When you’re drowning in debt, Chapter 7 bankruptcy can offer a path to relief. For many Californians, this legal process provides a fresh start by wiping out most unsecured debts like credit card balances and medical bills. But while it sounds simple, the process comes with rules, requirements, and consequences you need to understand before taking the first step.
Who Qualifies for Chapter 7 Bankruptcy
Not everyone can file for Chapter 7. You’ll need to meet income and asset tests designed to reserve this option for those who truly can’t repay their debts.
The most important eligibility hurdle is the means test, which compares your income to the median income in California for a household of your size. If your income falls below the median, you qualify automatically.
If it’s above the median, you’ll need to complete a more detailed review of your income and expenses to determine whether you have enough disposable income to repay some of your debt. If your leftover monthly income is too high, you may be steered toward Chapter 13 instead, which involves a repayment plan.
You can’t file for Chapter 7 if you’ve received a Chapter 7 discharge in the last eight years. A prior Chapter 13 discharge may also affect your eligibility if it occurred within the last six years.
You’ll also need to complete a credit counseling course from an approved agency within 180 days before filing. And if the court determines that you’re abusing the system or failing to disclose required information, your case can be dismissed.
California’s Bankruptcy Exemptions
Many people are surprised to learn that filing Chapter 7 doesn’t mean giving up everything you own. California law allows you to keep certain assets through bankruptcy exemptions—but you must choose between two sets of exemptions.
California is unique in that it offers two different exemption systems known as System 1 (704 exemptions) and System 2 (703 exemptions). You must pick one or the other when you file; you can’t mix and match.
- System 1 (704): This system is often better for homeowners with substantial home equity. It includes a homestead exemption that protects a significant portion of your home’s value—anywhere from $300,000 to $722,000 depending on the county and property location.
- System 2 (703): This system tends to favor those without significant home equity. It includes a wildcard exemption that can be used to protect any property, such as a car, cash, or bank account balances.
Common Exemptions Include:
- Equity in your primary residence
- Personal property like clothes, furniture, and appliances
- Retirement accounts and pensions
- A modest vehicle
- Tools of the trade
- Public benefits like Social Security and unemployment
Choosing the right exemption system can dramatically impact what you keep and what’s at risk. Working with a bankruptcy attorney can help you make the best decision based on your unique financial situation.
Filing Process
Once you’ve determined that you’re eligible and understand what property is protected, the Chapter 7 filing process begins. While each case has its own nuances, most follow a predictable series of steps.
Step 1: File the Petition
- Your case starts when you file a petition with the U.S. Bankruptcy Court for your district in California. This includes detailed paperwork about your debts, income, assets, expenses, and recent financial transactions.
As soon as you file, something called the automatic stay goes into effect. This legal shield stops most creditors from collecting, garnishing wages, or suing you while the case is pending.
Step 2: Appointment of the Trustee
- A court-appointed trustee is assigned to your case. This person’s job is to review your filings, identify any nonexempt assets, and determine whether those assets can be sold to pay creditors. In most cases, people don’t have non-exempt property and their cases are considered “no asset.”
Step 3: 341 Meeting (Meeting of Creditors)
- About a month after filing, you’ll attend a short hearing called a 341 meeting. You’ll be asked a few questions under oath by the trustee. Creditors can attend but rarely do. As long as your paperwork is accurate and complete, this step is usually quick and uneventful.
Step 4: Trustee Review and Asset Liquidation (If Applicable)
- If you have nonexempt assets, the trustee may arrange to sell them and distribute the proceeds to creditors. If you don’t, the trustee will simply report that no assets are available for liquidation.
Step 5: Debt Discharge
- If everything goes smoothly, you’ll receive a discharge order about 3–4 months after filing. This permanently eliminates your personal liability for most types of unsecured debt, including:
- Credit cards
- Medical bills
- Personal loans
- Utility balances
- Some old tax debts
- However, some debts cannot be wiped out through Chapter 7. These include:
- Student loans (with limited exceptions)
- Most recent tax debts
- Child support and alimony
- Court fines and restitution
Once the discharge is granted, your case is closed. You’re no longer responsible for the eligible debts, and creditors can’t try to collect them in the future.
Get the Guidance You Need Before Filing
Filing for Chapter 7 bankruptcy is a major decision. While it can provide meaningful relief, it also affects your credit and financial future. If you’re considering this route, having someone who understands California’s unique bankruptcy rules by your side can make a big difference.
At Janus Law, we help individuals throughout California take control of their debt and move forward with confidence. Reach out right now to schedule a consultation and learn whether Chapter 7 is the right step for you.
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