Bankruptcy protection, under the right circumstances, can be an exceedingly helpful system in which to solve tyrannical debt problems that would otherwise threaten the economic stability of California households. However, the advantages of declaring bankruptcy should first be analyzed with an eye to each borrower’s specific financial scenario and the other debt solutions that now exist to aid California borrowers through their larger burdens and dreams. A host of alternative debt relief programs have come into being through the last few years which can in some ways be of even greater assistance to harried consumers. Considering these programs and the ways in which bankruptcy laws have changed in the past few years (both in California and around the country), it’s more important than ever before that financially strapped borrowers examine every option and fully understand just what bankruptcy protection means to ordinary consumers this day and age.
There are any number of questions to be answered before you step foot in a bankruptcy attorney’s office (especially considering that their billing practices start on the first step through the door). Would you, for instance, be essentially guaranteed a speedy discharge of all applicable debts? What will the effects be for you and your household as relates to the relevant credit ratings and FICO scores? Obviously, the complete information about California bankruptcies could and has fit entire law libraries, and your authors wouldn’t pretend to offer more than a cursory analysis of the modern California bankruptcy protections available. For the needs of this article, we are going to concentrate our efforts on explaining personal bankruptcy which, in the state of California, almost always will mean either a Chapter 7 or Chapter 13 petition (under extremely peculiar circumstances Chapter 11 bankruptcies may be filed by individuals in California), and hope to provide some greater understanding about the complexities of the programs as they now stand.
Within California, Chapter 7 protection remains the most frequent form of personal bankruptcy to be filed by consumers even after the revisions to the United States bankruptcy code severely curtailed the program and worsened the existence of those suffering through the proceedings. As most consumers, in California and the rest of America, are already aware, Chapter 7 debt elimination bankruptcies – when successfully discharged, at least – will liquidate a certain segment of the filing borrower’s financial obligations. Although credit card bills and similar revolving debt accounts will likely be done away with provided the bankruptcy petition passes close scrutiny from a trustee appointed by the California courts, a large swath (perhaps even a majority) of borrower’s debts will remain ultimately untouched by any bankruptcy no matter the needs of the debtor or the skill of their attorney. Much as the fantasy of a fresh start remains constant in the eyes of Californians and all Americans taught since childhood about the wonders of personal bankruptcy, Chapter 7 protection no longer guarantees any absolute shield from assembled creditors.
To a point, some of this should be clear. Most taxes, of course, shall remain invulnerable to any bankruptcy proceedings as well as any payments intended for scheduled familial sustenance (alimony, child support) and any monetary penalties handed down by the state or federal judicial systems (criminal fines and reparation from embezzlement or similar white collar misdeeds). Secured debts which are already tied to collateral such as home mortgages or automobile loans are generally ignored in California bankruptcies, to the benefit of most of those filing, but borrowers will often be asked to talk to their lenders about their payment plans and reaffirm all obligations. Student loans, though they may seem upon first glance the most unsecured of all debts, remain unaffected by Chapter 7 debt protection because of national legislation now twenty years old that protects educational lending from bankruptcy. Clearly, with regards to California citizens whose debt loads are overwhelmingly stuffed with credit card bills, the Chapter 7 debt elimination bankruptcy may yet be of some benefit, but not every debt laden borrower will be equally well served by the program.
For that matter, many of these borrowers may not even be let inside the program. Much as Chapter 7 bankruptcies remain the most popular system because of the potential for liquidation of all unsecured debts, not every borrower in California will have the ability to qualify for the Chapter 7 protections. The majority of Californians who will be refused Chapter 7 can thank the changes wrought by the 2005 congressional legislation for new regulations that insist each borrower earn less than the average Californian regardless of debt levels, but there are other elements that must be considered by debtors prior to filing. There are a few different causes for the denial of Chapter 7 debt elimination, in actuality, and a good portion concern themselves with inappropriate or even possibly fraudulent behavior on the part of the borrower declaring for bankruptcy. In California, for example, the courts frown upon potential filers transferring any of their assets before declaring bankruptcy as this is generally done to hide any property from seizure to repay lenders (attempting to obliterate the evidence of any assets meets the same scrutiny and repercussions).
Any financial activity that may purposefully hide assets should rightly be avoided upon any sound ethical basis – not to mention the very real chance of criminal charges brought by the California judicial system – but there are also problems that could arise from simple laziness or poor memories of your financial dealings. Any failure to properly account for existing assets or debts (though, clearly, there’s virtually no reason for Californians filing for bankruptcy under Chapter 7 to ever knowingly avoid mention of debts) may result in the bankruptcy petition being turned down by the courts. In fact, simply forgetting to turn in a single document to the California county clerk or filling out the paperwork incorrectly could force the trustee to decline the bankruptcy. This is yet another reason why experienced and competent attorneys knowledgeable about California bankruptcy law are so instrumental to successful application and discharge of Chapter 7 and Chapter 13 bankruptcies.
