In many instances, filing for bankruptcy in California is the same when filing bankruptcy in any other state. Undergoing the bankruptcy process in California falls under federal law. Nonetheless, this procedure of bankruptcy filing can be complex, which is why our comprehensive guide is a helpful source of information. Continue reading to gain a better understanding of what individuals need to do to file for bankruptcy in California.

How Does Bankruptcy Work in California? 

A common misconception many applicants believe is that filing for bankruptcy falls under California state law. This isn’t true, as the process involves federal law and works by unwinding any contracts an individual might have with their creditors. 

Such a process is what gives applicants a fresh start and frees them of their debt. However, California’s laws also come into play during this procedure. These state laws dictate the property individuals may keep after they file for bankruptcy in California. Such proceedings are covered under Title 11 of the Bankruptcy Code. Most cases are handled under three main chapters, which are Chapter 11, 7, and 13. 

What Is the Right Bankruptcy Chapter to Choose? 

Many people who file bankruptcy in California typically select Chapter 13 and Chapter 7. In most instances, individuals don’t know the difference between these two chapters. Here are the characteristics of each one to better understand which you should choose when filing a chapter: 

Chapter 7 Bankruptcy 

This form of bankruptcy is typically a filer’s first choice. One of the most significant reasons for this is because it’s quick. In most cases, it only takes a couple of months to complete. Moreover, it has the reputation of being cheap, as you don’t need to pay your creditors. Chapter 7 bankruptcy works well for those who have property consisting of essential items required to work and live. 

However, filers who have more assets run the risk of losing these items. This is especially the case if these individuals own unnecessary and luxurious items. For example, filers in possession of a timeshare in the Bahamas, a baseball card collection, an RV, or even a vehicle/house (and you have too much equity or are behind on payments) might lose these items when filing for this form of bankruptcy in California. 

One of the biggest differences between Chapter 13 and Chapter 7 bankruptcy is that this chapter doesn’t include a payment plan option allowing filers to catch up on late car payments or mortgage. Hence, individuals could lose their car or home if they’re behind on these payments when filing for Chapter 7 bankruptcy. 

Chapter 13 Bankruptcy 

Those filing for this form of bankruptcy are required to pay their creditors a percentage or all of what they owe within a three-year or five-year repayment plan. This payment plan included when you file for Chapter 13 bankruptcy offers benefits that aren’t found in a Chapter 7 bankruptcy case. 

One example of this is that filers can keep all of their possessions. Additionally, they can save their car from repossession or their home from foreclosure. If you require time to repay your debt, this bankruptcy petition can force a creditor into a payment plan. However, one of the biggest downfalls of this bankruptcy case is that it can be expensive. Most filers can’t afford the monthly payments. 

Does Filing for Bankruptcy Erase Debts?

A bankruptcy petition wipes away most debt, like overdue utility bills, credit card balances, personal loans, and medical bills. Additionally, you can get rid of a car payment or mortgage if you accept giving up the car or house securing this debt. This is only applicable if you’ve put your property up as collateral to create a secured debt. Hence, the lender gets this property back if you’re unable to pay what you owe. 

Although you gain a ‘new beginning’ when you file bankruptcy in California, you can’t wipe away all debts. Some debts that you can’t remove during a bankruptcy case include non-dischargeable debts. These are items like recent tax debt and domestic support arrearages. 

Moreover, student loans can’t be easily removed either, as you’re required to win a separate lawsuit for this debt to be erased. When you file bankruptcy, it’s recommended to ensure enough of your debt is discharged during this process. Otherwise, your bankruptcy case wouldn’t be worthwhile. 

How to File Bankruptcy in California: A Complete Checklist 

The concept of erasing debt sounds fantastic but you might be unaware of how exactly to file bankruptcy. Understanding what is required of you and what debt relief you could gain helps see whether this process is worthwhile or not. Here are the significant steps you need to consider when partaking in your bankruptcy journey: 

• Consider what chapter you would like to file. It’s always a good idea to learn about Chapters 7 and 13. 
• Check to see what debt you can erase when you file for California bankruptcy. 
• Find out if you can keep your property after you file bankruptcy.
• Determine if you qualify.
• Understand if it would be worthwhile to hire a bankruptcy lawyer.
• Stop paying any qualifying debt.
• Collect all the necessary bankruptcy forms and financial documents.
• Undergo a credit counseling course.
• Complete and file the necessary paperwork.
• Hand over the required financial documents.
• Attend the 341 creditor’s meeting.
• Attend the necessary confirmation hearings and create payment plans (This is only applicable if applying for Chapter 13 bankruptcy). 
• File a debtor’s education course certificate and receive the debt discharge. 

