What is Chapter 7?

Do You Know What Chapter 7 Bankruptcy Is?

This is a question that many people ask when they come to see me about filing bankruptcy in California. In a nutshell, Chapter 7 Bankruptcy is a (1) Federal Law that (2) provides debtors a legal process (3) by which certain types of debts are eliminated (4) without the debtors having to pay back any portion of those debts that are eliminated.

Wow, that is a mouthful, isn't it? What does all of that mean? Well, let's take it a little at a time. The numbers in the paragraph above show how the statement is broken down for you below.

1. Bankruptcy is a Federal Law

This means that all court activities take place in a Federal Court, not a state court. Also, this means that Federal Law dominates the entire process. It dominates, but it is not the sole source of law for bankruptcy in every state because the States have the right to draft laws that provide additional rights for debtors in bankruptcy. For example, California provides 2 sets of exemptions that are not available in the Federal laws. An exemption is a way to protect an asset from being taken by the trustee and sold.

2. Bankruptcy Law Establishes the Specific Process That Must be Followed in Every Chapter 7

This includes how a bankruptcy case is handled, to how debts are eliminated. The legal process of Chapter 7 is discussed in more detail here.

3. Which Debts Can and Can't be Eliminated in Chapter 7?

Well, it is easier to list the debts that can't be eliminated because the list of debts that can be eliminated is quite long. The debts that can never be eliminated in Chapter 7 are: trust fund taxes, debts obtained through fraud, debts for injury due to willful and malicious injury, debts due to injury in auto accidents where debtor was intoxicated, court-ordered spousal and child support payments owing, fines or penalty payable to a government unit, restitution ordered by a court, debts resulting from loans to pay non-dischargeable taxes. You will probably notice that I did not list student loans and other taxes on the list. The reason is that these debts might be eliminated in Chapter 7 Bankruptcy if the rules are met. If you are looking to eliminate your student loans, don't get your hopes up. The most difficult debt to eliminate is a student loan. You will have to prove to the court that you are unable to work or earn enough to pay off the loan. This is a very high burden of proof and is rarely met. Taxes are another debt that was not listed above. This is because some taxes can be eliminated in Chapter 7 Bankruptcy. For a more detailed discussion of taxes, click here.

4. Debtors Don't Have to Pay Anything Toward Those Debts That are Eliminated in Bankruptcy Once the Bankruptcy Case is Filed

So, once you file Chapter 7, you can stop paying all of those debts that will be eliminated. However, you may want to keep paying some of those debts, especially a car payment on a car that you want to keep. Well, you can keep the car as long as you keep the payments current and sign a reaffirmation agreement with the lender. Your attorney will explain what this is.

If You Have More Questions

Please contact us if you have more questions or are ready to move forward and start the process of becoming debt-free. Remember, we are here to help you resolve your debt problems, so call us now!

(949) 954-7568