With regards once again to the niggling details that surround Chapter 7 bankruptcy, not much has changed in the past few generations in terms of the process of filing. The borrower or borrowers will fill out a petition of bankruptcy and then hand in or mail the paperwork to an officer of the court for your area of California. These documents will contain meticulous records of all of the filers’ financial activities including income history and all potential assets (even, as we’ve said, the barely remembered minutiae of years past; no detail should be considered too small with the potential penalties so very disastrous if the courts have a mind to take interest) whether considered exempt or otherwise. You should also completely fill out what is known as a debt matrix that lists the name and address of each of your lenders as well as the total balance and minimum payments requested from each account. To underline the earlier point, you MUST take pains to be absolutely certain of all information therein and leave nothing out as an improperly filed bankruptcy petition would be considered tantamount to perjury under California law.
Once the initial bankruptcy paperwork has been filed and the fees (cash or money order, remember; California does not accept personal checks) have been accepted by the county clerk for your area of the state, what’s become known as an automatic stay is instantly effected that prevents all attempts for collection from the credit card companies and other lenders. Not only will this prohibit telephone and direct mail harassment from creditors (which Californians are already protected from, to a certain extent, under state law), but this also means that the lenders cannot repossess cars, garnish wages, initiate foreclosure proceedings, or start any other legal actions meant to collect funds legally owed. While the so-called automatic stay should ordinarily remain valid for the duration of the bankruptcy, there are occasional contingencies in which the California courts may withdraw protections if the lenders could reasonably convince the trustee in charge of the borrower’s bankruptcy case that they deserve special circumstances.
Such circumstances, once again, do not happen often at all. Generally, they are only argued in the case of secured debts such as real estate or automobiles in which depreciation or poor upkeep could be an issue. Nevertheless, this eventuality should be kept in mind by all Californian borrowers. They should also check to see the legal status of their local utility companies. Once a subscriber has filed for bankruptcy protection, public utilities such as water or gas would be forced to continue services even in the absence of regular payments as long as the defaulted utility bills were part of the bankruptcy filing documents. Depending upon the amounts that are owed, however, this may be false economy on the part of the household filing for bankruptcy. Throughout the duration of the period where the trustee analyzes the debtor’s qualification, the utilities shall retain the legal right to demand a (sometime quite significant) deposit within a few weeks of the automatic stay. Borrowers already so financially harried as to first consider bankruptcy may not be able to afford the deposit, and they will have to consider – as with so many things – whether or not the potential dream of debt liquidation through Chapter 7 shall be worth the inevitable cost.
To return to the Chapter 7 bankruptcy process, the duration of court proceedings generally lasts for a period just over three months. In this time, the California courts will appoint a trustee with various duties that include analyzing the bankruptcy petition, examining the filer’s qualifications for an eventual elimination of debts, seizing all assets not considered exempt under California or federal law, overseeing the auction of all of these assets, and dispensing the funds collected from auction to the various lenders whose debts had been discharged through bankruptcy. The trustee will also a hold a meeting of creditors to be held roughly four weeks following the initial declaration of bankruptcy. In this meeting, the borrower or borrowers who had filed the bankruptcy petition will testify under oath while the lenders confirm the assets and debts set down in the original paperwork as well as ask any pertinent questions that may come about. For the vast majority of California borrowers, the meeting will likely entail nothing more than a single trustee verifying the accuracy of the paperwork and shouldn’t take any longer than twenty or thirty minutes. We understand how any legal proceedings may unnerve many citizens, but, if the information provided is complete and truthful, you will have nothing to worry about. Of course, should the information provided be somewhat less than truthful or if you had managed to miss some bit of property or forget about an old lien, you should expect additional meetings – and, in the worst possible scenario, even a criminal trial.
Presuming every aspect of the paperwork is verified and the eligibility of the borrower is deemed acceptable by the trustee and the state of California, discharge papers will be sent out by mail in twelve to fourteen weeks after the initial filing. Make sure that you keep this notice in your records as proof of bankruptcy to ensure that the debts have been legally erased. After all, even though the Chapter 7 bankruptcy has been completed, that does not mean you can simply forget about the program. Your credit reports will show evidence of bankruptcy for up to another decade after discharge, remember, and, while most of the damage to FICO scores will be able to be repaired before then (through regular payments of whichever secured credit cards you can manage to acquire), the resistance you will find from potential lenders, landlords, and even employers shouldn’t be forgotten. While trying to better your credit rating just after bankruptcy, though, you should remain vigilant about ensuring that each credit account or similar debt legally eliminated actually falls off the credit report. Whether purposeful or not, many credit card companies somehow forget to inform the three credit bureaus about the changes regarding their debt accounts, furthering lowering your already plummeting FICO score, but, under California law, they’ll be forced to update their information upon request. In the event that they remain recalcitrant, a copy of the original bankruptcy discharge should list the debt in question as forever erased and force compliance upon point of law.
