Unexpected expenses such as medical bills or dividing one household into two as the result of divorce can increase the need for debt relief. Whatever the reason for your debt troubles, this is how to prepare for bankruptcy in California.
Decide What Type of Bankruptcy to Declare
When you’re declaring bankruptcy in California, you’ll need to choose between two different types: Chapter 7 and Chapter 13. Each offers different options and protections for filers.
Chapter 7: How it Works
Also known as a liquidation bankruptcy, Chapter 7 allows the debtor to discharge, or eliminate, all debts owed that are eligible for discharge. Under bankruptcy laws, some debts can only be discharged under limited circumstances. Some of these include:
- student loans;
- tax debt;
- child support;
- debts owed for injury caused to another while the debtor was under the influence of alcohol (such as DUI); and
- restitution owed as a result of a criminal conviction.
While all eligible debts are eliminated, in rare cases, some of the debtor’s assets may be subject to sale by the Trustee to satisfy those debts. Assets that are exempt, or protected from sale, include:
- retirement accounts such as pension, profit sharing and stock bonus plans, IRAs, and deferred compensation plans such as your 401(k) account;
- your “homestead” (the house you claim as your primary residence) up to certain equity limits;
- your primary vehicle (especially if it is used for purposes such as business or transportation of children if you live in an area where no other means such as public transportation is available);
- any single household item that is worth less than $675 (for example, valuable antiques and jewelry could be included in your assets). Chances are that this is the last place the Trustee will look to for assets because of the time and expense of having each item appraised but it is still legally an option.
California offers two systems of exemptions and most debtors don’t have to surrender any property at all in bankruptcy.
Note that Chapter 7 is reserved for those most in need of debt relief, so you’ll have to qualify in order to use this chapter.
Chapter 13: How it Works
The other type of bankruptcy commonly filed by individuals is Chapter 13. Unlike Chapter 7, which settles all eligible debts within a few months, Chapter 13 is a reorganization of your existing debt over a period of time. You and the Trustee will create a plan to pay off all, or a percentage, of your debt over three to five years, depending on the amount of the debt and assets in the plan. You’ll make one monthly payment and the Trustee will distribute it to your creditors.
With a Chapter 13 plan, you can catch up on mortgage and car payments and continue to make your regular payments. Any leftovers every month will go to your unsecured creditors. At the end of the plan, the rest of your debts will be discharged.
The right bankruptcy chapter for you will depend on your unique financial circumstances, so consider consulting an experienced bankruptcy attorney to learn how each type will affect your finances and which will best meet your goals.
Filing Bankruptcy in California: Step by Step
Once you’ve decided which chapter is right for you, you’ll need to start preparing for the filing itself.
1. Gather the Necessary Documents
As with other legal proceedings, the court will require certain information from you to get the process started. Here is some of the information that you will need available to file your petition:
- valid identification, which can include a driver’s license, Social Security card, or birth certificate;
- a listing of all bank accounts in which you have an interest;
- a listing of all insurance policies that could result in a claim by or against you;
- all tax returns filed within the last two years (if you are behind on submitting your returns, you may be required to do before your petition can be filed);
- proof of ownership of any valuable assets that you own (including the deed to real property or a car registration);
- proof of your income for the previous six months. Even if you are currently unemployed, any money that you have made within the last six months must be submitted to the court. The best evidence of this is usually pay stubs; and
- any evidence of your particular circumstances. The need to file bankruptcy can arise from many sources. If a divorce or an unusual expense such as medical care has been a significant cause of your financial situation, any documents that prove these events should be submitted to the court.
2. Meet the Credit Counseling Requirement
Before your bankruptcy process starts, you’ll need to attend a credit counseling session through a court-approved service. They’ll help you go over your finances and decide whether bankruptcy is the best choice for you. This is not optional — failing to attend credit counseling can get your case dismissed.
