Struggling under the weight of crushing debt can be mentally and emotionally taxing, especially if you feel you aren’t making any progress paying it off. While filing for bankruptcy may not sound like the best idea, it could actually be the best option in certain situations. California bankruptcies are complicated, but they exist as a tool to help debtors overcome the hurdle of overwhelming debt.
If you find yourself or your business struggling to make payments and stay afloat, a bankruptcy filing could give you the financial breathing room you need. Contact a California bankruptcy lawyer with Marshack Hays Wood at (949) 333-7777 to discuss your options. We can walk you through the California bankruptcy process from start to finish, ensuring that everything proceeds as smoothly as possible.
What is Bankruptcy?
According to the United States Courts, bankruptcy “helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan.” It is a legal process that occurs in bankruptcy court. Federal bankruptcy laws exist to protect individuals and businesses that file bankruptcy.
Generally, bankruptcy cases begin when the debtor files a bankruptcy petition with the appropriate bankruptcy court. Whether it is an individual or joint filing, any entity that wishes to file bankruptcy must submit a petition to the bankruptcy court.
Where Do Bankruptcy Cases Happen in CA?
California is divided into four federal bankruptcy districts, each serving specific regions of the state. These districts ensure that bankruptcy cases are handled efficiently based on geographic location. They include the Northern, Eastern, Central, and Southern Districts of California. While most districts have multiple court locations to accommodate residents across different counties, one district operates with a single court. Understanding which district you fall under is essential for filing your bankruptcy case correctly.
How to Know if Bankruptcy is Right for You
It’s important to remember that not every debtor needs to file bankruptcy to get a handle on their debts. However, filing bankruptcy is a great option for many people who struggle with insurmountable debt, creditor harassment, wage garnishment, or imminent lawsuits. Even though your credit score may take a hit initially, bankruptcy can actually help you build a higher score in the long term.
One of the biggest benefits of bankruptcy is the automatic stay. The automatic stay stops collection efforts, lawsuits, wage garnishments, foreclosures, and repossessions from proceeding. But how can someone know whether or not bankruptcy is the best choice for them?
If your situation meets any of the following criteria, it may be time to consider filing bankruptcy.
- Significantly behind on major bills like mortgages or car payments, and you can’t seem to catch up.
- Unable to pay basic monthly expenses without credit cards.
- Loss of a significant source of income.
- Drastic increase in expenses, such as medical bills.
- Unable to make more than the minimum payments on credit cards and other debts.
- Your home is at risk of foreclosure or your vehicle is at risk of repossession.
- Creditors are constantly harassing you about payments.
- You cannot achieve debt relief through other methods like credit counseling.
What Debts Can Be Eliminated by Bankruptcy?
Bankruptcy is incredibly effective at erasing certain types of debts. However, not all debts can be eliminated through bankruptcy. Before deciding to file for bankruptcy in California, it is crucial to understand whether or not your debts qualify for bankruptcy discharge.
Generally, the following debts can be discharged through bankruptcy.
- Credit card debt
- Personal loans
- Medical bills
- Utility bills
- Phone bills
- Car loans
- Deficiency balances after foreclosure or repossession
- Judgments from unpaid medical bills, credit card debt, or other unsecured debts
Debtors may also be able to discharge tax debts older than 3 years and student loan debt if paying the debt would cause undue hardship.
What Debts Cannot Be Eliminated by Bankruptcy?
In most cases, tax debts and student loans cannot be erased in bankruptcy. Other debts that cannot be discharged in bankruptcy include the following.
- Alimony
- Child support
- Debts related to larceny, embezzlement, DUI personal injury judgments, or willful and malicious injury to another person’s property
What are the Different Types of Bankruptcies in California?
Under the United States Bankruptcy Code, there are six bankruptcy chapters that individuals and businesses can file. These are Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. By far, the two most common chapters are Chapter 7 and Chapter 13. Below, we provide a brief overview of each bankruptcy chapter.
Chapter 7 Bankruptcy
Also known as liquidation bankruptcy, Chapter 7 bankruptcy is the most common bankruptcy chapter in the United States. It is also the most basic bankruptcy chapter. Basically, Chapter 7 liquidates the debtor’s property and distributes the proceeds to their creditors. They may keep any personal property or funds that are considered exempt.
Some businesses may also be able to file Chapter 7. The bankruptcy court may assign a bankruptcy trustee to the case who will run the business for a certain time. Generally, they will also oversee the liquidation and distribution of proceeds. This is usually done if the business is no longer viable or profitable.
Chapter 9 Bankruptcy
If municipalities like towns, cities, counties, or school districts file bankruptcy, they will file under Chapter 9. Any municipalities that file for Chapter 9 are protected from their creditors while they work out a plan for their debts. Notably, the largest city in the United States to file bankruptcy was Detroit, Michigan in 2013.
Chapter 11 Bankruptcy
Also known as a “reorganization bankruptcy,” Chapter 11 bankruptcy is available to both businesses and individuals. Unlike in Chapter 7, the debtor does not have to give control of their business operations to a bankruptcy trustee. They also don’t have to sell all of their assets.
Instead, Chapter 11 reorganizes the debts and negotiates terms like payment values and interest rates on debts. This is a better option than Chapter 7 if a business wants to reorganize their finances and come out of bankruptcy as a profitable business.
Chapter 12 Bankruptcy
If family fishermen or family farmers fall on hard times, they can file Chapter 12 bankruptcy. This chapter is reserved specifically for those individuals. Under this chapter, the debtor must develop a repayment plan that lasts three to five years. During this time, they will repay their debts to their creditors.
