Chapter 7 Bankruptcy FAQ

Chapter 7 bankruptcy, commonly known as "liquidation bankruptcy," is a federal legal process that allows individuals and businesses to discharge most unsecured debts by liquidating non-exempt assets. Under 11 U.S.C. § 727, eligible debtors can receive a discharge of qualifying debts, typically within 3-6 months of filing. In California, Chapter 7 operates under federal bankruptcy law administered through the U.S. Bankruptcy Court, with proceedings governed by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure.

The process begins when you file a petition with the bankruptcy court, along with detailed schedules listing your assets, liabilities, income, and expenses. Upon filing, an automatic stay immediately halts most collection activities under 11 U.S.C. § 362. A court-appointed trustee reviews your case, conducts a meeting of creditors, and determines if you have non-exempt assets that can be sold to pay creditors. California debtors can choose between two exemption systems: the California Code of Civil Procedure § 704 series (System 1) or § 703.140 series (System 2), which protect certain assets from liquidation.

Most Chapter 7 cases are "no-asset" cases where all property is exempt, meaning the debtor keeps everything and receives a discharge without any asset liquidation. The discharge eliminates personal liability for most unsecured debts, providing a fresh financial start.

To qualify for Chapter 7 bankruptcy in California, you must pass the means test established by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, codified at 11 U.S.C. § 707(b). This test compares your current monthly income to California's median income for your household size. If your income is below the state median, you automatically qualify. If above, you must complete a detailed calculation of allowable expenses under 11 U.S.C. § 707(b)(2) to determine whether you have sufficient disposable income to repay creditors through a Chapter 13 plan instead.

Additionally, you must receive credit counseling from an approved agency within 180 days before filing (11 U.S.C. § 109(h)). The counseling must include budget analysis and discussion of alternatives to bankruptcy. You cannot have had a Chapter 7 discharge within the past 8 years (11 U.S.C. § 727(a)(8)) or a Chapter 13 discharge within 6 years, with certain exceptions for cases where creditors received substantial payment.

California residency affects which exemptions you can claim. To use California exemptions, you must have been domiciled in California for the 730 days (2 years) immediately preceding your bankruptcy filing under 11 U.S.C. § 522(b)(3)(A). If you haven't lived in California for that period, you use the exemptions from the state where you lived for the 180-day period before the 2-year period. Previous bankruptcy filings may also affect eligibility, and the court can dismiss your case for abuse under 11 U.S.C. § 707(b) if it determines you have sufficient income to repay creditors.

Chapter 7 bankruptcy can discharge most unsecured debts including credit card balances, medical bills, personal loans, utility bills, payday loans, collection accounts, deficiency balances after repossession or foreclosure, and certain civil judgments. Under 11 U.S.C. § 727(b), the discharge releases the debtor from personal liability for these debts, and creditors are permanently prohibited from attempting to collect them under 11 U.S.C. § 524(a)(2).

However, certain obligations are non-dischargeable under 11 U.S.C. § 523. These include most student loans (unless you prove undue hardship in an adversary proceeding under § 523(a)(8)), recent tax debts (generally income taxes less than 3 years old, with the return due date within 3 years of filing), child support and alimony obligations, debts arising from fraud, embezzlement, or willful and malicious injury, criminal fines and restitution, debts from death or personal injury caused by DUI, HOA fees that accrue after filing, and debts not listed in your bankruptcy schedules if the creditor didn't receive notice.

For taxes, specific rules apply under § 523(a)(1): income tax debts may be dischargeable if the return was due at least 3 years before filing, was filed at least 2 years before filing, and the tax was assessed at least 240 days before filing. California law does not create additional categories of non-dischargeable debt beyond federal bankruptcy law, though California courts interpret and apply the federal exceptions.

The means test, mandated by 11 U.S.C. § 707(b)(2), determines Chapter 7 eligibility by analyzing your income and expenses. First, calculate your "current monthly income" (CMI) by averaging your gross income from all sources for the six calendar months before filing, then annualizing it (multiplying by 12). Compare this to California's median income for your household size, which is published by the U.S. Trustee Program and updated periodically. If your annualized income is below the median, you pass the means test automatically and qualify for Chapter 7.

If your income exceeds California's median, you must complete the second part of the means test using Official Form 122A-2. This form calculates your monthly disposable income by subtracting allowable expenses from your CMI. Allowable expenses include IRS National Standards for food, clothing, and personal care; IRS Local Standards for housing, utilities, and transportation; actual mortgage or rent payments; car loan or lease payments; mandatory payroll deductions like taxes and Social Security; term life insurance premiums; court-ordered payments; childcare costs; health insurance and medical expenses; and certain secured debt payments.

Your monthly disposable income is then multiplied by 60 months to determine your potential repayment ability. If this amount is less than $8,175 (as of 2024, adjusted periodically for inflation under § 104), you pass the means test. If between $8,175 and $13,650, you pass if it's less than 25% of your unsecured, non-priority debt. Above $13,650 creates a presumption of abuse under 11 U.S.C. § 707(b)(2)(A)(i), though you can rebut this with special circumstances showing decreased income or increased expenses.

