Chapter 7 is the most common form of bankruptcy and the fastest. A typical case is over in about three to four months, and it ends with a court order that permanently eliminates credit cards, medical bills, personal loans, and most other unsecured debt.
What people fear most is losing the house, the car, or the retirement account. In most cases that is not what happens, because California law protects a defined amount of property from creditors and from the bankruptcy trustee. Most people who file Chapter 7 keep everything they own.
That protection is not automatic, though. It depends on whether the case is properly prepared. This article follows a Chapter 7 case in the order it progresses.
Who Qualifies for Chapter 7
Eligibility turns on income, measured by what the law calls the means test.
- Step one. Your household’s average income for the six months before filing is compared with the California median for a household of your size. If you are below the median, you qualify.
- Step two. If you are above the median, a second calculation subtracts allowed living expenses, taxes, and secured debt payments. Many people above the median still qualify at this step.
- Prior cases. You cannot receive a Chapter 7 discharge if you received one in a case filed within the last eight years.
- Asset exemptions. Qualifying on income is not the whole question. If you own property that the exemptions do not fully protect, a Chapter 7 filing could put that property at risk, and another chapter may be the better choice. Exemptions are discussed under Stage 1 below.
The means test does not apply when more than half of your debt is non-consumer debt, meaning debt that was not taken on for personal, family, or household purposes. Common examples are business loans and lines of credit, business debts you personally guaranteed, commercial leases, and most tax debt.
Evaluation
Deciding whether Chapter 7 is the right tool, and what it will and will not do for you.
What goes away and what does not
Chapter 7 eliminates most unsecured debt: credit cards, medical bills, personal loans, old utility bills, deficiency balances after a repossession, and most civil judgments. Some debts survive, including child and spousal support, most recent taxes, debts obtained by fraud, and criminal fines. Student loans survive unless the court finds undue hardship, which is a separate proceeding described in our student loan discharge guide.
Your property and the exemptions
California offers two different sets of exemptions, and a debtor must choose one. One is built around a large homestead exemption for equity in a home. The other offers a flexible allowance that can be applied to almost any asset. Retirement accounts are generally protected under either. Choosing the right set is the most important strategic decision in a Chapter 7 case, and we make it by listing everything you own and testing both.
- Do not repay loans from relatives or friends. The trustee can recover those payments from them.
- Do not transfer property or take your name off a title.
- Do not use credit cards or take cash advances once you have decided to file.
- Do not cash out a retirement account to pay debts that the bankruptcy would eliminate anyway.
Timing
A pending garnishment or lawsuit argues for filing soon. An expected tax refund, a recent drop in income, or a large recent payment to a creditor may argue for waiting a few weeks. And because the means test looks back six months, the month you file can change whether you qualify. We set the filing date deliberately.
Preparation
Building a petition that is complete and accurate, because that is what the law requires and what earns the discharge.
Documents
We collect seven months of pay stubs, the last two years of tax returns, recent bank statements, a photo ID, and proof of your Social Security number. Our client portal lets you fill out a bankruptcy questionnaire and upload your documents from a phone, tablet, or computer.
Credit counseling
Every individual must complete a short credit counseling course from an approved provider before filing. It is done online or by phone and takes about an hour. The certificate is good for 180 days.
The petition and schedules
The petition package lists every asset, every debt, your income, your expenses, and your financial history for the past several years, and you sign it under penalty of perjury. Thoroughness is what earns the discharge. A debt you forgot can usually be added. An asset or a transfer you left out can cost you the case. We go through the draft with you line by line before it is filed.
Filing
Stopping collection and putting the case in front of the court.
The automatic stay
The moment the petition is filed, a federal injunction takes effect. Wage garnishments stop. Lawsuits are frozen. Bank levies, collection calls, and letters end. A foreclosure or repossession is paused. We send notice of the filing directly to any creditor that is actively collecting, so the stay takes hold right away.
What happens at the court
The court assigns a case number, appoints a Chapter 7 trustee, and sends every creditor a notice with the date of your meeting of creditors, also known as the trustee’s meeting. You do not go to court on the day of filing, and most Chapter 7 debtors never appear before a judge at all.
Your part
- Keep making the monthly payments on a car loan or mortgage you intend to keep.
- Keep the car insured. A lender can ask the court for permission to repossess a vehicle that is uninsured, even when the payments are current.
- Tell us about any change: a new job, an inheritance, a lawsuit, or money you did not expect.
The Meeting of Creditors
Answering the trustee’s questions under oath.
About a month after filing, you attend the meeting of creditors, which is currently held by Zoom video. Despite the name, creditors rarely attend. The meeting is conducted by the trustee, not a judge, and usually lasts five to ten minutes, depending on the trustee’s schedule. You take an oath and answer questions about the petition papers filed. We prepare you beforehand and attend with you.
What the trustee is looking for
The trustee’s job is to find property that is not protected by an exemption and could be sold for the benefit of creditors. In most consumer cases there is none, and the trustee files a report saying so shortly after the meeting.
Decisions about secured debts
For a car loan or other secured debt, you choose among keeping the property and continuing to pay, signing a reaffirmation agreement that keeps the loan in force after the bankruptcy, or surrendering the property and walking away from the balance. Each has consequences, and a reaffirmation in particular deserves a careful look before you sign. The choices are explained in our reaffirmation agreement guide.
The second course
After filing, you complete a financial management course, also online. The court will not enter a discharge without it.
Discharge
Receiving the order that ends the debt, and what comes after.
Creditors and the trustee have 60 days from the date first set for the meeting to object to your discharge. Objections are uncommon. When the deadline passes, the court enters the discharge order, typically about three to four months after the case was filed.
The discharge is a permanent court order. A creditor whose debt was discharged may never again call you, bill you, sue you, or garnish your wages for that debt. A creditor that tries is violating a federal injunction.
What it does not do
A discharge eliminates your personal liability, but it does not by itself remove a lien. A car lender can still repossess if payments stop, and a mortgage remains on the house. Some judgment liens can be removed by a separate motion during the case, and we check for them.
After the case
A Chapter 7 filing can remain on a credit report for up to ten years, but rebuilding starts as soon as the discharge is entered, because the debts that were dragging the report down are gone. We give every client guidance on the first steps.
Chapter 7 or Chapter 13?
Chapter 7 is not always the better choice. Chapter 13 may fit better in these situations.
- You are behind on a mortgage and want to keep the home. Chapter 13 lets you catch up over three to five years.
- You own property the exemptions do not fully protect. Chapter 13 lets you keep it by paying its value over time.
- Your income is too high for Chapter 7.
- You owe recent taxes or support arrears. Chapter 13 puts them on a payment plan.
- Someone co-signed for you. Chapter 13 protects co-signers on consumer debts while the plan runs.
What It Costs
The court’s filing fee for a Chapter 7 case is $338. The two required courses and a credit report add a modest amount.
Our attorney fee for a Chapter 7 case is a flat fee, quoted at the first meeting and set out in a written agreement before any work begins. Some employer-sponsored legal plans cover it.
- Pay stubs for the last seven months, or other proof of income
- Tax returns for the last two years
- Recent bank statements
- Any lawsuit papers, garnishment orders, or collection letters
- Your mortgage statement and car loan statement, if you have them
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.