California Bankruptcy: Chapter 7 Basics
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Considering filing for bankruptcy in California? If you are considering Chapter 7, it is important to fully understand the different benefits that you will have available to you. The first is known as the “discharge,” which will ultimately wipe almost all of the debts. The second is the “automatic stay,” which will freeze any foreclosure or any acts to collect while the bankruptcy petition is carried out. Often known as straight bankruptcy or liquidation, Chapter 7 is often the most popular choice; this is namely because after it has been filed, almost all of your personal liability regards debts will be wiped out. Not all of it, but most. Certain debts will not qualify – for example, student loans, alimony and debts related to income taxes.
If you are considering filing for Chapter 7, it is important to know that eligibility is rigid and is based primarily on your last six months of income. The first step to determining whether or not you qualify is comparing your income to the median in your state for a household of your size. If it is below the median, you will almost always qualify; the same goes if your debts mostly are derived from business. Even if they are higher, you may still be eligible to file. This will lead to what is known as the means test. This will use a certain formula that takes into consideration income and expenses to determine “disposable income.” It will ultimately seek to ask whether or not you have the financial ability to pay back your debts over a five year period. If you can, you will not be eligible. If, however, you can’t, you still may be eligible for Chapter 7.
When filing a Chapter 7 bankruptcy petition, a trustee will be asked to serve as a liquidator. As Chapter 7 is known as the liquidation chapter, it is important to understand how this works. Liquidation is essentially selling your goods to satisfy your debts with your creditors. Despite the name, however, Chapter 7 filings rarely occur in any form of liquidation. In fact, in most cases property can be saved. For example, if you have a home that is valued at less than the balance of the loan, there is no purpose in liquidating it. Other properties are simply exempt. This results in what is known as a “no asset” case.
Chapter 7 and Foreclosure Proceedings
In a best case scenario, when filing for Chapter 7, you will receive your discharge before the foreclosure sale ever occurs. This typically occurs within four or five months of having filed for bankruptcy. This will result in you remaining the legal owner of the house – with no personal liability to pay off the mortgage debt or any of the related income taxes. It is your decision as to whether you want to keep the home, sell it or permit it to go to foreclosure auction. Keep in mind that the lender has the right to foreclosure and get paid, but they are barred from taking further action against you and your earnings or assets.
This, however, is not always what occurs. If you have previously filed for bankruptcy and had it dismissed within the last year, the automatic stay which freezes foreclosure proceedings will only last for a mere 30 days. If you have two previous cases dismissed, there will be no automatic stay at all. If your current case is dismissed, the automatic stay will dissolve and will allow the lender to pursue the foreclosure process.
In most cases, lenders will actively attempt to have the automatic stay lifted. They will attempt to do this by contacting a judge and making their case; most often, they will argue that they are not receiving their payments and are therefore not protected. If you agree to make monthly payments during the duration of the bankruptcy, the judge will often keep the automatic stay. There are also defenses that you can make to a motion to lift the automatic stay; for example, you and your attorney could argue that the lender violated the Truth in Lending Act (TILA). You could also use this opportunity to discuss a loan modification.
After filing for Chapter 7, the foreclosure sale will be re-scheduled; typically, it will be a month later. This will continue for as long as the automatic stay is in place. If the month passes, and the automatic stay is still in place, the sale will be re-scheduled a month later and so on and so forth. Eventually, however, the automatic stay will terminate. It is important to know the final scheduled date of the foreclosure sale and to know the special rules that apply to foreclosures that have been postponed. In these cases, there is no further written notice that is required to sell the property being foreclosed upon. Once a new date is set, so long as you are out of bankruptcy, you can have your house sold without being told anything else.
It is also important to keep in mind that just because you have completed a Chapter 7 filing does not mean that your foreclosure process is completed. What Chapter 7 does do is provide you with some breathing room to pursue a loan modification. Should you receive a discharge, this can also be helpful in reducing how much unsecured debt you are buried by and can help improve your footing when negotiating with a second mortgage company. If you have further questions about how Chapter 7 can benefit you, please do not hesitate to contact a California debt relief attorney from our firm today. We hope to hear from you soon.