Chapter 7 bankruptcy is known as the “complete” or “liquidation” bankruptcy. It does not mean that you will lose all your property. In most cases, you can keep your home, cars and even a business through this process while eliminating other debts.  Read more about debt reduction and the particulars related to bankruptcy.

Chapter 7 Bankruptcy Example 1:

Mr. and Mrs. Smith own a home, lives in the suburbs, drives a Honda Odyssey minivan and a Toyota Avalon sedan. Let’s talk about the home first. The home is worth about $500,000, but there is both a first and second mortgage. The first mortgage is about $450,000 and the second mortgage (a line of credit taken out to do some home improvements before Mr. Smith lost his job) is about $50,000. As long as the Smiths continue to make mortgage payments on both the first and second mortgages, they will not lose their home. In California, even if Mr. and Mrs. Smith had some equity in the home (equity is the difference between the market value and loan amount), they are protected up to $100,000. More about homestead exemptions later.

What about the cars ? Same thing. You look at the value of the car (Kelley Blue Book) and figure out what its worth and subtract the loan amount. That again is the equity and the law protects a couple thousand of that. If you didn’t have a home with some equity to protect, you could protect more of other things. For instance, if the Honda Odyssey was paid off and was worth $10,000, that would be protected.

So the Smiths used $50,000 to do some remodeling, but that was because she wanted to start a home-based business. The construction ran over-budget (like they always do), and they had to have the built in wall unit for the home office. They used some of their credit cards. The online business needed more capital than they thought and she used more credit cards. Then, Mr. Smith lost his job (although he is now working as a consultant). Fortunately, Mrs. Smith kept her job and they are barely able to get by but the credit card bills keep mounting. Now the creditors are calling her and harassing her at work (more about Creditor Harassment later).

The Smiths can file bankruptcy, keep their home and cars, even keep their online business (assuming it is now up and running and generating a little income) and wipe out their credit card debts.

Misconceptions about Chapter 7 Bankruptcy

So, why do people have this aversion to filing bankruptcy. It still carries some stigmas, but more than that there are some real misconceptions out there.

Misconception #1: Bankruptcy laws changed in October 2005 and is no longer available.

Truth #1: Absolutely bogus. Bankruptcy law is still available (but the laws did change, but you can let your bankruptcy lawyer worry about that).

Misconception #2: Bankruptcy laws changed and I would still have to pay all my credit cards back even if I filed.

Truth #2: Again, absolutely not. But let me explain. There are exceptions to every rule and this one is no different. If you used your credit cards for non-necessities within the last 90 days before filing, you are presumed to have had no intent to pay your creditors back and you will probably have to pay back the amounts you used during that period. So why not wait 3 months and then file ?

Misconception #3: I will never be able to recover from bankruptcy and never be able to get credit again.

Truth #3: No way. While the fact that you filed bankruptcy remains on your credit report for up to 10 years, your FICO score will gradually build up to almost pre-bankruptcy levels. If you keep a home (like the Smiths did) and make payments on a mortgage, some clients report a good FICO score in about a year. When you gradually use credit cards after filing bankruptcy and pay them on time, you will build up your credit in about 2 years. Notice I mentioned that when you use credit cards and not if you use credit cards. Clients report that credit card companies are sending them offers to sign up for credit cards right after getting their discharge. There are companies out there (plenty of them) that want you to get their credit cards. Why ? Because you can’t file another Chapter 7 for another 8 years. You have to pay them back.

So does that clear up some misconceptions for you about Chapter 7 bankruptcy?

If you have more questions about Chapter 7 bankruptcy in Los Angeles and wish to speak with bankruptcy attorneys Los Angeles.