There are two types of bankruptcy, and it is managed at the federal level, so the principles of it are the same everywhere except California.
In chapter 7 bankruptcy, the process called liquidation is followed, here you sell your assets to a trustee who in turn sells them to settle your debt. Most of your debts can be settled here except, some like student loans, alimony, etc. most dischargeable debts are emitted but first you have to pass the means test. There are 2 ways to take the test,
Form 122A-1: Chapter 7 Statement of Your Current Monthly Income: You need to file your marital and filing status documents along with your monthly payments to the median in your state depending on your household size. When you calculate your yearly pay, if it is lower than the median specific to your state, you are allowed to file for bankruptcy under Chapter 7.
Form 122A-2: Chapter 7 Means Test Calculation: Here your income and expenses are calculated to determine your total disposable income. If you exceed the state median, you need to fill out the form which helps determine how much amount you will need to pay to clear your debts. However, if the amount is higher than the state median, you may not qualify for bankruptcy, unless you qualify under exceptions. Presumption of abuse is a term used when your income is much higher than the state median
Before filing for bankruptcy you need to-
- Go for counseling on bankruptcy
- File a bankruptcy court petition
- Discuss your situation with your creditors.
Chapter 7 bankruptcy is for anyone who has little or no disposable income or for those with large debts that will require half your annual income to pay off. Here the process can be completed within 6 months or less. An experienced attorney will also look for other factors and guide you.
Advantages of filing for chapter 7-
- A fresh start
- Protection against collection actions
- You keep all your assets except inheritance
- No minimum debts required
- It is over in 3-6 months
However, there are disadvantages to filing in California because of losing non-exempt property. To keep assets like a car or home, either opt-out of Chapter 7 or sign a reaffirmation agreement. You must then continue paying these debts, and any back payments owed.
Under chapter 13, it proposes a 3-5 year plan of repayment of debts. To be allowed to file under this you must have a regular income. Here also you will have to take the means test, however, if you have not passed for chapter 7 test, you will still be eligible for chapter 13. It is recommended to those who are sure that they will be able to pay their debts in 5 years or less.
The process requires extra qualifying tests. These incorporate the best interest of creditors test, which ensures that the creditors will get as much as they would in chapter 7. The best efforts test shows all your projected discretionary income is paid towards the arrangement. When you file, you should begin making installments within 30 days, and keep repeating.
A Chapter 13 plan enables you to:
- Keep all assets
- Reduce some debts
- Avoid collection efforts
- avoid foreclosure
- 3-5 years are given to pay.
- Prioritizing creditors
There are disadvantages such as it stays on your credit record for a long time.