What Is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

What Can Bankruptcy Do for Me?

Bankruptcy may make it possible for you to:

  • Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
  • Stop foreclosure on your house or manufactured home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.)
  • Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
  • Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
  • Restore or prevent termination of utility service.
  • Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.

What Can’t Bankruptcy Do For Me?

Bankruptcy cannot, however, cure every financial problem. Nor is it the right step for every individual. In bankruptcy, it is usually not possible to:

  • Eliminate certain rights of “secured” creditors. A creditor is “secured” if it has taken a mortgage or other lien on property as collateral for a loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally cannot keep secured property unless you continue to pay the debt.
  • Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines, and most taxes.
  • Discharge debts that arise after bankruptcy has been filed.
  • Protect cosigners on your debts. When a relative or friend has cosigned a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan. Cosigners on some debts can be protected, however, if a chapter 13 bankruptcy is filed.

What Different Types of Bankruptcy Cases Should I Consider?

There are four types of bankruptcy cases provided under the law:

  • Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires an individual to give up property which is not “exempt” under the law, so the property can be sold to pay creditors. Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they cannot avoid or afford to pay.
  • Chapter 11, known as “reorganization,” is used by businesses and a few individuals whose debts are very large.
  • Chapter 12 is reserved for family farmers and fishermen.
  • Chapter 13 is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years using their current income.

Most consumers filing bankruptcy will want to file under either chapter 7 or chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

What Is A Chapter 7 Bankruptcy Case?

In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.

If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

If your income is above the median family income in your state, you may consider filing a chapter 13 case. Median family income is different in each state. For example, in 2012, the median income for a family of four ranged from a low of just under $56,365 in New Mexico to $105,175 in New Jersey. Other states fall in between. Higher-income consumers who are above the state median must fill out “means test” forms requiring detailed information about their income and expenses. If the forms show, based on standards in the law, that they have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they cannot file a chapter 7 case, unless there are special extenuating circumstances.

What is a Chapter 13 Bankruptcy Case?

In a chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property–especially your home and car–which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.

You should consider filing a chapter 13 plan if you:

Own your home and are in danger of losing it because of money problems;
Are behind on debt payments, but can catch up if given some time;
Have valuable property which is not exempt, but you can afford to pay creditors from your income over time.
You will need to have enough income during your chapter 13 case to pay for your necessities and to keep up with the required payments as they come due.

What is a Chapter 11 Bankruptcy Case?

In most cases, it is preferable for consumers to reorganize their financial affairs with a Chapter 13 plan, rather than a Chapter 11 plan. However, there are situations where Chapter 13 is not available, or will not produce the best result. For instance, if the amount of your secured debts or the amount of your unsecured debts exceeds the debt limits set forth in Section 109(e) of the bankruptcy code, you most likely will not be eligible to file a Chapter 13 case. Also, Chapter 13 plans are limited to five years in duration. If you need more time to organize your financial affairs, Chapter 11 may be an option for you.

Chapter 11 cases are much more involved than Chapter 13 cases. Accordingly, the fees for Chapter 11 cases are typically much higher than the fees for Chapter 13 cases.

What Does It Cost to File for Bankruptcy?

It now costs $306 to pay the filing fee for bankruptcy under chapter 7 and $281 to file for bankruptcy under chapter 13, whether for one person or a married couple. The court may allow you to pay this filing fee in installments if you cannot pay it all at once. If you hire an attorney you will also have to pay the attorney fees you agree to.

Our firm will give you a quote for the attorneys’ fees in your particular case.  Attorneys’ fees start at $845 for simple individual Chapter 7 cases.  The attorneys’ fees are higher for more complicated Chapter 7 cases, Chapter 13 cases and Chapter 11 cases.

What Must I Do Before Filing Bankruptcy?