California offers two mutually exclusive exemption systems, and you must choose one when filing—you cannot mix and match. System 1 (CCP § 704.010 et seq.) includes a homestead exemption ranging from $300,000 to $600,000 depending on factors like age (55+), disability, and annual gross income below $35,950 (adjusted for inflation). Other System 1 exemptions include motor vehicle equity ($3,325), jewelry ($8,725), bank deposits ($1,788), burial plots, tools of the trade ($8,725 for non-commercial, $18,450 for commercial), health aids, prosthetics, and prescribed items without limit, and household furnishings and personal effects.

System 2 (CCP § 703.140(b)) mirrors the federal exemptions in 11 U.S.C. § 522(d) and includes a smaller homestead ($29,275), but offers a valuable wildcard exemption ($1,700 base plus up to $17,075 of unused homestead, totaling up to $18,775) that can protect any property. System 2 also includes motor vehicle equity ($6,375), household goods and furnishings ($15,575 total, $775 per item), jewelry ($1,700), tools of the trade ($8,725), and personal injury awards ($29,275, except punitive damage awards).

Retirement accounts receive special protection under 11 U.S.C. § 522(b)(3)(C), including unlimited exemption for qualified ERISA plans like 401(k)s, 403(b)s, and pensions, and up to $1,512,350 (adjusted for inflation) for traditional and Roth IRAs. The bankruptcy trustee liquidates any non-exempt assets to distribute proceeds to creditors. Choosing the right exemption system requires careful analysis of your specific assets—System 1 benefits homeowners with equity, while System 2 with its wildcard often better protects renters with personal property, cash, or non-retirement investments.

The automatic stay, established by 11 U.S.C. § 362(a), is one of bankruptcy's most powerful protections. It takes effect immediately upon filing your Chapter 7 petition and acts as a federal injunction prohibiting virtually all collection activities against you, your property, or property of the bankruptcy estate. This includes stopping lawsuits and legal proceedings, wage garnishments, bank account levies, foreclosure proceedings, repossessions, utility disconnections for at least 20 days, creditor phone calls and letters, collection agency activity, and post-petition interest accrual on most debts.

The stay protects you while the bankruptcy case proceeds, typically lasting until your discharge is entered or the case is dismissed. However, certain actions are exempt from the stay under § 362(b), including criminal proceedings, collection of domestic support obligations (child support and alimony), certain tax court proceedings, evictions if the landlord obtained a judgment for possession before you filed (though California law provides limited time to cure under certain circumstances), and actions by governmental units to enforce police or regulatory powers.

Creditors can request relief from the stay by filing a motion under § 362(d), which courts may grant for "cause" (such as lack of adequate protection for secured creditors) or if the debtor has no equity in the property and it's not necessary for reorganization. This commonly applies to mortgage lenders seeking to foreclose. The stay may also terminate automatically for repeat filers who had cases dismissed within the prior year under § 362(c)(3)-(4). Willful violations of the automatic stay can result in sanctions against creditors under § 362(k), including actual damages, costs, attorney fees, and potentially punitive damages.

The typical Chapter 7 bankruptcy in California takes approximately 4-6 months from filing to discharge. The timeline follows a structured process governed by the Federal Rules of Bankruptcy Procedure. Immediately upon filing, the automatic stay takes effect under 11 U.S.C. § 362, you receive a case number, and the court assigns a trustee to your case. Within 14 days of filing, you must provide the trustee with tax returns for the most recent year and pay stubs from the 60 days before filing under 11 U.S.C. § 521(a)(1).

Within 20-40 days after filing, the trustee schedules the 341 meeting of creditors required by 11 U.S.C. § 341(a), where you answer questions under oath about your financial affairs and bankruptcy petition. You must complete a financial management course from an approved provider before discharge under 11 U.S.C. § 727(a)(11). Creditors have 60 days from the first scheduled 341 meeting date to object to your discharge or the dischargeability of specific debts by filing adversary proceedings under Federal Rule of Bankruptcy Procedure 4004 and 4007.

If no objections are filed and the trustee determines there are no non-exempt assets to liquidate (a "no-asset" case), the court issues a discharge order approximately 60-90 days after the 341 meeting. The discharge is entered under 11 U.S.C. § 727, eliminating your personal liability for discharged debts. The case is then closed. Cases involving significant assets requiring liquidation, litigation over exemptions, objections to discharge, or adversary proceedings may take 12-18 months or longer. Complex business bankruptcies or cases with fraud allegations can extend beyond 2 years.

