Filing bankruptcy in California is in important decision that comes with several pros and cons. It’s important to note that bankruptcy filing involves several factors that may affect how your financial situation evolves. Many people believe bankruptcy is a safe and quick way to relieve financial pressure. Although it has several benefits that can help people, it also has its cons.
When it comes to a bankruptcy filing, people must consider both the advantages and disadvantages of the process before choosing the tools they’re going to use. This article is going to go over the pros and cons of filing bankruptcy in California, as well as how to choose the best option for your particular case.
According to U.S. law, bankruptcy is a legal process where an individual or business can’t pay for their loans or debts in any way, so they start a bankruptcy process to remove these debts and get a fresh start. In these processes, the bankruptcy court gives creditors the chance of obtaining a repayment plan based on the person’s or business’s assets that can be liquidated.
Every bankruptcy case is handled in federal courts according to the Bankruptcy Code. The person responsible for administering the bankruptcy cases is typically a trustee, which is an officer appointed by the U.S. Trustee Program. While bankruptcy filings may seem like a reasonable idea, it’s important to note that declaring bankruptcy can make these records stay on your credit reports for some time, making it more challenging for you to take loans in the future.
The two primary methods to file for bankruptcy in California are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Each method has different benefits for the individual/business, but keep in mind that both methods don’t apply to everyone. To learn more about Chapter 7 and Chapter 13 bankruptcy, keep reading.
Chapter 7 bankruptcy is the most common bankruptcy type. There, individuals or businesses with not many assets may be able to dispose of unsecured debts (medical bills, credit card debt, etc.) In case the person has non-exempt property, such as cash, bonds, or stocks, they must liquidate these assets to repay some of the debts to the creditors.
On the other hand, people with an exempt property only may not need to repay their unsecured debts to creditors, depending on the case. Once the person sends the required forms to the bankruptcy court, the assigned bankruptcy trustee is going to review them and interview the person about the content. If everything gets approved, the person is going to get a notice of the bankruptcy discharge.
Keep in mind that Chapter 7 bankruptcy can help someone get rid of unsecured debts, but it cannot erase them all. In cases of child support, tax debts, or a student loan, the person may not be able to get relief from those loans.
As mentioned before, not everyone can file Chapter 7 bankruptcy with a court of law to get a clean slate. Generally speaking, people who earn under the median income for California, based on their estate size, may file Chapter 7 bankruptcy. To evaluate this income, the court of law considers the person’s average monthly income over the past six months.
People who don’t pass the “Means Test” may have to file Chapter 13 bankruptcy. Overall, people with low income or credit scores, who don’t own expensive assets, or have problems paying their personal loans may need to file for Chapter 7 bankruptcy to relieve their financial situation.
In most cases, people could fill out their Chapter 7 bankruptcy forms in about seven days. The meeting with the assigned bankruptcy trustee could take up to two months after filing the forms.
Finally, it could take from two to three months after the meeting to get the discharge letter.
It’s important to note filing for bankruptcy is not free; to file for Chapter 7 to relieve yourself from some financial obligations, you must pay a $338 filing fee. However, in case you earn below 150% of the Federal Poverty Line, you could be able to receive a fee waiver. Additionally, unemployed people or people on social security could also receive a fee waiver.
You must also pay for a personal finance course online, which can cost from $10 to $50. There, you could also request a fee waiver, depending on your current personal financial status. In case you decide to pay for a bankruptcy attorney, you may have different fees depending on the service.
Individuals that can’t file the former type of bankruptcy must go for Chapter 13 bankruptcy, which is also known as the “Wage Earner’s Plan.” Chapter 13 is for those who have significant income and don’t apply for Chapter 7. Here, people create a debt repayment plan for their creditors. Except for non-exempt assets, debtors can keep their assets without any problems.
Filing for bankruptcy with Chapter 13 means that the debtor must create a plan for their creditors and follow through with it within three to five years, according to California law. If needed, the creditors can use the disposable income from the debtor for the repayments. At the time of filing for bankruptcy, the debtor starts the process by making a list of all the creditors and all the debts in place; with that information, the debtor creates the repayment plan to gain some relief for their personal loans.
As with Chapter 7, Chapter 13 doesn’t apply for student loan debt, alimony payments, or other related debt types. However, it can be used to pay for credit cards or other personal payments. While Chapter 13 can give the debtor relief for their financial situation and a clean slate, it may make it harder for them to borrow money in the future.
It depends on the case. In most cases, debtors are eligible for Chapter 13 if their debts are below $1,257,850 for secure debt and $419,275 for unsecured debt. Additionally, the person responsible for filing the forms must complete a credit counseling course to be eligible and get a discharge.
Filing for bankruptcy, in this case, can take from three to six months for the pre-confirmation period. However, keep in mind that Chapter 13 involves a three to five-year repayment strategy for every loan. In essence, the person may only complete this legal process once they’re done paying all their financial loans.
In case the person follows through with the debt payments, the court of law can provide them with a discharge, excusing the rest of the financial debt and giving them a clean slate. Overall, the person is going to take from three to five years to complete all the processes and get a fresh start with their credit.
It’s important to note that bankruptcy filings are not an “easy” way to avoid paying for credit cards, paying off student loans or child support, or get a fresh start immediately. There’s a much more complicated process that everyone must follow carefully if they want to take care of their debt/credit with a bankruptcy discharge. In essence, it’s vital to know the pros and cons of filing for bankruptcy in California.
