What is Chapter 7 bankruptcy?

Chapter 7 Bankruptcy is where you don’t repay the debt because you can’t. It’s technically called “liquidation bankruptcy” because they’ll liquidate your assets. Do not downplay this part or underestimate it because your cousin’s hair stylist filed Chapter 7 bankruptcy and kept all their stuff.

Every case is different, and risk of losing assets for the benefit of your creditors can be a serious risk. If you’re fortunate to have lots of things, and have lots of debts, they’ll take your things to pay your debts. This is the law. This is Chapter 7 bankruptcy.

Chapter 7 Bankruptcy and Eligibility

Step one: do you even qualify for Chapter 7 bankruptcy? Not everyone is eligible. There’s a formula that determines who can and can’t file Chapter 7 bankruptcy. A lot of it weighs your current monthly income and views your household size, and also includes a lot of census data and IRS averages.

It may sound straightforward, but which months of your income do you count, do you have to include a roommate’s income, and what if your income today is different than it was on a recent tax return? And that’s just the first question on this long complicated form.

Then there’s the issue about the household budget. What if your income is “under the line” but you don’t pay rent, have a car payment, and your monthly expenses are relatively low? Yes, you may barely have money to pay your credit cards (or can’t afford to pay all, but only some). Is this a factor?

And how do COVID economic relief, child tax credits, and stimulus payments fit into all this. Maybe you pay your ex some money for child support but it’s not court-ordered, or you send some cash regularly to your mom to help her out. Do these count?

There are lots of variables, and each case is different. Contact us for a case evaluation and let’s figure it out together.

What Can I Keep in Chapter 7 Bankruptcy?

Congratulations. Let’s say you qualify for Chapter 7 bankruptcy. But remember, this is liquidation bankruptcy, there is a very real risk you can lose things. So, this leads to many new questions: “Can I keep my house in bankruptcy?” “Can I keep my car in Chapter 7 bankruptcy?” “How much money can I protect in bankruptcy?”

The answer, like pretty much every question you can ask an attorney is, “it depends.” While bankruptcy is a federal law governed by many federal statutes, in this complicated specialty, the answer is governed by state law.

This Los Angeles bankruptcy attorney practices in the state of California. So, we’re more familiar with the California bankruptcy exemptions. Each state has its own. Some states don’t have any, but instead use federal exemptions. And to make it even more complicated, it’s not always determined by where you live, but where you have lived in the past few years, and for how long.

And to make matters even more complicated, California exemptions come in two types, and each protects different things. Grossly oversimplifying, there’s one way to protect some home equity, and another to protect cash and cars. But here’s the catch: you often can’t do both.  Try to protect your home, and you may have to give up your bank accounts and tax refunds. Additionally, with changes to the 2021 California homestead exemption, the amount of home equity depends not only upon where you live, but how long you’ve lived there.

(You might wonder, “what is the Los Angeles County median sales price for the prior year,” and for good reason. Many of my Los Angeles bankruptcy lawyer colleagues are wondering the same, and who actually has this information? We’re all constantly learning as we feel our way through this new law.)

Further, if you don’t have a house, chances are you can protect most if not all your assets, using the California exemptions. If you have a car, it’s likely there’s not a lot of equity in it, and by the time you pay it off, it’s not worth that much. However, beware: in 2021, used cars are suddenly a lot more valuable than they used to be, and you may be surprised what your car is worth. But generally, the answer to “can I keep my car in bankruptcy” is, in California, “Yes.”

But you really should consult with a Los Angeles bankruptcy lawyer to learn more about what you can keep, as each case is different, and there are twists and turns that a website just can’t go into without knowing your specific fact situation.

The 341(a) Meeting of Creditors in Chapter 7 Bankruptcy

Every Chapter 7 bankruptcy has a time for a case administrator called the trustee to examine the debtor about his or her assets. It is at this time where the bankruptcy trustee determines that there are assets which are available to be sold for the creditors to pay some of the debts. Other creditors can attend also, and question you, and you must answer, under oath. There is a penalty for perjury, including hefty fines, and jail.

This is where the rubber meets the road. The better your bankruptcy petition was completed, the better things will be properly explained (and protected), and the smoother this hearing will go.  Be completely upfront with your bankruptcy attorney. If your Los Angeles bankruptcy lawyer is aware of even the unflattering, they can give advice on how to disclose it, or to perhaps delay your filing until such time when it no longer hurts your case in your Chapter 7 petition.

Ultimately, the hearing is typically a few minutes long, but it’s an intense few minutes. The path of your case typically isn’t decided by the hearing, but by what happened prior to it, and again, how well the bankruptcy papers, schedules, and statement of affairs were filled out.