Most people encounter financial challenges at some point in their lives. If you are facing insurmountable financial difficulties because of an unexpected illness, injury, job loss, or other problems, bankruptcy could be a good choice. Filing for bankruptcy protection might help you find a way out of crushing debt and provide you with a new start.

Here is some information about the two most popular types of consumer bankruptcy in California, their processes, and how to prepare for them from experienced bankruptcy attorney Ike Shulman.

How Does the California Bankruptcy Process Work?

In California, bankruptcy follows a process controlled by federal law instead of state law, so the process of filing for bankruptcy in California is the same as it is if you file for protection in any other state. The bankruptcy process voids contracts between you and your creditors, which helps to provide you with a fresh financial start.

While the overall process is the same in all states, California laws control the property you can exempt from the bankruptcy estate. There are also some key things you will need to know about filing, which we will discuss later in this article.

Chapter 7 vs. Chapter 13: Which Is the Right Chapter for You?

The two most common and popular types of consumer bankruptcy are Chapters 7 and 13. Here is how they differ so that you can determine which might be the better option for your financial situation.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most popular type of consumer bankruptcy for a few reasons. When you file for Chapter 7 bankruptcy, the process only takes a few months. Chapter 7 is a liquidation bankruptcy, which means your non-exempt assets will be sold by the trustee to repay a  portion of what you owe. If your assets consist only of items that you can claim exempt from liquidation, this type of bankruptcy might be the best choice. Once your debts are discharged, you will not have to pay most creditors anything else, and many Chapter 7 filers in California can exempt most if not all of their property. Some debts, however, may not be discharged, including support obligations and recent tax debts.

If you have non-exempt assets, however, you might lose them. For example, if you have substantial equity in your home exceeding your homestead exemption, your house might be at risk. California law does provide a significant homestead exemption, which in 2022 can be as high as $626,400, depending on how high the median home value is in your county. Chapter 7 bankruptcy also doesn’t include a payment plan to allow you to catch up on your mortgage or auto loan, so you might lose your home or vehicle if you are behind on your payments at the time that you file.

There is also an income test for eligibility to file chapter 7.  If your income is substantially higher than the median income for a family of your size in California, you may not qualify, so you will want your attorney to carefully review this issue with you.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves a repayment plan through which you will pay a portion or all of what you owe to your creditors over three to five years. While you will have to repay your creditors something, there are a number of benefits to filing for Chapter 13 protection. You can keep all of your assets while also being able to catch up on your mortgage or auto loan and save them. If you need additional time to repay a non-dischargeable debt such as back taxes, you can use Chapter 13 to force a payment plan and have more time to catch up. However, your budget must show that you have the means to pay the monthly Chapter 13 payments.

California Bankruptcy: Will it Eliminate Your Debts?

In a Chapter 7 bankruptcy, most unsecured debts will be discharged a few months after you file your petition, including medical bills, credit card balances, past-due utilities, personal loans, and others. If you want to give up a car for which you have an auto loan you can no longer afford, bankruptcy can also get rid of that debt by surrendering the car.

Some debts can’t be discharged, however. Some examples of non-dischargeable debts include child support, spousal support, recent tax debts, and student loans in most cases. You will need to check the types of debt that you owe to decide whether filing bankruptcy will be worthwhile for you.

California Bankruptcy Steps

Using a checklist for bankruptcy in California can help you to track your progress and prepare. Here is a checklist of steps to use to guide you through the process.

Bankruptcy Checklist

  1. Learn the differences between Chapters 7 and 13.
  2. Review your debt types to determine whether they can be erased in bankruptcy.
  3. Determine which property you can keep and which you might lose in bankruptcy.
  4. Determine whether you qualify for Chapter 7 or Chapter 13.
  5. Cease paying your dischargeable debts, excluding car loans you want to keep.
  6. Gather your most recent financial documents.
  7. Take the required pre-filing credit counseling course.
  8. Fill out and file your bankruptcy paperwork with the Bankruptcy Court.
  9. Turn in your financial documents.
  10. Attend the 341 creditor’s meeting.
  11. If you file Chapter 13, make the required payments on time under your plan.
  12. Complete the debtor education course and file your certificate.
  13. Receive the discharge of your debts.

For all of these steps, it is advisable to have an experienced bankruptcy attorney guide you. Many bankruptcy attorneys offer an intial free consultation, so you should take advantage of that opportunity before embarking on this serious step.