If the borrower does not qualify for the Chapter 7 debt elimination program under California eligibility requirements, they’ll have no choice but to enter Chapter 13 debt restructuring. While consumers’ unsecured financial obligations above two hundred and seventy thousand dollars and secured loans above eight hundred thousand dollars will find it difficult to take advantage of this form of bankruptcy, most of the borrowers in California will still be relatively easily admitted to the protection. The fundamental blueprint of successfully declaring for Chapter 13 bankruptcy does not change much from the Chapter 7 guidelines within California. Borrowers must still fill out the litany of paperwork (formal petition, list of assets, debt matrix and so on) with the addition of a repayment plan that explains how the filer intends to satisfy the applicable financial obligation in a period between thirty six and sixty months. Obviously, this payment plan must be accompanied by not only a detailed list of all creditors but also an explanation of future earnings and, again, all assets though, in California, they should be protected from seizure upon compliance with the program.
As with Chapter 7 bankruptcies, trustees will still have to look at the entirety of the filer’s finances, and, since the debt reorganization technique is rather more complicated than simple liquidation, the time spent between debtor and trustee will grow alongside all difficulties until the eventual end of the program. This Chapter 13 payment schedule depends upon a variety of different factors which prioritize the debts. California and federal tax debts less than three years old, familial obligations, and moneys owed to the courts because of past criminal assessments obviously take precedence while credit card accounts or similar unsecured personal debt burdens will be repaid more slowly. Once the schedule has been finalized to the court’s approval using guidelines for household expenses (the same for all Californians as outlined by the Internal Revenue Service), the borrowers must then send funds each month to the trustee who in turn distributes the money to the various lenders. Typically, Chapter 13 discharge will come after the payment plan has been successfully fulfilled even if all unsecured debts were not paid in full although, once again, many of the borrowers’ debts could never be officially wiped from the record until completely satisfied regardless of bankruptcy discharge.
Since Chapter 13 bankruptcies have roughly the same effect upon the filer’s credit but require borrowers to repay the majority of their debts (while living under the sometimes untenable household budgets authorized by the California courts and IRS), Chapter 7 bankruptcies shall always be far more popular for any consumers fighting against seemingly insurmountable debts. Still, even for those borrowers accepted into the Chapter 7 bankruptcy program, they must still – as we have written – face the possibility of asset forfeiture to repay past lenders. In California, this eventuality is slightly less harsh than what borrowers of other states must go through. Within our state, debtors filing for Chapter 7 bankruptcy are allowed to decide whether or not to use one of two different schedules of exemptions – they’re also, rather uniquely, allowed to employ federal exemptions along with state exemptions whenever they would seem more beneficial – to attempt to safeguard their possessions. As you could imagine, the entire list of exemptions would dwarf even this lengthy article, but borrowers considering Chapter 7 protection in California should be aware of at least some of the details contained within the state bankruptcy code.
In the first system of California bankruptcy exemptions, homesteads – which, for these purposes, can mean anything from condos to houseboats to trailers – are protected up to varying dollar amounts depending upon age and income of the borrower or borrowers and the size of the family with special dispensations made for the disabled. All household furnishings and apparel that are demonstrably needed by the family are similarly vouchsafed, though much then depends upon the evaluation of the California court trustee, as well as burial plots, medical gear, and any materials intended for home maintenance worth less than two thousand dollars. Objects that are provably found to be family heirlooms, artwork, and jewelry are protected as long as the total value is found to be under five thousand. Automobiles must be worth less than nineteen hundred dollars, but, if you could claim them necessary for work, the vehicles in question may be shelved under the five thousand dollar tools of trade exemption. Unemployment benefits and workers compensation are protected as well as at least three quarters percentage of unclaimed wages. All disability benefits are disallowed from seizure as well as any financial aid to active students; also, the pensions of employees who worked for the state of California or federal government shouldn’t be worries over. Life insurance policies that have not yet matured are protected up to eight thousand dollars – double that, if both husband and wife declare bankruptcy – and any benefits from matured policies depended upon for support will be left alone.