You must receive budget and credit counseling from an approved credit counseling agency within 180 days before your bankruptcy case is filed. The agency will review possible options available to you in credit counseling and assist you in reviewing your budget. Different agencies provide the counseling in-person, by telephone, or over the Internet. If you decide to file bankruptcy, you must have a certificate from the agency showing that you received the counseling before your bankruptcy case was filed.

Most approved agencies charge between $20–$50 for the pre-filing counseling. However, the law requires approved agencies to provide bankruptcy counseling and the necessary certificates without considering an individual’s ability to pay. If you cannot afford the fee, you should ask the agency to provide the counseling free of charge or at a reduced fee.

If you decide to go ahead with bankruptcy, you should be very careful in choosing an agency for the required counseling. It is extremely difficult to sort out the good counseling agencies from the bad ones. Many agencies are legitimate, but many are simply rip-offs. And being an “approved” agency for bankruptcy counseling is no guarantee that the agency is good. It is also important to understand that even good agencies won’t be able to help you much if you’re already too deep in financial trouble.

Some of the approved agencies offer debt management plans (also called DMPs). A DMP is a plan to repay some or all of your debts in which you send the counseling agency a monthly payment that it then distributes to your creditors. Debt management plans can be helpful for some consumers. For others, they are a terrible idea. The problem is that some counseling agencies will pressure you into a debt management plan as a way of avoiding bankruptcy whether it makes sense for you or not. You should not consider a debt management plan if making the monthly plan payment will mean you will not have money to pay your rent, mortgage, utilities, food, prescriptions, and other necessities. It is important to keep in mind these important points:

  • Bankruptcy is not necessarily to be avoided at all costs. In many cases, bankruptcy may actually be the best choice for you.
  • If you sign up for a debt management plan that you can’t afford, you may end up in bankruptcy anyway (and a copy of the plan must also be filed in your bankruptcy case).
  • There are approved agencies for bankruptcy counseling that do not offer debt management plans.

It is usually a good idea for you to meet with an attorney before you receive the required credit counseling. Unlike a credit counselor, who cannot give legal advice, an attorney can provide counseling on whether bankruptcy is the best option. If bankruptcy is not the right answer for you, a good attorney will offer a range of other suggestions. The attorney can also provide you with a list of approved credit counseling agencies, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust.

What Property Can I Keep in a Bankruptcy Case?

In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. If you moved to California from a different state within two years before your bankruptcy filing, you may be required to use the exemptions from the state where you lived just before the two-year period.

California has a dual exemption scheme–this means that you must choose to exempt assets EITHER under Section 703 OR under Section 704 of the California Civil Code.  The following is a list of some of the important exemptions under each scheme–amounts are current as of March, 2013, but these amounts are periodically adjusted, so check with us for the latest information.

What Assets Are Protected Under Section 703 of the California Code of Civil Procedure?

Section 703 is often referred to as the “Wildcard” or “Grubstake” exemption scheme.  The idea is that if you do not have equity in a home, Section 703 allows you to protect other kinds of assets instead.  Some of the important exemptions under Section 703 include:

  • Homestead:  Equity in your home up to $24,060.
  • Wildcard:  Unused portion of homestead PLUS an additional $1,280 (This means that if you do not have equity in a home, you can protect up to $25,340 of ANY asset–including excess equity in a vehicle, cash, investments, etc.).
  • Motor Vehicles:  Up to $4,800 in motor vehicle equity.
  • Tools of Trade:  Items used in a trade or business up to $7,175
  • Personal Injury Claims:  Claims for personal bodily injury up to $24,060.
  • Household Items:  Household goods, personal clothing and effects, animals, etc., not to exceed $600 for any individual item.
  • Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance, and pensions–regardless of the amount.
  • Retirement accounts:  Up to $1,000,000 for eligible retirement accounts.

What Assets Are Protected Under Section 704 of the California Code of Civil Procedure?

