Chapter 7 Bankruptcy
Chapter 7 is a type of Federal bankruptcy filing, and is a liquidation. It is one of several different types of Federal bankruptcy filings. It is by far the most common type of bankruptcy, and it is designed to help people who cannot afford to repay their debts. At The Law Office of Henry Ahrens, we are experts in handling these matters, and in making sure the process goes smoothly.
In a Chapter 7 bankruptcy, a person can have all or most of his debts eliminated (the legal term for eliminating debts is "discharged"). In a San Diego Chapter 7 bankruptcy, you can eliminate all your unsecured debts, which are any debts without collateral. That includes credit card debts, medical bills, payday loans, bank overdrafts, personal loans, business debts, judgments, lawsuits, unpaid balances left over on prior repossessions, returns or foreclosures, guarantees for debts of others, back rent for old apartment rentals, cell phone bills, cable television bills, utility bills, certain types of tax debt, and even student loans, in certain circumstances. And even that is only a partial list of the type of debts that you can eliminate in a San Diego Chapter 7 bankruptcy.
Take a moment to consider what eliminating or discharging your debts truly means. It means that from the moment that your debts are discharged, your creditors can never again attempt to collect those debts from you, ever. You will no longer have any legal responsibility to repay those debts, ever again. You will be completely free and clear of ever again having to repay those debts, or answer to your creditors.
You will then truly have a "fresh start" to rebuild your life, and start completely anew, without the crushing burden of those past debts weighing you down. In other words, you are getting a reset on your life - the opportunity to start again, without the debts and the mistakes from the past continuing to haunt you. At that moment, you are truly free.
As mentioned above, a Chapter 7 is a liquidation. That means that if you own assets that have over a certain value, in various asset categories, then those assets can be taken from you, sold, and the proceeds of the sale used to repay (at least in part) your creditors. However, in San Diego Chapter 7 bankruptcies, it is very rare that a person filing for such a bankruptcy will lose any of their assets in their bankruptcy.
2. Practical Definition of a Chapter 7 Bankruptcy
Although you will not find this definition anywhere else, the practical, common sense definition of a Chapter 7 bankruptcy is no more complicated then this:
"In a Chapter 7 bankruptcy, you can eliminate your unsecured debts in exchange for giving up your assets, but only to the extent that you have assets above and beyond what you are allowed to keep (the legal term is "exempt")."
We will now explain what each component of the above sentence means, starting first with the debt side of the equation, and then moving to the asset side this equation.
3. Eliminating Your Debts in a Chapter 7 Bankruptcy - Secured vs. Unsecured Debts
Your debts fall into either one of two categories - they are either considered to be secured debts or unsecured debts. You can eliminate your unsecured debts in a San Diego Chapter 7 bankruptcy.
(A) Secured debts are any debts for which you have pledged any of your assets as collateral to repay the debt. The most common examples of secured debts are car loans and home mortgages - the collateral for the car loan is the car, and the collateral for the mortgage is your house. You cannot eliminate or discharge secured debts in a Chapter 7 bankruptcy, as the secured creditor always has the right to take back the underlying collateral if you don't pay. In other words, if you don't make your car loan payments, the secured car lender will repossess the car, and if you don't pay your mortgage, the lender will foreclose on your house.
The secured lender, upon repossession or foreclosure, will then sell the collateral, and apply the proceeds of the sale to the amount you owe. So to the extent of the value of the underlying collateral, the secured creditor will be repaid. If you owe the secured creditor more than the value of the underlying collateral, any remaining balance (called a "deficiency") will be eliminated in your San Diego Chapter 7 bankruptcy, as any such remaining balance is now considered to be an unsecured debt.
(B) Unsecured debts are any debts for which there is no collateral. Almost all unsecured debts can be eliminated, or discharged in a San Diego Chapter 7 bankruptcy. There are a few exceptions to this rule, such as: (1) debt incurred by you by fraudulent means (which basically means debts you incurred without the intent to repay, such as debt incurred on the eve of a bankruptcy filing); (2) certain types of tax debts (though some tax debts can be eliminated in San Diego Chapter 7 bankruptcies); (3) student loans, for which you cannot prove undue hardship; (4) criminal court fines and restitution; (5) court ordered alimony and child support; and (6) debts incurred after you file for a Chapter 7 bankruptcy.
But generally speaking, almost all unsecured debts can be eliminated in a San Diego Chapter 7 bankruptcy.
4. Keeping Your Assets in a Chapter 7 Bankruptcy - Exempt vs. Non-Exempt Assets
Your assets also fall into either one of two categories - they are either Exempt or Non-Exempt Assets. You keep a specific asset to the extent that a given asset of yours is considered to be an Exempt Asset. Those of your assets that are considered to be Non-Exempt Assets can be taken from you by your bankruptcy trustee, sold, and the proceeds of the sale distributed pro-rata to your unsecured creditors, as San Diego Chapter 7 bankruptcies are liquidations.
The determination is made on an asset by asset basis. In other words, some of your assets may qualify as being an Exempt Asset, while other assets of yours may be considered to be a Non-Exempt Asset. An asset is anything that you own which has value.
