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Which chapter is right for you?

Chapter 7 – Liquidation of Debts

A primary purpose of bankruptcy is to discharge debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. Under Chapter 7, discharge is only available to individual debtors, not to partnerships or corporations. The right to a discharge is not absolute.  Some types of debts are not discharged, and liens against property are not removed.

There are multiple types of debts that generally cannot be discharged in a Chapter 7 bankruptcy:

  • Student loans
  • Most types of taxes
  • Child support or alimony
  • Criminal restitution and other court fines or penalties
  • Debts left off the bankruptcy petition unless the creditor actually knew of the filing
  • Debts owed to a child or ex-spouse arising from divorce or separation
  • Fines or penalties owed to government agencies
  • Personal injury debts arising out of a drunk driving accident
  • Debts arising out of tax-advantaged retirement plans
  • Condo or cooperative housing fee debts
  • Attorneys’ fees for child custody or support

A Chapter 7 case begins with the debtor filing a petition and supporting documents with the bankruptcy court serving the area where the person lives or where the business is organized or has its principal place of business.  Filing a petition under Chapter 7 automatically stops most collection actions against the debtor or the debtor’s property, including an eviction.   However, filing a petition does not stay actions to establish paternity, actions for domestic support obligations (child support and alimony), or most other family law cases,  Further, the stay may only be in place for a short time in some situations. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 13 – Reorganization of Debts

A Chapter 13 bankruptcy helps individuals with regular income develop a plan to repay all or part of their debts. Under this chapter, a debtor proposes a repayment plan to make installment payments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period.  If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. No plan is longer than five years, but this does not necessarily mean that all debts must be paid within five years.  With an approved plan, debts remaining after five years are discharged.  During the time a plan is pending, creditors cannot start or continue collection efforts.

Chapter 13 has several advantages over a Chapter 7 bankruptcy.  Most significantly, Chapter 13 can be used to save a home from foreclosure by curing delinquent mortgage payments over time.  However, all current mortgage payments must be paid when due during the Chapter 13 plan   Chapter 13 also allows other secured debts to be paid over time, which usually results in lower payments.  Chapter 13 also has protection for co-signers, and Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.