What Happens When You File Bankruptcy in California

Filing for bankruptcy is a significant decision that can have far-reaching consequences on your financial future. If you’re considering this option in California, it’s essential to understand the process and implications. This guide will walk you through the key aspects of filing for bankruptcy in the Golden State.

Table of Contents

1. Introduction to Bankruptcy
2. Types of Bankruptcy: Chapter 7 and Chapter 13
3. Eligibility Requirements
4. The Filing Process
5. The Role of the Bankruptcy Trustee
6. Impact on Assets and Debts
7. Life After Bankruptcy

1. Introduction to Bankruptcy

Bankruptcy is a legal process designed to help individuals and businesses eliminate or repay their debts under the protection of the federal bankruptcy court. In California, as in other states, bankruptcy laws are meant to give a fresh start to those overwhelmed by financial obligations they can no longer manage.

2. Types of Bankruptcy: Chapter 7 and Chapter 13

There are two primary types of bankruptcy for individuals in California: Chapter 7 and Chapter 13.

• Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, it involves selling off non-exempt assets to pay creditors. Most unsecured debts, such as credit card debt and medical bills, can be discharged.
• Chapter 13 Bankruptcy: This is a reorganization bankruptcy where the debtor creates a repayment plan to pay back all or a portion of their debts over three to five years.

3. Eligibility Requirements

Eligibility for bankruptcy varies based on the type:

• Chapter 7: Requires passing the Means Test, which compares your income to the median income in California. If your income is below the median, you qualify for Chapter 7.
• Chapter 13: Requires a steady income to make monthly payments under the repayment plan. There are also debt limits; as of the time of writing, unsecured debts must be less than $419,275 and secured debts less than $1,257,850.

4. The Filing Process

Filing for bankruptcy involves several steps:

• Credit Counseling: You must complete credit counseling from an approved agency within 180 days before filing.
• Filing the Petition: Submit a bankruptcy petition along with schedules of assets, liabilities, income, and expenditures to the bankruptcy court.
• Automatic Stay: An automatic stay goes into effect, stopping most collection actions against you.
• 341 Meeting: Attend the meeting of creditors, where the trustee and creditors can ask questions about your financial situation and bankruptcy forms.

5. The Role of the Bankruptcy Trustee

A bankruptcy trustee is appointed to oversee your case. Their responsibilities include:

• Reviewing your bankruptcy forms and documents.
• Conducting the 341 meeting.
• Liquidating non-exempt assets in Chapter 7 cases or overseeing the repayment plan in Chapter 13 cases.
• Distributing proceeds to creditors.

6. Impact on Assets and Debts

• Exempt vs. Non-Exempt Assets: California allows you to choose between two sets of exemptions to protect certain assets. Exempt assets are protected from liquidation in Chapter 7, while non-exempt assets may be sold to pay creditors.
• Dischargeable Debts: Most unsecured debts can be discharged, meaning you’re no longer legally required to pay them.
• Non-Dischargeable Debts: Certain debts, such as student loans, child support, and some taxes, typically cannot be discharged.

7. Life After Bankruptcy

• Credit Impact: Bankruptcy will stay on your credit report for 7-10 years, affecting your ability to obtain credit.
• Rebuilding Credit: Start rebuilding your credit by making timely payments on any remaining debts, securing a secured credit card, and maintaining a budget.
• Financial Management: Consider financial counseling to help you manage your finances and avoid future financial difficulties.

Filing for bankruptcy in California can provide relief from overwhelming debt, but it comes with significant consequences. Understanding the process and its implications can help you make an informed decision and prepare for life after bankruptcy.