Protecting Property When Filing Bankruptcy in California 

You don’t need to worry about losing property when filing for California bankruptcy. This is because state exemption laws allow a debtor to keep their possessions. Understanding the exemptions listed below can help you maximize what you can keep during bankruptcy court. Here are the most significant exemptions: 

Nonexempt and Exempt Property 

Filers can keep their items protected when they ‘exempt’ property. However, you can either lose your property in Chapter 7 bankruptcy or pay to keep it in a Chapter 13 repayment plan if you have ‘nonexempt property’ or this exemption doesn’t apply to some of your items. 

Federal and State Exemptions 

Unlike other states, you can’t pick between federal bankruptcy and state bankrupting exemptions. You’re required to utilize California’s exemptions in bankruptcy court. Nonetheless, filers can also use federal non-bankruptcy exemptions. 

Doubling Exemptions 

Spouses filing for bankruptcy together are unable to double their exemption amount unless stated otherwise. 

Retirement Accounts 

All tax-exempt retirement accounts, such as 403(b)s, 401(K)s, profit-sharing, money purchase plans, SIMPLE IRAs and SEP, traditional and Roth IRAs, and defined benefit plans amounting to $1,362,800 for each person are protected when filing bankruptcy forms. 

California Bankruptcy Exemptions 

California bankruptcy offers two separate lists of items that filers can exempt (or protect). However, you can’t mix and match between these exemption schemes. Hence, filers should select the exemption list that works best for their specific position. 

California Homestead Exemption 

This type of exemption protects a specific amount of equity in an individual’s principal residence. You can exempt personal or real property in System 1 when filing for bankruptcy in California. This exemption covers a stock cooperative, boat, mobile home, planned development, community apartment, or condominium. In all of these instances, the exemption protects up to $600,000. 

In California’s System 2, this homestead exemption only applies in bankruptcy cases. Hence, you can’t protect this property against any creditors if you aren’t preparing a bankruptcy petition. In many California court procedures, bankruptcy-only exemption systems are deemed unconstitutional. 

However, in other court settings, debtors are allowed to utilize these exemptions during bankruptcy cases. California’s homestead exemption amounts to $29,275 under System 2 for personal and real property being utilized as a residence. 

California Motor Vehicle Exemption 

Equity in your truck, car, motorcycle, and any other vehicle is protected with the motor vehicle exemption. The System 1 vehicle exemption in Los Angeles is $3,325. However, this property is exempt up to $5,850 under System 2. 

California Household Goods Exemption 

Filers can protect an unlimited amount of essential household goods in Los Angeles. However, a single item can’t exceed more than $725 under System 2. 

California Wildcard Exemption 

A wildcard exemption isn’t available under System 1. However, you can use any portion of unused homestead exemption and an extra $1,550 to protect any property of the filer’s choosing. 

How to Prevent Exemption Problems in a Bankruptcy Case

It’s highly recommended for individuals to exempt their property carefully. The court-appointed official assigned to handle your case, also known as the bankruptcy trustee, is required to review these exemptions. If a bankruptcy trustee disagrees with an exemption, they are likely going to try to resolve this issue informally. However, if this attempt is unsuccessful, the trustee is required to file an objection with the court. From here, the judge decides whether you can keep the property in question or not. 

One example where the trustee might disagree with a filer’s exemption could be the classification for ‘art.’ An individual might own a rare and collectible car with an equity of $15,000. The Los Angeles vehicle exemption doesn’t entirely cover this car. From here, the individual might believe that the vehicle qualifies as a piece of art. Thus, the filer exempts the car using the Los Angeles unlimited art exemption. However, the trustee might disagree with these classifications and file an objection to the court. It’s the judge’s decision if the car is exempt because of the state’s unlimited artwork exemption or not. 

These exemption problems can become more serious, as purposely making inaccurate statements can be deemed fraudulent. If found guilty, bankruptcy fraud is punishable by up to 20 years, $250,000, or both. 

Who Qualifies for Bankruptcy in California? 

An individual can meet the initial requirement if they have never filed for bankruptcy before. Alternatively, filers should check to see if enough time has passed since they last filed. This waiting period can vary depending on what chapter was previously filed and what chapter you want to file. Additionally, you need to align with specific chapter qualifications. 

