by Greg Bennett, Esq.
In my earlier article, I gave an overview of the two most common types of Bankruptcy, Chapters 7 and 13. In this article, I will delve more deeply into Chapter 7 Bankruptcy.
The purpose of Chapter 7 bankruptcy is to provide a debtor a “Fresh Start” when an individual cannot pay their debts by “discharging” their obligations. A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor.
In order to qualify to file a Chapter 7 bankruptcy, you must pass a “means test” as well as have pre-bankruptcy counseling. The “means test” takes your current monthly income (averaged over the last six months) and expenses and determines if you have the “means” with which to pay back your creditors. If you pass the means test, the court will allow you to file Chapter 7 bankruptcy, because you have shown that you are not able to pay back your creditors. If you fail the means test (usually because your income is too high), you will not be allowed to file Chapter 7 bankruptcy, but you may still be allowed to file Chapter 13. Calculating the means test is done by a sophisticated software program and should not be attempted on your own.
Filing bankruptcy entitles you to the Automatic Stay in Bankruptcy which means that as soon as your bankruptcy is filed, all collection phone calls and letters must stop and all collection activities (including foreclosure activities) must cease during the bankruptcy.
If you run a personal services business as a sole proprietor or run any type of business through a corporation or other type business entity, you can continue running your business or, in the case of a business entity, bankrupt it separately.
Since this process is intended to give you a Fresh Start, although the trustee can require that certain assets be sold (liquidated) to pay creditors, not all of your assets must be liquidated and you are allowed to keep most of your assets valued at up to a certain amount. You will be allowed to keep numerous assets that are exempt from liquidation, including:
Up to $22,000 of any type of property (the wildcard exemption);
$50,000 to $125,000 of the equity in your home (the “homestead” exemption);
Up to $3,350 of the equity in your car;
Up to $11,000 of the unencumbered cash value in your life insurance; and
All of the funds in your tax-qualified pension plan (IRA, 401k, etc.).
In fact, less than five percent (5%) of all individuals who file Chapter 7 bankruptcy ever lose any unsecured property due to their bankruptcy. Although, most debts can be “discharged” in a Chapter 7 bankruptcy, certain debts are not dischargeable, including child support, alimony, student loans and some taxes.
Of course filing for Chapter 7 Bankruptcy is very complex and the foregoing is only a super simple overview. For a more detailed explanation of how Chapter 7 Bankruptcy works go to www.bennettandbennettlaw.com or come in for free 30 minute initial consultation.
Wm. Greg Bennett, Esq. is an attorney with over 20 years experience in private business and commercial real estate transactions and litigation. Mr. Bennett is a partner in the law firm of Bennett & Bennett, APC with his wife, Kelly Bennett, who practices family law, is a professional mediator and Mayor of Murrieta. Mr. Bennett is also a partner in Mediation Law Group, Inc. an alternative dispute resolution provider specializing in civil litigation and divorce mediation. Mr. Bennett can be reached by calling (951) 719-3456 or emailing him at gregbennett@bennettandbennettlaw.com“>gregbennett@bennettandbennettlaw.com.