Chapter 13 Bankruptcy
Also called a “wage earner’s plan,” Chapter 13 bankruptcy allows debtors with regular income to develop a repayment plan to pay back either part of or all of their debts to creditors. Generally, if a debtor makes above a certain amount of money, they will be barred from filing Chapter 7 and must file Chapter 13 instead. In contrast to Chapter 7, many debtors who file Chapter 13 can keep their homes instead of selling them to repay their creditors.
Chapter 15 Bankruptcy
This is the newest bankruptcy chapter, having been added to the Bankruptcy Code in 2005. Chapter 15 bankruptcy allows for bankruptcy cases that involve multiple countries. Basically, the goal of Chapter 15 is to facilitate cooperation between foreign debtors, foreign courts, and the United States bankruptcy process. If a foreign debtor has assets in multiple countries, including the United States, they can file Chapter 15.
How to Prepare for Bankruptcy in California
After determining that bankruptcy is the best course of action for your situation, it’s important to prepare for your case before filing.
Consult a Bankruptcy Attorney
While nobody is required to have an attorney for their bankruptcy case, it is crucial to at least consult with one before initiating the case. Filing without an attorney (pro se), while a valid option, often has less than desirable outcomes. No bankruptcy law requires you to hire an Orange County bankruptcy lawyer.
Despite this, even the federal bankruptcy court system cautions against pursuing bankruptcy in California or any other state without legal representation. According to the bankruptcy courts’ website, filing without an attorney is extremely difficult. They caution against doing so for the following reasons.
- To have a successful bankruptcy filing, the filer should be well-versed in the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the rules of the applicable California bankruptcy court locations. It is very unlikely that the average filer will have this knowledge.
- Bankruptcy fraud is a crime. If the debtor fails to provide information that is completely truthful, accurate, and complete, they may be accused of bankruptcy fraud or have their case dismissed. An attorney will ensure that you fill out and file everything correctly so that your case proceeds as smoothly as possible.
Decide Which Chapter Is Right for You
An attorney can also help you determine which bankruptcy chapter is best for your situation. Each chapter has its upsides and downsides, and it is very likely that one chapter will benefit you much more than the others. In fact, you likely won’t qualify for most chapters. Additionally, you will need to complete a bankruptcy means test before filing.
The means test determines whether you make too much money to file Chapter 7. If you do, you will likely have to file Chapter 13. Your attorney can help you fill out and complete the means test before filing.
Gather All Necessary Documents
To file bankruptcy, you will need to gather certain documents that show your income, assets, debts, and spending habits. The best way to approach the process is by organizing your documents before submitting your bankruptcy petition. This can help your case proceed without unnecessary setbacks.
Some of the most important documentation you will need includes the following. This list is not exhaustive.
- Proof of income
- Basic personal information
- Tax returns from the past three years
- Real estate assets
- Vehicle records and assets
- Bank statements
- Alimony or child support documents, if applicable
- Debt records
- Credit records
- Full list of your assets and liabilities
- Proof of credit counseling course completion
Complete the Credit Counseling Course
You must attend and complete a court-approved credit counseling course before the bankruptcy process can begin. During the course, a credit counselor will review your finances with you and help you determine whether or not bankruptcy is the best choice. Remember that credit counseling is mandatory. Failure to attend this course before submitting your petition, your case could be dismissed.
Determine Your California Bankruptcy Exemptions
The most notable difference between California bankruptcy laws and bankruptcies in other states is that California has two lists of bankruptcy exemptions. Unlike some states, you cannot choose between California exemptions and federal exemptions if you file in California. You must use California’s exemptions rather than those provided by federal law. You also cannot double the exemptions if you are filing jointly with your spouse.
Understanding the exemptions you are entitled to in your case can help you maximize the amount of property you keep. Below, we briefly list what you may keep under California’s bankruptcy exemption systems 1 and 2, respectively.
- Homestead exemption up to either $600,000 or $31,950
- Motor vehicle exemption up to either $3,625 or $6,375
- Household goods up to an unlimited amount in System 1 and no more than $800 in System 2
- Wildcard exemptions do not apply in System 1, but you can apply unused portions of your homestead exemption plus an additional $1,700 to your wildcard exemption in System 2.
- Other exemptions include tax-exempt retirement accounts, a certain percentage of your wages, public benefits, tools of the trade, and insurance.
How to File for Bankruptcy in California
Once you and your attorney have prepared adequately, you can file your bankruptcy petition. After you file your petition, this is when your case truly begins. You will file your paperwork with the local bankruptcy court, then either pay the filing fee or request a fee waiver. Because California is a large state, it has several bankruptcy court locations. Your attorney can help you determine which court to file with based on where you live. They will also ensure that you fill out any necessary local forms for your case.
As soon as you file, the automatic stay goes into effect. This restricts your creditors from attempting to collect on your debts. It may take a few days for this information to reach your creditors, as the court will mail them a notice of the automatic stay. Then, you will complete the following steps.
- Submit financial documents that prove everything you listed in your bankruptcy paperwork.
- Attend the 341 meeting of creditors. This meeting is mandatory for filers, but not for creditors.
- Complete a debtor education course and submit the certificate of completion with the court.
You must complete all of the above before you can receive your bankruptcy discharge.
Contact an Orange County Bankruptcy Lawyer at Marshack Hays Wood Today
If you’re struggling with crushing debt that makes your daily life or business operations difficult, bankruptcy may be a helpful option for you. Whether you are an individual or a business owner, bankruptcy can give you the financial breathing room you need to get your finances in order. It can even help you achieve a higher credit score over time.
To speak with a qualified Orange County bankruptcy attorney about your case, contact Marshack Hays Wood by calling (949) 333-7777 or completing our online intake form today. We can evaluate your case during a confidential consultation and give you sound advice on what to do next.
