Chapter 7 Bankruptcy Provides a “Fresh Start”
The underlying theme of a Chapter 7 bankruptcy is to give the debtor a “Fresh Start”. Upon successful completion of a Chapter 7 case, most if not all of an individual’s debts will be discharged and the debtor will no longer personally owe such debts; thus, a fresh start for the debtor. A straight forward Chapter 7 filing usually takes no more than 4 months from the date the case is filed until the debtor receives a discharge of his/her debts and the case is closed.
There are two primary components that must be assessed when determining if an individual qualifies for Chapter 7:
- Will the individual qualify based on income?
- If the debtor qualifies based on income, does the debtor have any assets that will be liquidated?
While there are significantly more factors that must be evaluated by a competent bankruptcy attorney prior to determining if Chapter 7 is beneficial to any particular debtor, the two primary components detailed on this page are a sound starting point in the Chapter 7 analysis.
Since the BAPCPA revisions to the Bankruptcy Code occurred in 2005, there are income limitations placed on Chapter 7 debtors. Below are the Median Household Income (applicable for April 1, 2013 and after) amounts that are used to determine if a person automatically qualifies for Chapter 7 bankruptcy in CA:
- Single, with 0 dependents, $49,185 gross income
- Married or Household of 2, $63,745 gross income
- Household of 3, $67,817 gross income
- Household of 4, $78,150 gross income
- For Household size greater than 4 people, add $8,100 per person
If a debtor’s gross income or gross household income is greater than the applicable numbers above, that debtor may still qualify to file under Chapter 7. However, such debtor is required to complete the Official Bankruptcy Form 22A, aka the “means test”. Click here to learn more about the “means test”
- The “means test” allows reduction of gross income with various IRS National Standard allowances for items such as food, clothing, household supplies, health care, non-mortgage expenses, and transportation. These IRS National Standard allowances are usually not a debtor’s friend as most actual expenses for these items in Southern California will exceed those amounts allowed by the IRS allowances.
- The “means test” also allows reduction of gross income by certain actual expenses. Some of these allowable actual expenses include such as taxes withheld from gross income, mortgage payments, car payments, involuntary deductions from gross income, health care, charitable contributions, and more.
Many people who make more than the Median Household income numbers (detailed above) attempt to work through the means test on their own and complete the test improperly. Don’t make that mistake as it can be misleading and costly!
- Call Spaulding Law Group at (714) 731-7595 and a Bankruptcy Attorney will be able to tell you if you qualify based on income.
Once a debtor qualifies based on income, it is imperative to determine if all the assets owned by the debtor are exempt from liquidation. Because a debtor gets a fresh start and is relieved of personal liability on most, if not all, pre-filing debts within 4 months of filing for Chapter 7; it is logical that the debtor is not allowed to keep a tremendous amount of personal assets.
- In California, the way a debtor’s assets are exempted from liquidation in a Chapter 7 is by and through the California Code of Civil Procedure (CCP). If a debtor has significant equity in a home, we use CCP §704. If a debtor does not have equity in a home, we use CCP §703.
- Under CCP §704, generally a single person can exempt or protect $75,000 of equity in a home, a married couple can protect $100,000, and debtors over 65 or debtors who meet special requirements can protect up to $175,000.
- Under CCP §703, a debtor has what’s commonly referred to as a wildcard or grubstake exemption in the effective amount of $26,925 that can be used to protect anything. This includes cash in a bank account, equity in a car, etc. This amount does not change if a debtor is married, 65, etc. like the homestead exemption does under CCP §704.
- Under either CCP §703 or CCP §704, a debtor also is granted various other exemptions that can be used to protect items such as household goods and furnishings, retirement accounts, equity in a car, jewelry, and various other items.
The asset analysis can be complicated for many debtors. Pre-filing planning is many times a necessary tool employed by a consumer bankruptcy attorney. If done properly, a competent bankruptcy attorney can make sure that all of a debtor’s assets are exempt from liquidation prior to filing the case.
Please don’t attempt to engage in your own pre-filing planning! There are all sorts of mistakes that debtors trying to represent themselves make in this respect. Some of the most common are repaying debts to family or friends prior to filing, giving away property for less than market value, liquidating retirement accounts, and so on.
Contact a knowledgeable bankruptcy attorney at Spaulding Law Group at (714) 731-7595 and we will make sure this does not happen to you.