Bankruptcy in California Text Size:

There is no magic formula for deciding when bankruptcy is the right choice. It is an option you might consider if you:

• Are paying only minimum amounts on your bills
• Can't budget yourself out of debt within five years
• Are getting notices that your mortgage or loans are being foreclosed
• Have had a severe financial setback, such as losing your job or a major client, a divorce or a costly illness

Bankruptcy does not get rid of all debts. You are still responsible for:

• Alimony
• Child support
• Most recent back taxes
• Most student loans
• Recent large purchases of more than $550 for luxury goods bought
  within 90 days of filing
• Fines or penalties of government agencies
• Fraudulent debts
• Cash advances of $825 within 70 days of filing

As a consumer, you can file for bankruptcy in California under either:

• Chapter 7 (Straight Bankruptcy) to wipe out all debts except those listed and get an immediate fresh start or
• Chapter 13 (Wage Earner Bankruptcy) to set up a repayment plan to pay back your debts over several years' time.

Bankruptcy Abuse Prevention and Consumer Protection Act

On April 20, 2005, the President signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which limits individual access to US bankruptcy courts. Some of the changes, which were effective October 17, 2005, included:

• New bans on Chapter 7
• Increased Chapter 13 payments
• New presumptions against debtors with increased penalties
• The reduction of judicial discretion to balance competing interests

Chapter 7 Bankruptcy

Chapter 7, otherwise known as "liquidation," is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee (appointed by the court) gathers and sells your non-exempt property and uses the proceeds from the sale to pay your creditors.

Most chapter 7 cases are "no-asset" case, which simply means that you do not have any non-exempt property for the trustee to sell.

Federal bankruptcy laws provide for a "means test" which will determine whether you are eligible to file of Chapter 7 bankruptcy. If your income is below the median income for families in California, based on Census Bureau statistics, you will be eligible. If you make more than the median income for families in California, your income over the past six months is considered, along with mortgage and car payments, back taxes and child support due, and school expenses up to $1,650 per year. You won't be eligible for a Chapter 7 bankruptcy if, after deducting these amounts, and the living expenses provided in the Internal Revenue Service's national collection standards, you can still pay at least $6,000 ($100/month) to unsecured creditors over five years. If you don't qualify for a Chapter 7 bankruptcy, your only option would be a Chapter 13 bankruptcy.

The U.S. Trustee Program will apply the median family income data to all cases filed on or after March 15, 2009. This median family income data will be adjusted again after the Census Bureau updates the data.

For California, for the cases filed after March 15, 2009, the median income for a single wage earner is $49,182; for a family of two, it is $65,097; for three, $70,684; and for four, $79,971. Add $6,900 for each individual in excess of 4.

You must also obtain approved credit counseling before you can file bankruptcy and file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.

Filing Chapter 7

A bankruptcy starts with the filing in bankruptcy court of the official petition and a lengthy document called a "Statement of Financial Affairs." This statement contains extensive schedules requiring a detailed list of all your debts, including:

• All priority debts (including taxes)
• All "secured" debts (including home mortgages and auto loans) that have property as "collateral"
• All unsecured debts of any kind Other information that must be provided on the Statement of Financial Affairs includes:
• The names and addresses of the creditors
• A list of all assets, including real estate and all forms of personal property

It is extremely important that the Statement of Financial Affairs be completed accurately. Debts that are not listed in the statement will not be discharged at the completion of the bankruptcy proceeding. Failing to list assets in an attempt to hide them from creditors may result in serious consequences, including the denial of discharge or charges of bankruptcy fraud.

Creditors are immediately prevented from trying to collect on your debts through what is called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.

Anyone you owe - or anyone who wants to continue collection proceedings during the bankruptcy process - must show the bankruptcy judge, after a hearing, that there is "cause" to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy process).

The trustee takes control of any property you do not get to keep. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims (with claims that are "secured" by property being paid first). Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.

341 Hearing

After the bankruptcy is filed, you must appear at the "first meeting of creditors" (also called a "341" meeting ). The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.

Generally, the only responsibility you have after the 341 meeting is to cooperate with the trustee in providing any requested information.

Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.

The trustee may review your income and expenses to see if you have enough money left after your current living expenditures to pay something to creditors.

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