If the house was worth $500,000, and had a $450,000 mortgage against it, that would leave $50,000 of equity in the home. Because the amount of equity in less than the $75,000 limit in that example, that homeowner would be able to file Chapter 7 bankruptcy and keep his house.
That homeowner would of course still need to keep making his mortgage payments, both on his first as well as on any second mortgages or home equity loans on that property. Because the amount of equity that you can protect can vary, it is important to speak to an experienced bankruptcy attorney. Special rules apply if you have lived in another state in the last 2 years or have purchased your home recently, which is another reason why you need to speak to an experienced bankruptcy attorney.
Will a Chapter 13 save my house?
Filing a Chapter 13 will stop the lender from foreclosing on your house. You will continue to make your regular mortgage payments in a Chapter 13, as well as a payment to the bankruptcy trustee. The bankruptcy payment will bring you current on your loan once you are done with your 3 year (or 5 year) payment plan. In some cases, you can remove a second mortgage on your home. However, the court can't force the lender to modify your mortgage. If you couldn't afford your first mortgage prior to a Chapter 13, you still won't be able to afford that mortgage after you file a Chapter 13. In other words, Chapter 13 is an attractive option for people who can afford their mortgage payments, but just need time to get caught up.
It is also a good option for people that are eligible to remove a second mortgage on their home. If you feel that it just isn't possible for you to make payments on your first mortgage, Chapter 13 bankruptcy isn't for you. If you are in that situation, you may want to consider filing a Chapter 7 bankruptcy.
What are the credit counseling requirements?
To be eligible to file bankruptcy, you must complete a credit counseling course prior to filing. We will sign you up for a course that you will complete on the internet (or the telephone, if you prefer.) The course is pretty simple, taking 60 to 90 minutes, and you can do it from the comfort of your own home.
After you file the case, there is a second course that you'll need to take to receive your discharge. That course is also taken on the internet or telephone.
Do I make too much income to qualify for a Chapter 7?
The court looks at your income and expenses to determine if you qualify for a Chapter 7. Specifically, the court looks at your current income and compares it to your current expenses. If your income is above average, the court also looks at your income for the 6 months prior to filing, and compares it to average expenses for people in your area, along with some of your actual expenses. That is called the Means Test.
Some kinds of expenses help on the means test, while others don't. For example, high mortgage payments help on the Means Test, while high rent payments do not. We have met people that make $150,000 a year that passed the means test, while we have met people that made $60,000 a year that failed the means test.
Some attorneys are intimidated by the means test and will tell that you don't qualify for a Chapter 7 if your income is above average. We are not afraid to go through the numbers to see if you qualify, even if your income is above average. Some people are even exempt from the means test; for example, people whose debt is primarily business debt are exempt from the means test entirely. Our attorneys have helped many people that were told by less experienced attorneys that they did not qualify for a bankruptcy.
What protections do I have against creditors and collection attempts?
Your Federal and State governments protect you, the consumer, against abusive and harassing collection attempts by creditors and collection agencies.
The law regulating how a debt may be collected from you is called the Fair Debt Collection Practices Act (FDCPA).
Under the FDCPA, collectors are limited in what they can and cannot do when they attempt to contact you for payment. A few of the things collectors cannot do are:
1. Harass you with threats of harm or obscene language;
2. Lie about the amount that you owe;
3. Threaten you with criminal charges or jail time if you do not pay;
4. Call or contact you at inappropriate times, like in the middle of the night, late at night, or in the early morning;
5. Call or contact you at inconvenient places;
6. Add interest or penalties that are illegal;
7. Contact you at your workplace when you've told them not to;
8. Discuss your debt with anyone else aside from yourself or your attorney.
If a creditor or collector violates the law, you are entitled to sue them in State or Federal court. You are entitled to compensation for damages caused by the collector, $1,000.00 in statutory damages, court costs and attorney's fees.
In California, the Rosenthal FDCPA (California Civil Code ยงยง 1788 et seq.) offers even more protections to consumers than its Federal counterpart.
Often times, a person like yourself who is in need of federal bankruptcy protection, may also need the protections of the FDCPA. If you are having difficulty paying your bills or haven't been paying them, then it is very likely you are being inundated by collection calls at home, on your cell, at your workplace, or even at the home of your family members.
Many collectors will call you, knowing that you do not know the laws protecting you. In addition, many collectors themselves do not know such laws. These situations give rise to abuse and harassment. If you are being contacted by creditors, please call us for a free consultation. We will discuss how you can stop the calls, and possibly recover against these collectors due to their abuse.
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