The important point to remember is that it is extremely rare that a Chapter 7 debtor loses any of their assets in a San Diego Chapter 7 bankruptcy. In other words, almost all Chapter 7 debtors will keep all of their assets, as all, or almost all, of the average San Diego Chapter 7 debtor's assets are considered to be Exempt Assets.
So how is it determined which of your assets are Exempt and which are Non-Exempt? That is a complicated question to answer in this forum. In San Diego Chapter 7 bankruptcies, a person filing for bankruptcy gets to choose between two different exemption schemes, both established by the State of California.
The debtor must pick either all the exemption amounts, by asset category, provided in the first state exemption scheme (the "703s", named after the California laws that establish them), or the debtor must pick all the exemption amounts, by asset category, provided in the second state exemption scheme (the "704s"). A debtor cannot mix and match which exemption amounts they want from either the 703s or the 704s - the debtor must either choose all of the 703 exemptions or all of the 704 exemptions.
Which exemption scheme is best for a given debtor will depend upon what type of assets the person filing for a San Diego bankruptcy has, the value of those assets, and the amounts of any secured debts for which those assets serve as collateral. Generally speaking, debtors with large amounts of equity in their personal residence will be better off picking the 704 exemption scheme, and debtors with small or no amounts of equity in their personal residence will be better off using the 703 exemptions.
At The Law Office of Henry Ahrens, we are expert at handling Chapter 7 bankruptcies, and we will be able to tell you, at your initial consultation with us, whether there is any possibility of you losing any of your assets in your San Diego Chapter 7 bankruptcy. Further, if need be, we can help you engage in pre-bankruptcy asset restructuring (called "exemption planning"), so that we can help you maximize your exemptions so that you will keep as much of your assets as possible under the law.
5. Qualifying for a San Diego Chapter 7 Bankruptcy
As mentioned at the beginning of this post, a San Diego Chapter 7 bankruptcy is for people who cannot afford to repay their debts. In other words, if you could afford to repay your debts, you may not qualify to have your unsecured debts eliminated or discharged in a San Diego Chapter 7.
There are two tests that determine whether you qualify to eliminate your debts in a Chapter 7. You must pass both tests. Both tests, in different ways, are trying to see if you can afford to repay more than a minimal amount to your unsecured creditors. If you can afford to do so, then you will not qualify to eliminate your debts in a Chapter 7. If you cannot afford to repay more than a minimal amount to your unsecured creditors, then you will qualify to eliminate your debts in a San Diego Chapter 7. The two tests are:
(A) The Schedule I & J Test. Schedule I lists your monthly income, from all sources. It starts with your average gross monthly income ("gross" meaning income before taxes are taken out), and then subtracts from it your average monthly payroll taxes. After this subtraction, you are left with your average monthly net income ("net" meaning income after taxes are taken out).
Schedule J is simply a list of your average monthly living expenses, which are then added together. It does not include such expenses as unsecured debt payments, as the point is to see if you have any money left over at the end of month to pay your unsecured debts. Note that both Schedule I & J determine your income and expenses as of the current moment, and what your income and expenses are anticipated to be for the year going forward.
The Schedule I & J test then simply subtracts the total of your living expenses from Schedule J from your net income from Schedule I. If you have more than a minimal amount of net income left over, after subtraction of all your living expenses, then you will not qualify to eliminate your debts in a Chapter 7 bankruptcy. If your net income is either equal to, less than, or only slightly more than your living expenses, then you will pass the Schedule I & J Test. Remember, the point is to see if you can afford to repay your debts, after subtraction of your living expenses.
(B) The Means Test. The Means Test is also trying to determine whether you have the "means", or the ability, to repay your debts. It is a rigid arithmetic calculation. It starts by adding together all your gross income, from all sources, for the six full months prior to your bankruptcy filing. (By "full" months, that means the month of filing does not count. So if you file sometime in July, the applicable six month time period is all income received from January 1st of that year through June 30th of that year.)
After all gross income for the applicable six month period is added together, that number is then divided by six. The resulting number is simply an average of your gross income for the six months prior to your filing, which is called "CMI", which stands for Current Monthly Income. Your CMI number is then multiplied by 12 to annualize it.
Your annualized CMI number is then compared to the medium income, for your state of residence, for your household size, based upon IRS statistics. If your annualized CMI is less than the medium income (for your state and household size), you pass Means Testing. If your annualized CMI is greater than the applicable medium income, you then go to the second level of Means Testing.
The second level of Means Testing will then subtract from your monthly CMI your monthly living expenses - some of which are your actual living expenses, and some of which are allowance numbers, based upon IRS statistics for your household size and state of residence. If, after subtraction of these monthly living expenses, you still have more than a minimal amount of CMI income left over, you will not pass Means Testing. However, if these monthly living expenses eat up all or almost all of your CMI income, you will pass Means Testing.
At The Law Office of Henry Ahrens, we are expert at handling Chapter 7 bankruptcies, and we will be able to determine whether you will qualify to eliminate your debts in a San Diego Chapter 7 bankruptcy. We are expert at handling both the Schedule I & J Test, and the Means Test, and we often can get people to qualify under these tests where other attorneys are unable to.
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