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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.