Today’s economy is built on people consuming goods and services. Often, consumers are encouraged to acquire and/or have acquired items with credit that they cannot afford to purchase outright with cash. Additionally, if they become ill, or lose their job, or if they have failed to properly plan their finances, making it impossible and/o difficult to pay their debts, it might be time to consider filing Chapter 7 Bankruptcy in order to get a new and fresh start in managing their personal finances.
Our country is experiencing a time when we are witnessing multi-billion dollar financial bailouts extended to large banking institutions, insurance carriers, and where well-established automobile makers are filing bankruptcies. Private debtors also deserve to have personal financial relief.
For you to qualify for Chapter 7, you must meet specific eligibility requirements. You may file under Chapter 7 only one time every eight years. When filing Chapter 7 in California, you must qualify under a means test before becoming eligible. Generally, your average monthly income within six months prior to filing Chapter 7 should not be higher than California's median income. If your average income is higher than the median income, you might not qualify to file under Chapter 7, that is, if your disposable income allows you to pay your creditors a portion of your debts over a fixed period of time.
It takes approximately three months to get completely discharged under Chapter 7 Bankruptcy. Before filing bankruptcy, most people are required to confer with a nonprofit credit counseling agency. The reason for credit counseling is to review and determine whether you could make use of other options to pay your debts. Once credit counseling is complete, the Voluntary Bankruptcy Petition gets filed with the Bankrupty Court, requesting a discharge of debts. After this petition is filed with the court, the court then enters an order for relief, called an Automatic Stay, which requires all creditors to discontinue collection efforts. This means that creditors must immediately stop all forms of debt collection harassment.
Filing Chapter 7 Bankruptcy requires a debtor to place all of his or her debts and assets under the control of the Bankruptcy Estate Trustee, typically a Chapter 7 Trustee. The Trustee's function is to acquire money from the debtor's estate for the benefit of unsecured creditors. However, in most cases, the Trustee cannot touch the property which is stipulated as “exempt property” under bankruptcy laws. Exempt property is property a debtor can keep during and after filing bankruptcy.
California has created its own individual exemption policy. There are two different sets of state exemption policies which California uses during a bankruptcy process. One is called the Standard California Exemption, and the second is called an Alternative California Exemption. The Alternative California Exemption, with a few important variations, is similar to the Federal Exemption, which is rarely applicable in the State of California. A debtor filing for bankruptcy in the State of California must meet a two year residency requirement to qualify under California's exemption system.
Generally, a debtor might be deemed exempt for both real and personal property, although, most exemptions fall under a cap amount, which is continuously updated by the California Judicial Council. One of the most important exemptions offered is the Homestead Exemption which allows a debtor to retain the equity he amassed in his primary residence. Presently, the State of California Homestead Exemption allows debtors to retain from $50,000.00 to $150,000.00 of equity in their primary residence when declaring bankruptcy under Chapter 7.
In today's current real estate market, property values in certain areas have declined substantially, and a number of homes are “under water” (meaning you owe more than the house is currently worth). This means that many debtors who would not have been able file under Chapter 7 during the housing bubble, due to significant equity in their homes (and thus would have had to file under Chapter 13), are now able to discharge their debts under Chapter 7 and retain their primary residence.
When filing Chapter 7 Bankruptcy, debtors must choose either the standard or the alternative set of the California State Exemptions. They cannot pick and choose between exemptions contained within both systems.
It is important to note that in many cases, even if the debtor has property worth more than the exemption allows, the Bankruptcy Trustee (i.e., Chapter 7 Trustee) may still not want to deal with that property; if the Trustee sees that very little money can be recovered from taking the entire asset. In such a case, a Trustee is likely to abandon such property, and the debtor could retain it. Often such abandoned nonexempt property can be retained by the debtor through redemption, which means offering the creditor a lump sum payment equal to the property's current replacement value. Redemption eliminates all liens on the property.
Another alternative available to the debtor is called a Reaffirmation. In such reaffirmations, the debtor continues paying for the property. When a debtor reaffirms a debt, both the creditor's lien on the property and the debtor's personal liability under the reaffirmation agreement survive the bankruptcy.
Finally, it is important to note that in some circumstances, a debtor may be able to eliminate or reduce liens attached to his exempt property. This procedure is known as Lien Avoidance. The amount of a lien that can be eliminated depends on the value of the property and the amount of the available exemption. However, not all liens can be wiped out. For instance, the remedy of lien avoidance cannot be used for home equity loans or second mortgages if a debtor files under Chapter 7, but might be available if the debtor files under Chapter 13. The debtor therefore eliminates his second mortgage, treating it as unsecured debt under a court approved Chapter 13 repayment plan.