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Is It a Good Idea to File Chapter 7?


The knee-jerk answer to this question is “no.” Most people believe a real-life Chapter 7 is similar to a Monopoly bankruptcy. Bankrupt players in this board game lose all their money, all their assets, and are permanently expelled from the game. Chapter 7’s nickname, the liquidation bankruptcy, supports this idea. Real life is completely unlike Monopoly in many ways, including the impact of Chapter 7 bankruptcy.

Yes, the trustee (person who manages a bankruptcy for a judge) liquidates all nonexempt assets to satisfy the debtor’s unpaid obligations. However, as outlined below, most people don’t have nonexempt assets. Furthermore, instead of making financial problems worse, bankruptcy’s Automatic Stay makes them better. An Irvine bankruptcy lawyer helps debtors maximize the advantages of Chapter 7 and make the most out of their fresh starts.

Qualifying for Chapter 7

Whether or not it’s a good idea, debtors must qualify for Chapter 7 before they can consider filing it. The basic qualifications are written and unwritten.

Most people know about the means test, which is the primary written qualification. Congress added this requirement in 2005, under the misguided belief that many people charged luxury vacations on their credit cards and then filed Chapter 7 to avoid paying the bills.

Instead, situations beyond the debtor’s control, mostly high medical bills, prompt most bankruptcy filings, but that’s the subject of another blog.

As of November 1, 2023, under the means test, an Orange County family of five that pays mortgage or rent must earn less than $3,419 per month to qualify for Chapter 7.

These pacts basically make certain debts, such as the aforementioned medical bills, immune from discharge. Trustees ask questions about the debtor’s financial situation if they sign too many of these pacts. An Irvine bankruptcy lawyer can give you more information.

Asset Protection

A Monopoly bankruptcy puts your plastic hotels and houses at risk. A real-life bankruptcy protects core assets, such as:

  • Home equity;
  • Motor vehicle;
  • Government benefits;
  • Retirement account; and
  • Personal property.

An Irvine bankruptcy lawyer uses obscure loopholes, like the best interests of creditors rule, to extend these exemptions.

Assume Sam owns a small, nonexempt boat. The boat needs so much fix-up work to sell at an auction that creditors would go in the hole if they paid all these expenses, plus auction fees and other expenses.

Debt Discharge

Chapter 7 discharges most credit cards, medical bills, payday loans, and other unsecured debts. The average credit card interest rate is so high that minimum payments don’t make a dent in the UPB (unpaid principal balance). Getting off this treadmill could save your family hundreds of dollars a month.

Some unsecured debts, mostly student loans and back taxes, are priority unsecured debts that are only dischargeable in certain situations. However, the Automatic Stay still protects Chapter 7 debtors from wage garnishment and other adverse actions while the case is pending. This pause gives a lawyer a chance to renegotiate the debt and obtain more favorable repayment terms.

Work With a Tenacious Lawyer

Regardless of your financial problems, there’s usually a way out. For a free consultation with an experienced bankruptcy lawyer in Irvine, contact The Law Office of Charles A. May.


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