Wipe Out Debt and Start Fresh with Chapter 7

Reasons for filing under Chapter 7

Chapter 7 bankruptcy can provide you with a fresh start by eliminating (discharging) most unsecured debts including credit cards and medical bills. Filing for Chapter 7 can be a better option than debt consolidation, especially when facing 2 to 5 years of payments on a consolidated balance. Chapter 7 offers several immediate and long-term advantages for those facing overwhelming debt:

• Permanent Debt Elimination: The primary benefit is the legal elimination (discharge) of most unsecured debts, including credit card balances, medical bills, personal loans, certain civil judgments, and even payday loan balances that are over 2-3 months old.
• Immediate Relief: Immediately upon filing, an “automatic stay” goes into effect. This legally stops all wage garnishments, lawsuits, repossessions, and levies. It also prohibits creditors from continuing collection activities, including phone calls.
• Fast Process: Chapter 7 is a relatively fast process. Most cases are completed in four to six months after filing, at which time a discharge order replaces the automatic stay to permanently eliminate your personal liability for the debts.
• Keep Your Property: California has generous exemptions that allow most people to keep their home, car, and personal property such as the money in your bank account as well as retirement savings.
• Keep More of Your Paycheck: Chapter 7 does not place any claim on your future earnings, unlike debt relief programs that make you pay for 3 to 5 years. Any income you earn after filing belongs entirely to you.
• Quickly Rebuild Your Credit Score: Many people have a credit score lower than 625 when they decide to take advantage of the actual relief provided by bankruptcy. While it is common for your credit score to decrease further for 5 to 7 months after filing, most people see a large improvement in their scores after only 12 to 18 months after filing. Do you want a 650 to 700 credit score 1½ to 2 years from now? Would you like to qualify for a mortgage 2 to 2½ years from now? Both are possible after filing Chapter 7.

Frequently asked questions

Do I make too much money to file for Chapter 7?

To qualify for Chapter 7, a debtor must pass the “Means Test,” which compares their household income to the California median. If your income exceeds these limits, you might still qualify through “Part 2” of the Means Test, which deducts allowable expenses (like housing and transportation) to determine if there is enough disposable income to pay back creditors in a Chapter 13 plan. In many cases, you can make more than $10,000 above median income and still qualify using the second step of the Means Test.

The figures below are the updated median income limits for cases filed in California on or after April 1, 2026:

Note: Add approximately $9,900 for each additional member of your household if you have more than 4 people.

Will I have to sell my assets or property in bankruptcy?

Exemptions allow you to keep your property and assets. Exemptions are good. California’s exemptions are great (better than most other states). California provides TWO different sets of exemptions. You can choose the set that is best for you, but you can’t “mix and match” between the two sets.

1st Set of Exemptions (§ 704), Best for Homeowners. This system is generally preferred by individuals with significant equity in their primary residence.

• Homestead Exemption: Protects a substantial amount of equity in your home. In San Diego County, the Homestead Exemption is based on your zip code and its limit ranges from a minimum of approximately $361,121 in equity to a maximum of approximately $722,242 in equity. It is adjusted annually for inflation.
• Motor Vehicle: Approximately $3,850 in equity.
• Household Items: Fully exempt if “ordinarily and reasonably necessary.”

2nd Set of Exemptions (§ 703), Best for Renters. This system is often chosen by renters or those with little home equity because it provides a flexible “Wildcard” exemption.

• Wildcard Exemption: If you do not own your home or if you have no or negative equity in it, this exemption allows you to protect up to $38,700 of any property or combination of assets (cash, bank accounts, stocks, or extra car equity). It consists of a base amount ($1,950) plus the unused balance of the homestead exemption (up to $36,750).
• Homestead Exemption: Much lower than § 704, protecting only about $36,750 in equity.
• Motor Vehicle: Approximately $6,675 in equity.
• Tools of the Trade: Up to approximately $9,500 for tools, equipment, and implements used for work.

How do debt relief and consolidation programs compare to Chapter 7?

The following table compares Chapter 7 to debt relief and debt consolidation programs and assumes $100,000 in unsecured debt (a combination of credit cards, medical bills, and personal loans). We’re not assuming that you have $100,000 in debts; it’s just an easy round number to use as a basis to explain how the three options work differently. Many people incorrectly think that debt relief programs can “save their credit.” See below for how things usually work.

Will I have to pay taxes if I choose a Chapter 7 or a debt relief program?

You do NOT pay any additional taxes on Chapter 7 debts that are eliminated (discharged) in bankruptcy.

Unfortunately for debt relief programs, the IRS considers “forgiven debt” as taxable income. If you settle $100,000 of debt for $50,000, you will receive a Form 1099-C for the other $50,000 (the amount forgiven). At a 22% tax bracket, that is an unexpected $11,000 tax bill due the following April.