Qualifying for Chapter 7 Bankruptcy 

If a household’s gross income is less than the median income of the same-size family in Los Angeles, the debtor can qualify for Chapter 7 bankruptcy. To find out if you qualify, you can add your gross income earned in the last six months. From here, you should multiply this number by two. Compare this amount to the income charts found on the US Trustee website by selecting ‘Means Testing Information.’ 

In some instances, you might find that you make too much to qualify for Chapter 7. However, you can perform the second part of the means test by subtracting your expenses. After this, if you can’t afford to pay with a Chapter 13 plan, you can qualify for Chapter 7 bankruptcy. 

Qualifying for Chapter 13 Bankruptcy 

When it comes to this form of bankruptcy, it’s commonly known to be an expensive proposition. This is because you need to pay a hefty price to obtain the additional benefits gained from such bankruptcy. In many instances, individuals cannot afford the Chapter 13 monthly filing fee. To qualify for this petition, you need to pay the larger of: 

• The value of nonexempt property
• Your priority non-dischargeable debt, or
• Your disposable income. 

Why Hire a Bankruptcy Lawyer? 

Many people find it incredibly beneficial to gain credit counseling. A bankruptcy attorney can provide legal advice and help with the entire filing process for debt relief. You can expect a bankruptcy attorney to help you: 

• Determine when to file for bankruptcy 
• Qualify for your chosen chapter
• Protect the property you want
• Avoid bankruptcy fraud or any exemption problems
• Understand when you can stop making any payments you want to erase in your case

When you file for bankruptcy, you can expect your creditors to continue calling. In these instances, it’s best to ignore these calls. This is because informing creditors about your bankruptcy might encourage them to take more drastic approaches to collect this debt before they lose the right to do so. However, hiring a bankruptcy attorney and referring creditors to your counsel can stop them from contacting you. 

The Process of Filing Your Bankruptcy 

The first step you need to conduct to file is gathering financial information. Collecting these documents can be daunting but using our checklist below can make this task a little easier. Here are the documents you should gather to file for bankruptcy:

Tax Returns 

If you’re exempt from tax returns, you aren’t required to provide these documents. However, if you aren’t exempt, you need to provide your tax returns from the last two years for Chapter 7 bankruptcy. You’re required to have both years to complete the necessary paperwork and the most recent year’s tax returns for your bankruptcy trustee. 

Otherwise, you’re required to provide your tax returns for four years if you’re filing for Chapter 13 bankruptcy. Additionally, you need to present tax transcripts. You can order these from www.irs.gov/individuals/get-transcript if you don’t have your tax return copies. 

Documents from the Most Recent Six Months

You need to present a list of documents that are no older than six months when you file. Such forms include: 

• Proof of income from your employee (like paycheck stubs)
• Other proof of income (like proof of maintenance payments or alimony, unemployment benefits stubs, or income from other sources)
• Bank statements – your trustee is going to want the most recent two months
• Retirement and investment statements – your trustee is going to want the most recent two months

Copies (and the Originals Presented at Court) 

• Passport, Government ID, ID card, or Driver’s License – the name on this document should match the name on your petition
• Proof of Social Security number or your Social Security Card

Preparing the Paperwork

Once you’ve collected all of these legal documents, you need to prepare the paperwork before it can be filed. Here’s what you need: 

• Bankruptcy forms: You can find free bankruptcy forms on the U.S Courts website. 
• Means test multipliers: Your trustee should provide you with a webpage where you can get the figures required to complete this means test. 
• Education providers: The bankruptcy trustee’s website also provides various approved counseling providers. You’re required to complete credit counseling during the 180 days before you file for bankruptcy. Additionally, you need to complete a debt management course once you have filed. 

Wrapping It Up – What Happens After Filing for Bankruptcy? 

You can expect your creditors to stop bothering you once you have filed for bankruptcy. It might take several days before the court informs your creditors about the ‘automatic stay’ order preventing them from asking you to pay. Once this takes place, you:

• Hand over your financial documents proving the legal statements made in your filed paperwork. 
• Attend the mandatory 341 meeting of creditors
• Complete the necessary debtor education and credit counseling course. From here, you need to file the completion certificate. 

All of these steps need to take place before you gain a Chapter 7 discharge. Chapter 13 filers are also required to attend a repayment hearing and complete this payment plan to receive their discharge in Los Angeles. 

Bankruptcy law can be complex, which is why it’s always best to hire an attorney in Los Angeles. We can help. Contact us today to learn why you need a bankruptcy lawyer now!