Bankruptcy in California
Filing bankruptcy in California is very different than filing bankruptcy in any other state and it has nothing to do with earthquakes, a beautiful shoreline, Hollywood, or being on the cutting edge. It has everything to do with bankruptcy exemptions.
In this article we’ll provide insider advice on how to prepare to work with a bankruptcy attorney, find the attorney who is a good fit for you, choose between filing Chapter 7 and Chapter 13 bankruptcies, and how California bankruptcy exemptions differ from those of the 49 other states.
How California Bankruptcy Law Differs from the Laws of Other States
Federal law dictates bankruptcy procedure. This means how you go about filing bankruptcy and the hoops you must jump through to get a discharge are the same no matter what state you file in. However, the way assets are protected is unique to California.
A two-tier exemption system is what makes California truly unique. Though some other states may appear to have a two-tier system, the choice is likely between the individual state and the federal exemption list.
In California, there is no choice between state and federal exemptions. The federal exemptions are not an option.
Instead, if you’re a California resident, you need to choose between filing under the “System 1” and the “System 2” exemptions.
If you own a house, System 1 is likely the best choice for you (but you should always consult with a qualified bankruptcy attorney to determine the best choice for your individual situation).
In general, System 1 allows married couples filing jointly to double the exemptions. There are some exceptions. System 2 does not permit doubling.
The homestead, jewelry, and wage exemptions under System 1 are much higher than under System 2.
If you don’t own a house, System 2 may be the best choice for you (but you should always consult with a qualified bankruptcy attorney to determine the best choice for your individual situation).
All child support and alimony are exempt under System 2, but not under System 1.
System 2 allows for a “wildcard” exemption equal to any unclaimed homestead amount, up to $22,075, plus an additional exemption of $1,175.
Filing Bankruptcy in California: Chapter 7 or Chapter 13
Filing Chapter 7 is typically preferred because the filer can get rid of credit card, medical bill, second and third mortgages, personal loans, and balances on homes that have been foreclosed upon or cars that have been repossessed. In extremely limited cases, very old tax debts can be discharged. Discharge means that you never have to pay those debts back. Never ever.
The catch is that you have to qualify to file for Chapter 7. In general, it’s for “lower” income earners. But, you might be surprised to see just how much you can earn and still file for Chapter 7 bankruptcy.
While a “means test” is used to determine eligibility, it’s not as simple as it looks. If you don’t think you qualify at first glance, consult with a qualified bankruptcy lawyer because there’s more than one way to qualify.
Chapter 13 is usually the best alternative to Chapter 7. The good news is there is no qualification test. The debts that aren’t discharged are reorganized, meaning that you may have lower car payments, be able to catch up on mortgage payments, and reorganize any tax debts owed.
How to Find and Select a Bankruptcy Attorney
To find a great solid bankruptcy lawyer, ask your financial advisor, CPA, or estate planning attorney for a referral. These professionals deal with clients in your situation every day. Other great sources of referrals are family and friends.
If you prefer to keep your financial stresses private, search out an attorney who practices bankruptcy law (and not a million other areas of practice). A jack of all trades is an expert in none.
Check out websites, blogs, newsletters, and ebooks offered by California bankruptcy attorneys. When you find one that may be a good fit, contact the office for a chat.
Most bankruptcy law firms will offer a no cost, no obligation consultation or phone interview so you can determine whether that lawyer is a good fit for you.
How to Prepare to Work with a Bankruptcy Attorney
Like a medical doctor can only provide a sound diagnosis and cure if she knows all of your symptoms, a bankruptcy lawyer can only let you know if bankruptcy is appropriate; which Chapter to file under; and how to best protect you, your family, and your assets if he or she has all of your personal information.
Start collecting your financial papers, including income statements, bills, contracts, assets, and payments made. If in doubt, disclose the information.
Where to Get Help Filing Bankruptcy
With a nod to Hollywood, bankruptcy is not a “Lone Ranger” sport. You likely would benefit from professional guidance. Be sure to consult with a qualified bankruptcy lawyer.