Here is a list of some of the most common benefits of filing bankruptcy:
An automatic stay is protection the individual or business gets for free as soon as they fill out the bankruptcy forms. Thanks to the automatic stay, no creditors can keep pursuing payments for any loan; additionally, they may not seek action against the individual until the bankruptcy gets a discharge.
The automatic stay applies for both Chapter 7-13 bankruptcies, according to California law. While automatic stays are not a permanent solution to ongoing debt or loan, they can give the individual some time to figure out how they want to proceed with the financial plan.
When someone has to pay off debt, they often have to deal with many creditors, which can get overwhelming. In a sense, filing bankruptcy can give the individual relief from having to deal with all creditors at once, especially if they get to avoid paying some of their financial obligations. Keep in mind this process may vary depending on the bankruptcy type.
Depending on how the processes go when you file for bankruptcy, you could be able to keep some of your property as soon as you repay the debt. While this is more common for assets in Chapter 13, this may also happen for people who fill out Chapter 7.
Unless you hire a bankruptcy attorney for legal advice and to foresee that you get your discharge, you’re going to get a court-appointed representative for free. These trustees handle everything regarding communication with the creditors. Additionally, if you’re working with Chapter 13, the trustee is responsible for processing every payment, making everything more comfortable for you.
In the case of Chapter 13, the person may stop or delay car repossession or foreclosure, although it depends on the case.
When you file for bankruptcy, it’s because you can’t keep paying your debt/loan. In these cases, the creditor must settle for any payment type they can receive. In the case of Chapter 7, the person can get all their disposable income liquidated to pay off the debt or loan; taking that into consideration, the person would not have to pay credit card debt or a small loan balance back.
As soon as the individual gets a bankruptcy discharge, any remaining debt gets written off, meaning they don’t have to pay it anymore. While it’s challenging to avoid all loans entirely, people may still have a way to avoid paying some complicated loans.
Depending on the case, people may rebuild their credit score right after getting discharged. Once the person gets the discharge order, they can start requesting credit cards without any problems. There are some limitations at the time of taking new credit and increasing credit score, but it’s still possible under particular circumstances.
Bankruptcy can be fatal for a person’s credit score. However, working with creditors to pay off debt can help with increasing the credit score in the future. Keep in mind that eliminating existing debt can lower the debt-to-income ratio, which is a considerable influence on the credit score.
As mentioned before, you can file for bankruptcy in California and get many benefits for your credit and financial situation in general. However, there are still some cons of filing bankruptcy that you must be aware of.
Here is a list of the cons of Chapter 7 and 13 bankruptcies:
Bankruptcy involves losing some equity on assets (or property in general), depending on the type of bankruptcy you file. That property can involve houses, cars, and others.
While bankruptcy can be helpful to take care of credit card debt and provide financial relief, it doesn’t cover student loans. There are some exemptions in which a bankruptcy attorney may address student loans, but these are rare cases, and even then, it’s challenging to get rid of them completely through bankruptcy.
Filing for bankruptcy isn’t free. To file every form, you may have to pay a particular amount of money, depending on the Chapter you chose. In case you choose to work with an attorney for legal advice, you may have to pay attorney fees, which can make things even more expensive.
Depending on the bankruptcy type you choose, from filling out the forms to receiving the discharge, you can take from months to even five years. In the case of Chapter 7, it may not take more than five or six months to receive the letter, which is not the case of Chapter 13.
Even if the person can write off some debt after they file for bankruptcy, they may not be able to cover some taxes, child support, and other debts.
Considering that bankruptcies are made public, some landlords may choose not to offer their property to tenants who decided to file for bankruptcy at some point.
Once the bankruptcy gets discharged, the person may be requested to leave the property if they’re behind on payments.
Whether you choose Chapter 7-13 bankruptcy, you may have some issues holding a particular position at work. Additionally, filing for bankruptcy may make you ineligible to work in any position that required handling finances.
The details for the bankruptcy can stay in a person’s credit report for up to 10 years after getting discharged. While bankruptcy can provide relief from some debts, there are some consequences that are hard to avoid in the future.
Bankruptcy records are public, making it possible for someone to go over them and notice that a particular person filed for bankruptcy. It’s not common for someone to investigate that information type, but it may still happen in cases where people need background information about someone they want to lend property, money, or any other financial asset.
A bankruptcy case in Chapter 7-13 can be fatal for someone’s credit score. Depending on what the person’s score was at the time they filed for bankruptcy, it may experience some significant drops which are hard to recover from.
Filing for bankruptcy in Chapter 7-13 doesn’t mean that it’s going to be impossible to qualify for new credit. However, it’s important to note that these new credits are going to lead to much higher interest rates and lower credit limits. Rebuilding credit after bankruptcy can be a slow and complicated task, but it’s still possible.
In case you want to apply for credit of $500 or higher, you may need to report your bankruptcy, making it harder to get the credit approved.
While filing bankruptcy can be a good way to gain some relief from harsh financial situations, it doesn’t mean it’s going to solve the root problem that led the individual to not have enough money to pay off their debt. In case the person doesn’t learn from the decisions that led them to lose money, they may keep repeating the same mistakes and requesting bankruptcy over and over again.
Now that you know the pros and cons of Chapter 7-13 bankruptcy in California, it’s time to consider all your options before making any decisions. When you file for bankruptcies in Chapter 7-13, there’s no turning back, and it should be seen as a last resort rather than a quick way to protect your assets.
In case you decide to start a case, consider talking to an experienced attorney for counseling. Some of them offer free consultations before diving deep into the case. The right attorney-client relationship could lead to positive results in the future, and in some cases, the ability to getting discharged successfully.