Property You Can Keep When You File for Bankruptcy in California

While the bankruptcy law is the same across the country, the amount of assets you can protect by claiming them exempt differs state by state. In California, filing for bankruptcy doesn’t mean that you’ll lose everything. Instead, the state allows you to claim exemptions for certain types of property. Exempted property won’t be counted as a part of the bankruptcy estate and won’t be sold by a bankruptcy trustee.

If an exemption doesn’t cover a type of property, you’ll either lose it if you file for Chapter 7 bankruptcy, or you can keep it while paying for it through your repayment plan in Chapter 13. All bankruptcy filers are allowed to protect their retirement accounts, including 401(k), 403(b), SEP IRA, SIMPLE IRA, money purchase, and profit-sharing plans. As of April 1, 2022, defined benefits, Roth IRA, and traditional IRA plans are also protected up to a total of $1,512,350.

California’s Bankruptcy Exemptions

In California, you can choose between two separate asset lists for exemptions, but you can’t mix and match the two lists.

Homestead Exemption

California’s homestead exemption protects some of the equity in your principal home. Under one set of exemptions, which is often referred to as Section 704 exemptions, you can exempt real property or personal property in which you live, including a house, condominium, stock cooperative, boat, planned development, or a community apartment up to a value of $626,400 in equity, depending on your county’s median home value.

Under the other set of exemptions, which is often referred to as Section 703.140(b) exemptions, there is no specified homestead exemption, but you can protect up to for personal or real property used as your primary residence is $33,650 in equity, as of April 1, 2022.

Motor Vehicle Exemption

Under California’s Section 704 exemptions, you can claim $3,625 in equity in your vehicle. California’s Section 703.140(b)(2) allows you to exempt up to $6,375 of the equity you have in a motor vehicle. Both of these numbers will increase to $7500 on bankruptcy cases filed on or after January 1, 2023, under a new law recently passed.

Household Goods Exemption

Under Section 704 an unlimited amount is allowed for necessary household goods. However,  Section 703.140(b)(2) only allows you to exempt household goods individually valued up to $800.

Wildcard Exemption

There isn’t a wildcard exemption available under Section 704. However, Section 703.140(b)(2) provides a wildcard exemption that allows you to exempt any amount of the $33,650 you didn’t use to protect home equity.

There are also many other exemptions available in California. Your bankruptcy attorney can help you understand which exemptions might apply in your case.

Avoiding Exemption Issues

Be careful when you claim exemptions for your property. The trustee will review what you have claimed. If the trustee disagrees, they maay try to informally resolve the problem. However, if an informal resolution doesn’t work, the trustee can file an objection with the court, and the judge will determine whether or not you can exempt the property. If you intentionally make inaccurate statements about your property, it could be considered fraud. Bankruptcy fraud is treated seriously and can result in up to 20 years in prison and a fine of up to $250,000.

How Do You Qualify for Bankruptcy in California?

There are time restrictions between filing for bankruptcy when you have filed in the past. If you haven’t filed for bankruptcy before, you won’t need to worry about it. However, if you have filed in the past, the specific waiting period that might apply will depend on which chapter you filed under before and the Chapter under which you plan to file this time.

There are also specific qualifications you will need to meet to file for either Chapter 7 or Chapter 13.

To qualify for Chapter 7, your income is measured and compared with families of the same size in California, and then is measured against your allowed living expenses. This is often described as the “means test”. If you make too much, you may not qualify for chapter 7 but still will normally qualify for chapter 13.

If you want to file for Chapter 13, you will need to earn sufficient income to make payments under your plan. You will need to pay whichever is larger:

The total value of your non-exempt property

Your disposable income, calculated under the bankruptcy “means test”.

Hire a California Bankruptcy Lawyer

While you are not required to hire a bankruptcy lawyer to file a bankruptcy petition, doing so is almost always a good idea. Bankruptcy cases can be complex and difficult for many people to comprehend. A bankruptcy attorney at the Shulman Law Office can help you to determine the chapter that would make the most sense for you, determine when it will be the right time to file, help you select the correct set of exemptions for your assets, and help you avoid serious problems that could result in the dismissal of your case or other negative consequences.

The great news about filing a bankruptcy petition is that the court will issue an automatic stay to your creditors once you file a petition. The automatic stay will stop almost all creditors from making further attempts to collect on your debt. To learn more about bankruptcy and your options, contact the Shulman Law Office today for a free and confidential case evaluation at 408-297-3333.