Section 704 is often referred to as the “Homestead” exemption scheme.  Section 704 allows homeowners to protect equity in their homes, along with certain other kinds of assets.  Some of the important exemptions available under Section 704 include:

  • Homestead:  Equity in your home up to $75,000 for single persons, $100,000 for married individuals or single individuals with dependent minor children or up to $175,000 for individuals over 65, permanently disabled individuals or individuals over age 55 with very low annual income.
  • Motor Vehicles:  Up to $2,725 in motor vehicle equity.
  • Tools of Trade:  Items used in a trade or business up to $7,175, or up to $14,350 if both the debtor and the debtor’s spouse are involved in the trade or business.
  • Personal Injury Claims:  Claims for personal bodily injury if “reasonably necessary” for suport.
  • Household Items:  Household goods, personal clothing and effects, animals, etc., not to exceed $600 for any individual item.
  • Public Benefits:  Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits and public assistance up to limited dollar amounts.
  • Retirement accounts:  Up to $1,000,000 for eligible retirement accounts.

What Else Should I Know About Exemptions?

In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement.

You also only need to look at your equity in property. That means you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $90,000 house with a $80,000 mortgage, you have only $10,000 in equity. You can fully protect the $90,000 home with a $10,000 exemption.

While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.

What Will Happen to My Home and Car If I File Bankruptcy?

In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it, if you pay its non-exempt value to creditors in chapter 13.

However, some of your creditors may have a “security interest” in your home, automobile, or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during the bankruptcy case if the creditor gets permission from the court, or after the bankruptcy case is closed.

In a chapter 13 case, you may be able to keep certain secured property by paying the creditor the value of the property rather than the full amount owed on the debt. Or you can use chapter 13 to catch up on back payments and get current on the loan.

There are also several ways that you can keep collateral or mortgaged property after you file a chapter 7 bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.

For more information regarding vehicles in Chapter 7 cases, see the sections below on Reaffirmation Agreements and Lease Assumption Agreements.

Can I Own Anything After Bankruptcy?

Yes! Many people believe they cannot own anything for a period of time after filing for bankruptcy. This is not true. You can keep your exempt property and anything you obtain after the bankruptcy is filed. However, if you receive an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to your creditors if the property or money is not exempt.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy will not normally wipe out:

  • Money owed for child support or alimony;
  • Most fines and penalties owed to government agencies;
  • Most taxes and debts incurred to pay taxes which cannot be discharged;
  • Student loans, unless you can prove to the court that repaying them will be an “undue hardship”;
  • Debts not listed on your bankruptcy petition;
  • Loans you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
  • Debts resulting from “willful and malicious” harm;
  • Debts incurred by driving while intoxicated;
  • Mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation.

Occasionally, if complications arise, or if you choose to dispute a debt, you may have to appear at a hearing. In a chapter 13 case, you may also have to appear at a hearing when the judge decides whether your plan should be approved. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney

What Else Must I Do to Complete My Case?

After your case is filed, you must complete an approved course in personal finances. This course will take approximately two hours to complete. Many of the course providers give you a choice to take the course in-person at a designated location, over the Internet (usually by watching a video), or over the telephone. Your attorney can give you a list of organizations that provide approved courses, or you can check the website for the United States Trustee Program office at www.usdoj.gov/ust. If you cannot afford the fee, you should ask the agency to provide the course free of charge or at a reduced fee. In a chapter 7 case, you should sign up for the course soon after your case is filed. If you file a chapter 13 case, you should ask your attorney when you should take the course. A certification from the course provider that you completed the course must be filed with the bankruptcy court. If it is not filed, you will not receive a discharge of your debts.

Will Bankruptcy Affect My Credit?

There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse.

The fact that you’ve filed a bankruptcy can appear on your credit record for ten years from the date your case was filed. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

If you decide to file bankruptcy, remember that debts discharged in your bankruptcy should be listed on your credit report as having a zero balance, meaning you do not own anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct.

