California Bankruptcy Law Firm
Chapter 7
Our bankruptcy practice focuses on Chapter 7 and Chapter 13 bankruptcies. We represent both individuals and small businesses in Chapter 7. Chapter 7 is known as the liquidation chapter because individual debtors receive a discharge and their debts are then extinguished. The goal of a Chapter 7 bankruptcy where the debtor is a business is not to receive a discharge. Instead the business is liquidated and ceases to exist.
Chapter 13
Under Chapter 13, debtors pay back a portion or all of their debts through a repayment plan filed with the court. This repayment plan lasts between 3 and 5 years.
Lien Strip
Pursuant to recent case law if the value of your home is below the amount owed on your senior lien(s) you may qualify to remove all junior liens against your property. This process of removing a junior lien is called a "lien strip". (i.e. - If your home value is $400,000, your first trust deed is $450,000, and your second trust deed is $200,000, a lien strip would remove the entire $200,000 second trust deed) This option is only available under a Chapter 13 bankruptcy and the security interest will only be discharged if the Chapter 13 plan is complete. Therefore, debtors must be able to complete a 3 to 5 year repayment plan in order to reap the benefits of a lien strip. This powerful legal tool can save debtors tens of thousands of dollars but it is important to talk to a legal professional to see if it is right for you.
Which Chapter Is Appropriate For You
The chief inquiry to determine which chapter debtors should file under for a personal bankruptcy is whether their average gross monthly income during the six months before filing bankruptcy was less than, equal to, or above the median income of their demographic.
The demographic is determined by family size and the state in which the debtor is filing. For instance, the median income for a single person in California is $47,363. The median income for a family of two people is $62,690. For a family of three, the median income is $68,070, and it is $77,014 for a family of four. The median income figures are based on the Census Bureau's most recent statistics.
If the debtor's average gross monthly income during the six months prior to filing bankruptcy was equal to or below the median income, then the debtor most likely qualifies for a Chapter 7. If the debtor falls above the median income mark, then a comparison must be made between the debtor's net monthly income and net monthly expenses. The amount of money left over at the end of the month after paying monthly expenses, not including credit card debt, will determine the appropriate chapter for the debtor to file. The median income test is a key component of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
The value of a debtor's non-exempt property can also determine the appropriate chapter for a debtor. However, this is usually only an issue for real property owners with a large amount of equity in their homes.
If the debtor's property value is below the value of the senior lien(s) the debtor may choose to do a chapter 13, even if the debtor qualifies for a chapter 7, in order to remove junior lien(s) from the property. As stated above this, this will require the debtor to complete a 3 to 5 year repayment plan in order to remove the security interest.
We can often ascertain which chapter our clients qualify for after a free telephone consultation.