3. Consult an Attorney
It’s possible to file a bankruptcy without the help of an attorney if your case is extremely simple, but most cases aren’t. The success rate for people filing their own bankruptcies (called a pro se filing), is very low. An attorney can help you navigate all the paperwork and requirements and can address any issues your creditors raise. They’re familiar with the process and the rules and can help you get through the process smoothly. Visit a few different lawyers in your area and talk to them about their fee structures and experience before you decide which one to hire.
See also: How much does it cost to file for bankruptcy?
What NOT to Do When Declaring Bankruptcy in CA
Even if you are just considering declaring bankruptcy in the future, the process will be much easier if you avoid making certain types of transactions within a specified period of time before you file. Some purchases and transfers of money are seen as fraudulent by the court, meaning it appears that you are taking these actions to hide some of your assets before the bankruptcy court gets a look at them. Even something done innocently without any intent to defraud the court can be illegal, sometimes even resulting in criminal charges.
One of the most common mistakes made is to transfer money or assets into another person’s name to keep them out of the bankruptcy estate. Many people don’t think that there would be anything wrong with transferring a car into your spouse’s name, or making a gift of it to one of your children. But even these can be viewed as fraudulent transactions by the court.
In most cases, the court will look at your transactions from the past 90 days to determine if any of them may be a problem for your bankruptcy. If they find any, they might actually “clawback” the transaction, meaning they’ll take that money or property back from the other party and make it a part of your bankruptcy estate.
Some other types of transactions that could be interpreted as fraud include:
- taking your name off of a joint bank account;
- selling your interest in a business that you own, or even just having your name removed as an owner;
- moving your money from your bank account into someone else’s; and
- selling real estate, even if you get a fair market price for it.
Other actions you should avoid prior to filing your bankruptcy petition include the following.
DON’T Pay off Certain Creditors, but Not Others
If a creditor has been patient with you when you are behind on payments, you may feel like you owe them special treatment and decide to pay them in full before all of your other creditors are named in your bankruptcy petition. But the bankruptcy court considers these to be “preferential transfers” that can not only lead to issues in your bankruptcy proceeding, but can also result in a clawback. If the bankruptcy Trustee feels that a payment has been made to avoid putting that creditor into the bankruptcy plan, he or she can actually sue the creditor to bring the amount paid back into the bankruptcy estate. Trying to be “fair” or “nice” to certain creditors can create more trouble for them than writing off the percentage of the debt that they lose through your bankruptcy plan.
See also: Paying Debts to Family Members Before Filing for Bankruptcy
DON’T Use Credit Cards for Unusual Expenses
The best course of action is to stop using your credit cards at all. If your history of charges includes regular expenses such as groceries, utility bills, gas, etc., these will likely be acceptable to the court. But any charges made beyond the norm, especially any expensive items, will be subject to close scrutiny by the court. Charges of over $650 made within 90 days of filing are generally prohibited.
See also: Five Mistakes to Avoid When You’re Struggling with Debt
DON’T File a Lawsuit
If you feel that someone owes you money, or you have a business dispute to resolve, don’t file a lawsuit against them before you file for bankruptcy. Anything that you recover from the suit can become property of the bankruptcy estate.
DON’T Make Business or Other Deals That Will Result in Payment to You
If you expect to receive money for any reason, these funds could become a part of your bankruptcy estate. Some examples include a bonus that you will receive at work, money from an inheritance, or even a tax refund.
If any of these transactions have occurred, or if you expect them to occur in the near future, it may be in your best interest to delay your bankruptcy filing. The date of filing is the date the court uses to determine these “look back” periods to see if any of these prohibited transactions have been made.
Making the Final Decision to File Bankruptcy
The bankruptcy process is complicated. For someone in serious need of debt relief, it’s worth it. Regardless of the reasons that led to your insurmountable debt, having a clean slate as provided by Chapter 7 or having your debts under management by the bankruptcy court until they are resolved in Chapter 13 can help set you on a new financial path.
If you’re struggling with debt and think bankruptcy may be the right choice for you, contact one of our experienced personal bankruptcy attorneys for a free consultation. We’ll go over your financial situation and help you determine the best way to deal with your debt.