Chapter 7 is often referred to as a “straight” bankruptcy or a “liquidation” bankruptcy. Both individuals and corporations are eligible to file. One of the main purposes of Chapter 7 is to give people a fresh start and an opportunity to rebuild. Businesses normally use Chapter 7 to effect an orderly liquidation and to stop creditor harassment. Corporations do not get a discharge as compared to individuals. In general, businesses cannot operate post-petition in Chapter 7 whereas they can in Chapter 13.
Chapter 7 can eliminate unsecured debt, such as credit cards, medical bills, certain income taxes, and repossessions. If a debtor wants to keep secured property like a home or a car, but is behind on the payments, a Chapter 7 case may not be the right choice. A Chapter 7 bankruptcy postpones but does not eliminate the right of mortgage holders or car loan companies to foreclose or repossess your property. Certain other obligations like alimony, recent income taxes and student loans are non-dischargeable. Chapter 7 provides an “automatic stay” that puts an end to collection activities, including lawsuits, bank levies and garnishment of your wages. People like Chapter 7 because it cleans up their credit and is a relatively quick bankruptcy.
To determine eligibility, it is necessary to first review assets. It is important to understand that Chapter 7 could result in the sale of some of your property. However, for most debtors their assets are protected by certain California exemptions. What is exempt is a matter of California law. Second, it is necessary to review income as it is considered to determine if you have the ability to repay a portion of your debts. A calculation is based on a six month average income and then compared to forecasted monthly expenses. Note that most people who are at the point of having to file for bankruptcy relief do qualify.
Once a Chapter 7 case is filed, a bankruptcy trustee is appointed to review your case and has the power to sell non-exempt assets and use the proceeds to pay your creditors. In most cases there is nothing to sell as most property is either exempt or fully secured. Careful consideration is required if you have a recent divorce, a recent sale of a business or real estate, a pending lawsuit, or if you may inherit property.
The goal of a Chapter 7 bankruptcy is to obtain the discharge of your debt. The discharge is granted approximately three months after the bankruptcy filing. After the bankruptcy is complete and discharge is granted, creditors are permanently barred from taking any collection actions against a debtor.
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