Financial stress is an unfortunate part of life for most Americans. High credit card bills and other unsecured debts, like student loans, cause much of this stress. Delinquent secured debt accounts, like past-due mortgage payments, add to it. For many California families, filing bankruptcy is a way out.
The Bankruptcy Code offers a fresh start for honest yet unfortunate debtors like you. A voluntary petition enables families to retake control over their own finances. And with the help of a bankruptcy lawyer, most families quickly recover from bankruptcy, so they can move on with their lives.
Protecting Your Property in a California Bankruptcy
- Utility shutoff
- Foreclosure
- Wage garnishment
- Repossession
- Creditor lawsuits
- Eviction
Typically, the automatic stay (section 362 of the U.S. Bankruptcy Code) stays in effect until the judge closes the case. Moneylenders can only bypass the stay in very limited situations. And if they try to do so, a bankruptcy attorney knows how to stop them.
At the end of the case, the judge discharges (Chapter 7 discharge, Chapter 13 discharge) most unsecured debts. Certain obligations, such as back taxes and alimony, are only dischargeable in some situations.
Am I Eligible for Bankruptcy in California?
Most people meet the formal and informal qualifications for bankruptcy. These qualifications help ensure that assistance is available to people who truly need it.
Formal Qualifications
The qualifications are different for different types of consumer bankruptcy:
- Chapter 7 is designed for people with unsecured debts, like credit cards and medical bills. You must pass a means test to qualify.
- Chapter 13 is designed for people with delinquent secured debt, like past-due mortgage payments. This “wage-earner plan bankruptcy” gives you up to five years to gradually erase this delinquency. As a bonus, the judge also discharges most unsecured debts.
The means test is the most significant Chapter 7 bankruptcy qualification. You can file under this section of the Bankruptcy Code if your family’s income is below the minimum for that geographic area. This amount fluctuates over time. A family of four in California must usually earn less than about $104,000 a year.
There is some room for regional variations. For example, the cost of living is much higher in the Bay Area than it is in the High Desert.
Chapter 13 bankruptcy filers must not exceed federally-mandated debt ceilings. Once again, the exact amount fluctuates. Generally, Chapter 13 filers cannot have more than $1.4 million in secured debt and $400,00 of unsecured debt. These amounts include current and past-due obligations. Once again, there might be some wiggle room in some cases.
All debtors must also complete an approved credit counseling course before they file, and a debt management class after they file. These classes, which are typically offered online, usually take a few minutes and cost a few dollars.
Informal Qualifications
These things vary according to type and location of bankruptcy. These qualifications usually involve Schedules I and J. These are the monthly income and expense schedules in a consumer bankruptcy.
Generally, Chapter 7 debtors should be in the red each month. If that’s not the case, the bankruptcy trustee might question the need to file Chapter 7. The Chapter 13 qualification is usually the opposite. These filers must be substantially in the black every month. Otherwise, they might not be able to make the required monthly debt consolidation payment.
California Property Exemption Laws
Bankruptcy is a federal law, and this law includes some property exemptions. But each state also has its own bankruptcy property exemptions. Many states allow debtors to choose between federal bankruptcy exemptions or state exemptions. Debtors in the Golden State do not have that choice. However, in California, you may choose between Section 703 and Section 704 exemptions. More on that below.
First, let’s take a step back and talk about some general principles. Creditors cannot seize exempt assets and sell them to pay your debts. They can seize and sell nonexempt assets. That seems like a straightforward definition, but there is lots of grey area.
Assume that Rafael owns a mobile home that he uses on road trips. He is unable to apply a 703 or 704 exemption to it. So, it’s theoretically nonexempt. But there are some practical considerations. The mobile home is several decades old and in rather poor condition. As a result, it has basically no financial value. Therefore, the trustee (the person who oversees the bankruptcy for the judge) may not be able to legally seize it.
This is just one of the questions that a bankruptcy lawyer must deal with, even if the bankruptcy seems clear cut.
