Bay Area Bankruptcy Attorney

This type of bankruptcy is also known as a "straight bankruptcy" or "liquidation bankruptcy".  The general idea behind this type of bankruptcy is that the trustee who is assigned by the bankruptcy court will liquidate or sell all of the person’s assets and use the proceeds to pay debts, and whatever debt remains unpaid is forgiven or discharged.  In actual practice; however, most people who file a Chapter 7 petition retain all of their assets due to the availability of exemptions that protect certain assets from liquidation.

Chapter 7 bankruptcy is by far the most popular type of bankruptcy proceeding for individuals.  Any individual residing, domiciled, or having property or a place of business in the United States may file a Chapter 7 bankruptcy.  To be eligible, the person must have received a credit counseling briefing from an approved agency prior to filing for bankruptcy.  In very limited circumstances a Chapter 7 case may be dismissed by the court for “abuse” if the court believes the person has the ability to repay creditors, and the person’s income is subject to a “means test” to determine whether there is a presumption of abuse due to the ability to repay creditors. 

The Chapter 7 Bankruptcy Process

A Chapter 7 case begins with the consumer filing a petition with the bankruptcy court serving the area where the person lives.  In addition to the petition, the person must also file with the court several schedules which detail the consumer’s assets, debts, income, expenditures and certain other details about the person’s financial affairs, as well as the results of the means test, if applicable.  The filer must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). 

The court must charge a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge (the total filing fee is $299.00). Normally, the fees must be paid to the clerk of the court upon filing.

Among the schedules that an individual will file is a schedule of "exempt" property. The Bankruptcy Code allows an individual to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the person’s home state.

Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the person or the person’s property.  The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments.

Between 20 and 40 days after the petition is filed, the trustee assigned by the court will hold a “meeting of creditors”.  During this meeting, the trustee puts the consumer under oath, and both the trustee and creditors who choose to attend may ask questions (as a practical matter, very few creditors attend these meetings). The person must attend the meeting and answer questions regarding his or her financial affairs and property. 

A date fixed 60 days after the meeting of creditors is the last date that a creditor may object to the consumer’s bankruptcy filing.  If there are no objections, the court will generally issue a discharge and close the bankruptcy case shortly after the expiration of this 60 day period.

Means Testing

Prior to October of 2005, any individual could file for bankruptcy protection under Chapter 7 of the Bankruptcy Code so long as the filing was made in “good faith” and was not an abuse of the Bankruptcy Code. There was no means testing to determine eligibility. For cases filed after October 2005, consumers must pass a “means test” or risk dismissal of their case as an abusive filing. The purpose of the means test is to determine whether the person has the ability to repay his unsecured creditors.

Means Test: Part One

In part one of the means test, the consumer’s gross income is compared to the median gross income in the state where the consumer lives. All income received by the consumer from most sources during the six months prior to filing is summed, then divided by six to arrive at a monthly average. This monthly average is then multiplied by 12 to arrive at annual gross income. The calculated annual income is then compared to the state-wide median for a family the same size as the consumer’s family. Shown below is the median income table for California effective for cases filed after March 15, 2011. These figures are updated on a regular basis.

STATE	1 EARNER	2 PEOPLE	3 PEOPLE	4 PEOPLE*
CALIFORNIA	$48,009	$62,970	$68,670	$78,869

*  Add $7,500 for each individual in excess of 4.

If the consumer’s family income is below the statewide median, it is presumed that a filing under Chapter 7 would not be abusive.

Means Test: Part Two

If the consumer’s family income is above the median, part-two of the test is then completed whereby the consumer’s reasonable and necessary expenses are deducted to determine whether the person has the ability to repay all or a portion of his/her unsecured creditors. If after deductions it is shown that the consumer does not have the ability to repay a significant portion of his/her unsecured debts, the consumer may proceed without a presumption of abuse.

Means testing can be complex, particularly in close cases. Our office can assist, and we can generally advise with a high degree of confidence whether your case would pass the test after our initial consultation.

Not All Debts are Discharged in Bankruptcy

It is important for Chapter 7 candidates to understand that certain debts cannot be discharged in a Chapter 7 bankruptcy.  For example, it is extremely difficult to get a student loan discharged.  Other types of non-dischargeable debt includes alimony, certain taxes, pre-petition fines and restitution orders, debts from injury or death due to alcohol or drug use, and certain condo and coop fees.

Credit Counseling and Debtor Education Requirements

The bankruptcy reform enacted by Congress in 2005 included a mandate that bankruptcy filers must undergo credit counseling before their case is filed, and also a debtor education course after their case is filed but before they receive a discharge of their debts. Both of these counseling requirements are mandatory and can be satisfied by taking internet based courses which take from 1 to 2 hours, or through telephone interviews.

Consult an Experienced Bay Area Bankruptcy Attorney

My office can assist you in determining whether bankruptcy is the right choice for you, and which chapter under the Bankruptcy Code would provide you with the most relief.  To schedule a free consultation with a knowledgable lawyer about filing a Chapter 7 bankruptcy in San Francisco, please call my office today at 415-865-0212.

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