What Else Should I Know?
  • Utility services:  Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed.
  • Discrimination:  An employer or government agency cannot discriminate against you because you have filed for bankruptcy. Government agencies and private entities involved in student loan programs also cannot discriminate against you based on a bankruptcy filing.
  • Driver’s license:  If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back.
  • Cosigners:  If someone has cosigned a loan with you and you file for bankruptcy, the cosigner may have to pay your debt. If you file under chapter 13, you may be able to protect cosigners, depending upon the terms of your chapter 13 plan.

How Do I Find a Bankruptcy Attorney?

As with any area of the law, it is important to carefully select an attorney who will respond to your personal situation. The attorney should not be too busy to meet you individually and to answer questions as necessary.

The best way to find a trustworthy bankruptcy attorney is to seek recommendations from family, friends or other members of the community, especially any attorney you know and respect. You should carefully read retainers and other documents the attorney asks you to sign. You should not hire an attorney unless he or she agrees to represent you throughout the case.

In bankruptcy, as in all areas of life, remember that the person advertising the cheapest rate is not necessarily the best. Many of the best bankruptcy lawyers do not advertise at all.

Document preparation services also known as “typing services” or “paralegal services” involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers cannot offer legal advice on difficult bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also many shady operators in this field, who give bad advice and defraud consumers.

When first meeting a bankruptcy attorney, you should be prepared to answer the following questions:

  • What types of debt are causing you the most trouble?
  • What are your significant assets?
  • How did your debts arise and are they secured?
  • Is any action about to occur to foreclose or repossess property, to attach your wages or bank account, or to shut off utility service?
  • What are your goals in filing the case?

Can I File Bankruptcy Without an Attorney?

Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is difficult and you may lose property or other rights if you do not know the law. It takes patience and careful preparation. Chapter 7 (straight bankruptcy) cases are somewhat easier. Very few people have been able to successfully file chapter 13 (reorganization) cases on their own.

What is a Lease Assumption Agreement?

A lease assumption agreement is an agreement to maintain the existing terms of a lease agreement after filing a bankruptcy case. Technically, a lease should be “assumed” instead of “reaffirmed.” Your lender may send you a short form requesting that you assume your lease. If you sign the assumption agreement, then your original lease contract will remain binding on you—including any provisions regarding excess mileage, vehicle condition, maintenance, insurance, etc. Once you sign and return an assumption agreement, it will be binding on you. There will be no court hearing and you will not have the opportunity to revoke the lease assumption.

You should not sign an assumption agreement unless you are sure that you want to keep the lease throughout the lease term and you are willing to pay any penalties if you do not fully comply with the original contract. If you do not sign the lease assumption, you will no longer be responsible for liability under the contract (such as liability for going over the mileage allowance, vehicle maintenance issues, etc.). Most leasing companies will allow you to finish out your remaining lease term and complete your lease payments–even if you do not assume the lease. However, if you do not assume the lease, you could also lose your rights under the lease contract (such as the right to purchase the vehicle on lease termination).

Assumption Agreements are strictly voluntary. Your discharge will not be affected by your decision whether or not to sign one of these types of agreement. Whether or not you decide to reaffirm a loan or assume a lease depends on the type of loan or lease and your intentions with respect to the contract.

Your attorney can not sign your assumption agreement for you. The assumption agreement will not be binding on you unless you sign it and return it to the finance company while your bankrutpcy case remains pending.

Many leasing companies ignore the distinction between a vehicle purchase contact and a lease. Such companies may ask you to “reaffirm” your lease. If you receive a request to “reaffirm” a vehicle lease, you should review the section above regarding reaffirmation agreements and decide whether you would like to reaffirm the lease. Once a lease has been assumed, it remains in place, just as if you had never filed a bankruptcy case.

In some cases, assuming a lease may help your credit score. But you must make all your payments and comply with all of the terms of the lease. If you fully comply, then your timely payments should continue to be reported to credit reporting agencies after you assume the loan.

What is a Reaffirmation Agreement?

Reaffirmation agreements are agreements to be liable on a debt which would otherwise be discharged in a bankruptcy case.