Section 703 Exemptions
If you do not own a home, or you have lived in your home for less than ten years, 703 exemptions could be a good option. These exemptions protect:
- Home equity ($26,800)
- Retirement accounts (full protection)
- Household goods (full protection if the item is worth less than $675)
- Social Security and other public benefits (full protection)
- Life insurance policy benefits (full protection)
- Motor vehicle equity ($5,350)
- Personal jewelry ($1,600)
- Wildcard ($28,255)
The home equity exemption seems small, but unless you have lived in your house for more than ten years, it’s usually big enough. During the first half of a mortgage loan, the bank applies most of the monthly payments to interest instead of equity. So, even if you have paid tens of thousands of dollars, you only have a few thousand in equity.
Motor vehicles are similar. Most people have almost no equity in a new car. Used cars which are paid off have almost no value. That’s especially true if the car has been in a minor accident or is in less than excellent condition. These same principles apply to household goods and jewelry.
California’s wildcard exemption allows you to protect otherwise nonexempt property. Many debtors apply the wildcard exemption to money in a checking or savings account. Others apply it to a vacation home.
Section 703 exemptions are bankruptcy-only exemptions. They are only available to bankruptcy debtors. For this reason, some courts see them as a violation of the Fourteenth Amendment’s equal protection guarantee. Talk to a bankruptcy lawyer about whether they will work in your case. Generally, these exemptions are the same for both individuals and married couples.
Section 704 Exemptions
If you have lived in the same home for more than ten years, California’s Section 704 exemptions might be for you. That’s especially true since the coronavirus outbreak prompted lawmakers to expand the 704 exemptions. These exemptions now protect:
- FEMA benefits
- Motor vehicle equity ($3,325)
- Life insurance policy benefits (full protection)
- Checking or savings accounts with a $1,788 minimum balance
- Social Security and other public benefits (full protection)
- Home equity ($300,000 or $600,000, depending on median home prices in the area)
- Retirement account (full protection)
- Household goods (full protection)
- Personal jewelry ($8,000)
The big downside to 704 exemptions is the lack of a wildcard exemption. The recent demand deposit account (DDI) exemption partially makes up for this deficiency.
Note that these values are not the fair market value. Instead, they are the as-is cash value. A home is a good example of the difference. Your house might have a fair market value of $500,000. But if you sold the house to a home investor, the as-is cash offer might be pennies on the dollar. So, the bankruptcy value of your home (a/k/a the garage sale value) could be much lower than the value listed on the tax appraiser’s website.
Only an experienced bankruptcy lawyer should address complex issues like bankruptcy values. Even an honest mistake could trigger a bankruptcy fraud probe.
How Much Does a California Bankruptcy Cost?
Much like the qualifications of bankruptcy, the costs associated with bankruptcy often vary significantly.
Filing fees are fixed by law. Generally, filing a new case costs about $350. You might be able to pay this fee in installments. You might even be eligible for a fee waiver. Filing fees also apply for official motions, like a motion to convert to a different chapter or a motion to amend the documents.
There are basically three different levels of professional fees. Since the forms are available online, some people try to file bankruptcy themselves. This is roughly like filing a small corporation’s tax return without consulting an accountant and without using any official instructions. Other people hire non-lawyer bankruptcy petition preparers to help them. But these individuals might not have any training whatsoever. Plus, they can only fill out forms. They cannot give advice, and they certainly cannot represent you in court.
A California bankruptcy attorney is the most expensive option, but it’s also the most cost-effective option. DIY filers often miss deadlines or fill out forms incorrectly. These errors, even if unintentional, could have serious consequences. A bankruptcy attorney will properly submit paperwork, give you solid advice, and stand up for you if things go sideways.
Partner With a Dedicated Attorney
To make the most out of the fresh start which the Bankruptcy Code guarantees, reach out to a California bankruptcy lawyer today. An attorney will help you maximize your exemptions and stand with you during the whole process.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.