The bankruptcy code provides two debt relief options to California residents who are struggling to cope with unmanageable financial situations. Chapter 7 bankruptcies are often referred to as liquidation bankruptcies while Chapter 13 petitions are commonly called reorganization plans, and debtors choose between these options based on the amount of money they earn and the kind of assets they hold.
Individuals hoping to file a Chapter 7 personal bankruptcy must first pass a means test. Those who earn less than the median income in their state for a household of the same size pass the test automatically. Those who earn more but cannot cover at least a portion of their unsecured debts after paying allowed monthly expenses may also be able to file a Chapter 7 petition. A Chapter 7 bankruptcy wipes out unsecured debts and the process generally takes between three and six months, and the exemptions in place allow Chapter 7 filers to keep certain assets such as their automobiles and tools they use to earn a living.
Individuals who file a Chapter 13 bankruptcy pay at least part of their debts back over a period of three to five years. Chapter 13 payment plans must be submitted to and confirmed by a bankruptcy court. During the confirmation hearing, judges review payment plans to ensure that they are feasible, have been submitted in good faith and comply with the law. Once all of the payments have been made, any remaining dischargeable debt is wiped out.
Many consumers decide to file Chapter 7 or Chapter 13 petitions after falling behind on their bills and being subjected to almost daily harassment from debt collectors. Attorneys with debt relief experience might explain that filing a personal bankruptcy will result in an automatic stay being issued. This is a legal order that requires creditors to cease all debt collection efforts. The automatic stay also puts a halt to debt collection lawsuits and prevents paycheck garnishments.