The second system of exemptions that Californians may take advantage of when declaring Chapter 7 bankruptcy applies more to the young or especially indigent. Husbands and wives are disallowed from doubling any of their exemptions, for example, and the homestead exemption would barely cover any modern California dwelling. Also, tools of trade are only guaranteed to the amount of seventeen hundred and fifty dollars. On the other hand, personal property – which covers everything from household furnishings and appliances to musical instruments and animals – will be exempted for up to four hundred and fifty dollars per item, jewelry to eleven hundred and fifty, and automobiles to nearly three thousand dollars. Unemployment compensation and all other stipends (social security payments, veterans’ benefits, public employee pensions) will be unaffected in the same way as with the other system. Either of the California exemption schedules are generally considered superior to the federal guidelines which tend to cover only the bare minimum of human needs according to replacement value of all goods, but, at the same point, every consumer thinking seriously about declaring bankruptcy protection needs to spend some time wondering about whether or not they want to risk the potential loss of their collected property. For some California borrowers, we understand, they realistically may have no other choice but to delve into such treacherous waters, but, before your family’s most prized possessions are lost to the auction block for negligible gains, you should understand exactly what the consequences of bankruptcy may be.
For secured debts in California bankruptcies, the rules are somewhat different. Any loans attached to property held by the borrowers are subject to a statement of intent which must be given to the courts no later than forty five days past the initial declaration, and the actual decision of what to do with such loans is largely up to the borrowers themselves. They can, for instance, simply cede the asset in question to the original lender, stop making payments, and attempt to erase the debt through Chapter 7 liquidation. Alternatively, they may monetarily offer the lender their estimate of the current value of the asset in question and see if the asset will no longer be considered collateral regardless of the remaining funds owed. More commonly, the secured debts will simply be reaffirmed through a formal agreement accepted by both the lenders and the trustee which essentially removes the debt from the Chapter 7 bankruptcy process. These are largely pro forma notifications, but the reaffirmation document must nonetheless be received by an officer of the California courts for the bankruptcy to continue unabated.
In rare cases, borrowers may be permitted to proceed along with the bankruptcy without reaffirming the loans which removes the borrower’s liability should repossession or foreclosure inevitably occur from lack of payments and the assets be found to be worth less than the accumulated debts. For California borrowers truly desperate, there’s even the opportunity while initially declaring bankruptcy to attempt to discharge the loan and yet maintain the objects purchased without any additional payments made. This rarely happens nowadays – it was far more common when household items were considered necessary collateral for personal loans; the new availability of credit cards for most every Californian effectively put an end to the practice – but, if you may be in a similar situation, you should be aware it does exist. There are so many variables to think about when considering Chapter 7 or Chapter 13 protection. In some cases, the spouse of the debtor filing may not actually have to declare bankruptcy themselves – thereby limiting the negative effects upon credit score – while still enjoying many of the more beneficial results of liquidated or restructured debts under state laws. Attorneys and their accompanying prices are unfortunately the necessary consequence of personal bankruptcy within California and the United States as a whole this very moment, and the preceding discourse should suggest to all borrowers how important knowledge of the effects of bankruptcy should be before they make any early decisions about their family’s financial destiny.
As your authors briefly mentioned at the beginning of this article, other alternatives to bankruptcy do now exist which may be of an even greater benefit to the right borrower than Chapter 7 protection. Secured debt consolidations, for instance, may temporarily lower the interest rates of home owners’ accumulated debts provided they have sufficient credit and income (and fearlessness regarding the free fall of Californian property values) to trade the equity of their residence for a moment’s respite. Consumer Credit Counseling and similar endeavors effectively lower their client’s payments – and, in so doing, equally raise the eventual balance that must be paid – but these companies’ effects upon credit ratings aren’t far different from what would be felt through bankruptcy. Debt settlement, on the other hand, utilizes the best aspects of mortgage consolidation and Consumer Credit Counseling to lower the overall balances of unsecured financial burdens without overly harming FICO scores nor risking any property investments. When successfully accomplished through certified professionals, debt settlement negotiation employs the threat of Chapter 7 bankruptcy to carve away up to sixty percent of the applicable debt balances through a succession of talks with representatives of the credit card companies. Depending upon your income potential or the specific lenders that you retain, bankruptcy within California may yet be the correct choice for debt relief solutions, but, nevertheless, it’s surely worth the time to investigate all of the next possible steps – particularly if the first consultation’s without any charge (something the bankruptcy attorneys licensed in California have no reason to offer). Anyone sufficiently curious about the bankruptcy alternative owes it to themselves to thoroughly investigate every bit of information about the program, but smart borrowers should also do the leg work searching out all available options to see whether or not, at the end of their period of discovery, they’ll truly need the bankruptcy protection at all.
The decision to reach out for help with your debt is not one that's easy to make. You were raised to "do the right thing", but now it’s nearly unbearable. You struggle along while your creditors are turning up the heat. And now you’re at the point where the late fees, penalties and interest expense make it impossible to keep your head above water.
Ask yourself this. If you could eliminate your debt without permanently damaging your credit, why wouldn't you?
