Once a person is no longer able to pay his debts, he may seek debt relief by filing for bankruptcy. The different types of bankruptcy are sorted into different chapters in the bankruptcy code and are named after their respective chapters. One type of bankruptcy is Chapter 7 bankruptcy.
Chapter 7 bankruptcy is also known as liquidation bankruptcy because it involves liquidating a person’s assets and using the proceeds to pay off as much debt as possible, after which, the remaining debt will be relieved.
There are many other types of bankruptcies under the US federal bankruptcy code with their policies and regulations. If you are considering bankruptcy, consult with one of our Chapter 7 bankruptcy attorneys today to know your bankruptcy options and if Chapter 7 is indeed the type of bankruptcy that is the best for you! We are Pasadena Bankruptcy Law, a bankruptcy law firm in Pasadena California.
1. California Bankruptcy Means Test
Before actually filing for a Chapter 7 bankruptcy, you must first find out if you are qualified to file bankruptcy Chapter 7 through a means test. The first part of the test involves comparing your total household income to the state median income. This includes all salaries, alimony, child support, pensions, and any financial aid that is given to you. You take all of these and compare them to the California household median income:
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If your household’s income falls below the state’s median, you automatically qualify to file for a Chapter 7, if not, you then proceed to the means test calculation.
For the means test calculation, you have to once again take your total household income, and subtract from it your deductible expenses which are sorted into four categories:
1. Payments to priority and secured creditors
Priority debts are debts that carry the most serious consequences if you do not pay for them. Such include income taxes and court fines. Secured debts are those that are backed by collateral such as a house, in the case of mortgages, or a car, for car loans.
2. Expenses according to the national standards established by the IRS
These are the living expenses established by the IRS. The IRS sets standard amounts for expenses going towards out-of-pocket medical bills, clothing, food, utilities, housing, among others.
3. Actual expenses
Of course, the amounts set by the IRS are not definite and may vary on a case-to-case basis. So, the extra expenditures for the necessities including those listed above are categorized under here, given that you can prove that they are necessary and reasonable expenses.
4. Administrative expenses
The expenses categorized here are those that you will have to pay if you were to file a Chapter 13 bankruptcy instead of Chapter 7. Chapter 13 is different in that it does not eliminate debt, rather, it restructures your debt into a more manageable repayment plan. This step is necessary because the state wants to check first if you can afford to pay for a Chapter 13.
You then subtract these expenses from your total household income. If the resulting amount is enough to pay for at least 25% of your total debt, you will not be qualified to file a Chapter 7 and will have to file a Chapter 13 bankruptcy. If it is not enough, you may proceed to file a Chapter 7.
The means test calculation is state-specific and will follow state law. This is why it is best to contact a local bankruptcy attorney. Pasadena Bankruptcy Law is a law firm based in Pasadena, California. We are committed to helping California residents settle debt problems because their financial future is important to us.
2. Counseling and Forms
After you have determined that you are qualified to file for a Chapter 7, you must then take credit counseling sessions before actually filing for bankruptcy. These credit counseling sessions must be conducted by a credit counseling agency approved by the US Trustee Program and must be taken within 6 months before filing.
You should also start compiling the documents and paperwork that you will need while undergoing counseling. These include vehicle titles, bank statements, income tax returns from the last two years, paycheck stubs, and a bankruptcy petition for the bankruptcy court to begin. You should also start filling out your bankruptcy forms at this point.
You should get a Pasadena bankruptcy lawyer at this stage because one can help you fill out and file bankruptcy forms, as well as inform you about the bankruptcy laws you will need to know. Talk to one of our Pasadena, California bankruptcy lawyers and get back on track today!
3. Trustee Appointment and Meeting of Creditors
Once you have filed your forms, your bankruptcy hearing will have officially begun. As soon as this happens, you will be placed under automatic stay which is a bankruptcy protection policy that protects you from creditor harassment and states that debt collectors may no longer contact you to collect your debts.
Also at this point, the court will assign to you a bankruptcy trustee who will be in charge of facilitating your bankruptcy filing. He will be responsible for sorting your assets into exempt and non-exempt properties.
Exempt assets are those that are necessary for you to keep on making a living. These include your house, a car, your clothes, etc. Exempt assets will be protected from repossession and will remain with you.
Nonexempt assets are the inverse- assets that are deemed not necessary to make a living and include high-value items such as collections, extra cars, and extra houses.
4. Debt Repayment
After your trustee has sorted your assets, you will get to keep your exempt assets while your trustee will have to acquire your non-exempt assets, have them liquidated, and use the proceeds to pay off as much of the debt you owed as possible, starting with your secured debts and then your unsecured debts.
5. Discharge of Remaining Debt
At this point, any of the remaining unpaid debts from the previous step will be eliminated. However, the bankruptcy law excludes 19 types of debt from being discharged by filing bankruptcy, including student loan debt and income tax debts.
6. After Bankruptcy
Of course, there are serious consequences to filing Chapter 7 bankruptcy. It will reflect on your credit report for the next 10 years. This might make it harder for you to acquire loans, or even switch jobs. Nevertheless, after filing for Chapter 7, you are once again given a clean slate. You now have a fresh start to rebuild your credit score.
If you have any questions about the bankruptcy process or how to file for bankruptcy, don’t hesitate to contact a Pasadena, California bankruptcy attorney today. We at Pasadena Bankruptcy Law are committed to providing you with bankruptcy information, helping you get out of debt, and have a fresh start in life.