The 341 meeting of creditors, named after 11 U.S.C. § 341, is a mandatory hearing where the bankruptcy trustee and any attending creditors can question you under oath about your financial affairs, assets, and bankruptcy petition. Despite its name, creditors rarely attend consumer bankruptcy meetings—most consist only of the debtor, their attorney if represented, and the trustee. The meeting typically lasts 10-15 minutes for straightforward cases and occurs 20-40 days after filing at the federal bankruptcy court or a designated meeting room.

You must bring photo identification and proof of your Social Security number under Federal Rule of Bankruptcy Procedure 4002(b)(1). The trustee will verify your identity, confirm you read and signed the petition, verify information from your petition and schedules about income, expenses, assets, and liabilities, ask about asset valuation and whether appraisals were obtained, question any unusual transactions or transfers in the years before filing, inquire about potential lawsuits or claims you might have, determine if non-exempt assets exist that could be liquidated, and ask about your current employment and income.

You must answer truthfully under penalty of perjury pursuant to 11 U.S.C. § 521(a)(3). False statements, omissions, or concealment of assets can result in denial of discharge under 11 U.S.C. § 727(a)(4), conversion of the case to Chapter 13, dismissal, or criminal prosecution for bankruptcy fraud under 18 U.S.C. § 152, which carries penalties of up to 5 years imprisonment and $250,000 in fines. The trustee may continue the meeting to a later date if additional information or documentation is needed. After the meeting concludes satisfactorily, the trustee files a report with the court, and the case proceeds toward discharge.

Whether you keep your house and car depends on your equity (current market value minus liens), your chosen exemption system, and whether you're current on secured loan payments. For your home, California's System 1 exemption under CCP § 704.730 protects $300,000 to $600,000 of equity depending on factors like age (55 or older), disability, income below $35,950, and whether the judgment debtor or spouse is 65 or older. System 2 under CCP § 703.140(b)(1) protects only $29,275 of home equity. If your equity exceeds your exemption amount, the trustee may sell the property, pay off the mortgage, give you your exemption amount, and distribute the remainder to creditors.

For vehicles, System 1 exempts $3,325 in equity under CCP § 704.010, while System 2 exempts $6,375 under CCP § 703.140(b)(2). Calculate equity by determining fair market value (often using Kelley Blue Book), subtracting all liens and loans, and comparing the result to your exemption. If equity is within the exemption and you're current on payments, you typically keep the vehicle.

If you have secured loans on your home or car, you must file a Statement of Intention within 30 days of filing under 11 U.S.C. § 521(a)(2), choosing to: (1) reaffirm the debt, agreeing to remain personally liable and continue payments; (2) redeem the property by paying the creditor the current fair market value in a lump sum under 11 U.S.C. § 722 (practical only for vehicles, not homes); or (3) surrender the property to the creditor. Reaffirmation agreements under 11 U.S.C. § 524(c) require court approval if you're not represented by an attorney and make you personally liable for the debt despite the bankruptcy discharge. Many California debtors successfully "ride through"—continue making payments without reaffirming—though creditors can technically repossess for non-reaffirmation even if current.

Filing Chapter 7 bankruptcy has several significant consequences, both immediate and long-term. Your credit report will show the bankruptcy for 10 years from the filing date under the Fair Credit Reporting Act, 15 U.S.C. § 1681c, potentially affecting your ability to obtain credit, favorable interest rates, housing rentals, and sometimes employment. Individual discharged accounts may remain on your report for 7 years. Credit scores typically drop 130-240 points initially, though many filers had already damaged credit from defaults and collection accounts before filing.

You may lose non-exempt assets to the bankruptcy estate under 11 U.S.C. § 541, which the trustee liquidates to pay creditors. However, California and federal law prohibit certain discrimination. Governmental units cannot deny licenses, permits, grants, or employment, or discriminate in any way based solely on bankruptcy under 11 U.S.C. § 525(a). Private employers cannot terminate employment solely for bankruptcy under 11 U.S.C. § 525(b), though they may consider bankruptcy for hiring decisions. California Labor Code § 2936 provides additional employment protections, making it a misdemeanor for employers to discharge employees due to garnishment proceedings or bankruptcy.

You cannot file another Chapter 7 for 8 years from the prior filing date under 11 U.S.C. § 727(a)(8), or Chapter 13 for 4 years. Professional licenses generally cannot be denied solely based on bankruptcy under California Business and Professions Code § 480(c), which prohibits denying licenses for discharged debts or debts subject to discharge. Some specific consequences include potential loss of credit cards (though some creditors allow you to keep cards with zero balances), difficulty obtaining mortgage loans for 2-4 years, higher insurance premiums in some states (not California, where Insurance Code § 1861.03(a) prohibits using credit scores for auto insurance), and public record status (bankruptcy filings are public and searchable through PACER).

Despite credit impacts, many debtors successfully rebuild credit within 2-3 years post-discharge through secured credit cards, credit-builder loans, becoming authorized users, maintaining on-time payments, and responsible financial management. The discharge eliminates debt burdens, stops collection harassment, and provides a genuine fresh start that often outweighs temporary credit consequences for those experiencing genuine financial hardship.