Chapter 7 Bankruptcy Explained

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In a Chapter 7 bankruptcy you wipe out your debts and get a new start. Chapter 7 bankruptcy is a liquidation.  The trustee collects all of your assets and sells any assets which are not exempt. The trustee sells the assets and pays you, the debtor, any amount exempted. The net proceeds of the liquidation are then distributed to your creditors with a commission taken by the trustee overseeing the distribution.

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Certain debts cannot be discharged in a Chapter 7 bankruptcy, such as alimony, child support, fraudulent debts, certain taxes, student loans, and certain items charged.  In most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills and very few assets. In the vast majority of cases a Chapter 7  bankruptcy is able to completely eliminate all of these debts.

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You may keep certain secured debts such as your car or your furniture or house by reaffirming those debts. To do so, you must sign a voluntary “Reaffirmation Agreement”. If you decide that you want to keep your house or your car or your furniture, and you reaffirm the debt, you cannot bankrupt that debt again for eight years. You will still owe that debt and you must continue to pay it just as you were obligated to continue to pay it before you filed bankruptcy. In order to reaffirm the debt, you must also bring it current. In other words, if you are three or four months behind, then you must pay the back payments which are due in order to reaffirm it. You can selectively reaffirm your debts – you can state that you wish to keep the house and the furniture, but that you want the car and the jewelry to go back to the respective Creditors.

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Reaffirmation agreements can be set aside during the earlier of 60 days after the agreement is filed with the Court, or upon the Court’s issuance of an Order of Discharge.

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Exempt Assets

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In California, you may exempt any property that falls into one of the exemptions categories below, up to the dollar amount listed. You will be able to kept this exempted property after you file bankruptcy.

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Homestead

 

The homestead exemption protects a certain amount of equity in your principal residence.

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Motor Vehicle

 

The motor vehicle exemption is designed to protect a certain amount of equity in your car, truck, motorcycle, or another vehicle.

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Personal Property 

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• Household items and personal effects

• Residential building materials to repair or improve home

• Jewelry, heirlooms and works of art

• Health aids

• Bank deposits arising out of Social Security payments and other public benefits

• Personal injury and wrongful death causes of action and recoveries that are necessary for support

• Cemetery and burial plot 

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Wages

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• 75% of wages paid within 30 days prior to filing bankruptcy

• Public employee vacation credits 

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Retirement & Pensions

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• Tax exempt retirement accounts (including 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined benefit plans)

• IRAS and Roth IRAs (limits apply) 

• Public retirement benefits

• Private retirement plans and benefits, including IRA and Keogh 

• Public employees pensions

• County employees pensions

• County peace officers pensions

• County fire fighters pensions

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Public Benefits

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• Unemployment and disability benefits, and union benefits due to labor disputes

• Workers' compensation benefits

• Public assistance benefits

• Relocation benefits

• Student financial aid
   

Tools of Trade - Tools, implements, materials, books, uniforms, instruments, one commercial vehicle, equipment, and furnishings

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Insurance

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• Matured life insurance benefits needed for support of unlimited value, or unmatured life insurance policy

• Disability or health insurance benefits 

• Homeowners' insurance proceeds for six months after received, up the to amount of homestead exemption

• Fidelity bonds

• Life insurance proceeds if policy prohibits use to pay creditors 

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Miscellaneous

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• Business or professional licenses 

• Trust funds of inmates 

• Property of business partnership 

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