Reaffirmation Agreements are strictly voluntary. Your discharge will not be affected by your decision whether or not to sign a Reaffirmation Agreement. Whether or not you decide to reaffirm a loan depends on the type of loan you have and your intentions with respect to the contract.

We do not usually represent our clients with respect to reaffirmation agreements.  Such representation is excluded from our standard retainer agreement.  Note that in many cases, you are actually better off not having an attorney sign a reaffirmation agreement for you because the attorney’s signature makes the agreement binding on you—-even if the agreement might create a hardship for you.

Many vehicle lenders will allow you to “retain and pay.” This means that they will let you keep your vehicle and pay off your vehicle loan balance, even though you decide not to sign a reaffirmation agreement. However, other lenders will repossess your vehicle if you do not reaffirm the loan—-even if you are current on the vehicle payments and you have kept the vehicle insured. Ford, Chrysler and their affiliates (Land Rover, Jaguar, etc.) are known to repossess vehicles if a Reaffirmation Agreement is not signed—-even if the borrower has made all of the payments. Other lenders may also choose to do so. Therefore, the safest thing to do, if you wish to keep the vehicle, is to fill out, sign and return the Reaffirmation Agreement.

If you do not retain us to represent you regarding your Reaffirmation Agreement, we will still provide general information to you.  However, you will need to contact your lender for instructions regarding completion and submission of the Reaffirmatino Agreement.

Once the lender receives the signed reaffirmation agreement, they will file a copy with the Bankruptcy Court and the Court will set a hearing date. You will need to go to the hearing so that the Bankruptcy Judge can decide whether or not to approve the reaffirmation agreement.

If the Judge decides that the reaffirmation agreement was not filled out correctly, or that the loan might create a hardship for you, or that there is some other reason not to approve the reaffirmation agreement, he or she may deny the reaffirmation agreement. If the Judge decides that the reaffirmation agreement is properly completed and that the loan is not a hardship for you, then he or she may approve the reaffirmation agreement. Rejection of the agreement by the Judge can create a “best of both worlds” situation. The reason is that bank will not be able to sue you for a deficiency if you later default on the loan, but you have the benefit of knowing that the lender will continue to accept your payments and will not repossess the vehicle.

If the Judge approves the reaffirmation agreement, then it will become binding on you. This means that the vehicle loan agreement that was in place before your bankruptcy case was filed will still be in place. If you later default on the vehicle loan, the lender will be able to repossess the vehicle and sue you for a deficiency if they are unable to recover the full loan amount by auctioning off the vehicle.

If the Judge approves the reaffirmation agreement, you will have a period of up to sixty (60) days, or until your case is closed, whichever comes first, to revoke the reaffirmation agreement. In order to revoke the agreement, you will need to file appropriate paperwork with Bankruptcy Court and give notice to the lender. You should ask us for help if you need assistance in doing this.

Will Reaffirming Debts Help My Credit Score?

In some cases, yes. If a loan has been reaffirmed and the Judge has approved the reaffirmation agreement, then the lender will usually continue to report your payment history to credit reporting agencies. Therefore, if you make all your payments in a timely manner, this may help you to rebuild your credit score after a bankruptcy filing. However, note that creditors are NOT required to report positive payment history, even if you reaffirm the loan.

Should I Reaffirm My Mortgage?

We almost never recommend signing a reaffirmation agreement for a loan secured by real estate. Such agreements are not required by the Bankruptcy Code. Moreover, such agreements can end up creating significant liability for you that you would not otherwise have. If you think you would like to reaffirm a real estate loan, you should contact us for advice before proceeding.

Should I reaffirm a loan for personal property other than a vehicle?

You may receive a reaffirmation agreement from a jewelry store, furniture store, electronics store or other creditor who claims to have a “security interest” in your property. We almost never recommend signing such reaffirmation agreements. If you think you would like to reaffirm such a loan, you should speak with us before proceeding. You may have other options, such as the right to redeem the items by paying only the current market value of the items—even if the current value is significantly less than the original purchase price.