COVID-19 Update: As of December 9, 2020, all bankruptcy courts in California are closed to the public. Some judges are canceling hearings. Others are conducting them via Zoom or another similar online tool. The same rules apply to trustees and 341 meetings. Once courts reopen, expect significant restrictions, like social distancing occupancy limits. Also, expect long security check-in lines.
Telephone and online chat assistance is usually available. For the latest information, see the coronavirus emergency page for the United States Bankruptcy Court, Central District of California. The other three bankruptcy court divisions in California have issued similar orders.
Bankruptcy Offers Relief From Financial Stress
Financial stress is an unfortunate part of life for most Americans. High credit card bills and other unsecured debts, like student loans, cause much of this stress. Delinquent secured debt accounts, like past-due mortgage payments, are even more stressful.
During the early days of the coronavirus outbreak, many lenders were patient. That era of good feelings is over. Now, creditors want their money. And they have the legal tools to get it.
For many California families, filing bankruptcy is a way out. The Bankruptcy Code offers a fresh start for honest yet unfortunate debtors like you. A voluntary petition enables families to retake control over their own finances. And with the help of a bankruptcy lawyer, most families quickly recover from bankruptcy, so they can move on with their lives.
Protecting Your Property in a California Bankruptcy
Many people believe they lose most of their property when they file bankruptcy. That's what happens in many board games, like Monopoly. But real life is different. As outlined below, most of your assets are exempt from creditor seizure, even in a so-called liquidation bankruptcy.
In most cases, an automatic stay takes effect immediately after you file for bankruptcy. You do not have to prove lender negligence or misconduct in order to stop:
Typically, the automatic stay (section 362 of the U.S. Bankruptcy Code) stays in effect until the judge closes the case. Moneylenders can only bypass the stay in very limited situations. And if they try to do so, a bankruptcy attorney knows how to stop them.
At the end of the case, the judge discharges most unsecured debts. Certain obligations, such as back taxes and alimony, are only dischargeable in some situations.
Am I Eligible for Bankruptcy in California?
Most people meet the formal and informal qualifications for bankruptcy. These qualifications help ensure that assistance is available to people who truly need it.
The qualifications are different for different types of consumer bankruptcy:
Chapter 7 is designed for people with unsecured debts, like credit cards and medical bills. You must pass a means test to qualify.
Chapter 13 is designed for people with delinquent secured debt, like past-due mortgage payments. This "wage-earner plan bankruptcy" gives you up to five years to gradually erase this delinquency. As a bonus, the judge also discharges most unsecured debts.
The means test is the most significant Chapter 7 bankruptcy qualification. You can file under this section of the Bankruptcy Code if your family's income is below the minimum for that geographic area. This amount fluctuates over time. A family of four in California must usually earn less than about $104,000 a year.
There is some room for regional variations. For example, the cost of living is much higher in the Bay Area than it is in the High Desert.
Chapter 13 bankruptcy filers must not exceed federally-mandated debt ceilings. Once again, the exact amount fluctuates. Generally, Chapter 13 filers cannot have more than $1.4 million in secured debt and $400,00 of unsecured debt. These amounts include current and past-due obligations. Once again, there might be some wiggle room in some cases.
All debtors must also complete an approved credit counseling course before they file, and a debt management class after they file. These classes, which are typically offered online, usually take a few minutes and cost a few dollars.
These things vary according to type and location of bankruptcy. These qualifications usually involve Schedules I and J. These are the monthly income and expense schedules in a consumer bankruptcy.
Generally, Chapter 7 debtors should be in the red each month. If that's not the case, the bankruptcy trustee might question the need to file Chapter 7. The Chapter 13 qualification is usually the opposite. These filers must be substantially in the black every month. Otherwise, they might not be able to make the required monthly debt consolidation payment.
California Property Exemption Laws
Bankruptcy is a federal law, and this law includes some property exemptions. But each state also has its own bankruptcy property exemptions. Many states allow debtors to choose between federal bankruptcy exemptions or state exemptions. Debtors in the Golden State do not have that choice. However, in California, you may choose between Section 703 and Section 704 exemptions. More on that below.
First, let's take a step back and talk about some general principles. Creditors cannot seize exempt assets and sell them to pay your debts. They can seize and sell nonexempt assets. That seems like a straightforward definition, but there is lots of grey area.
Assume that Rafael owns a mobile home that he uses on road trips. He is unable to apply a 703 or 704 exemption to it. So, it's theoretically nonexempt. But there are some practical considerations. The mobile home is several decades old and in rather poor condition. As a result, it has basically no financial value. Therefore, the trustee (the person who oversees the bankruptcy for the judge) may not be able to legally seize it.
This is just one of the questions that a bankruptcy lawyer must deal with, even if the bankruptcy seems clear cut.
Section 703 Exemptions
If you do not own a home, or you have lived in your home for less than ten years, 703 exemptions could be a good option. These exemptions protect:
Home equity ($26,800)
Retirement accounts (full protection)
Household goods (full protection if the item is worth less than $675)
Social Security and other public benefits (full protection)
Life insurance policy benefits (full protection)
Motor vehicle equity ($5,350)
Personal jewelry ($1,600)
The home equity exemption seems small, but unless you have lived in your house for more than ten years, it's usually big enough. During the first half of a mortgage loan, the bank applies most of the monthly payments to interest instead of equity. So, even if you have paid tens of thousands of dollars, you only have a few thousand in equity.
Motor vehicles are similar. Most people have almost no equity in a new car. Used cars which are paid off have almost no value. That's especially true if the car has been in a minor accident or is in less than excellent condition. These same principles apply to household goods and jewelry.
California's wildcard exemption allows you to protect otherwise nonexempt property. Many debtors apply the wildcard exemption to money in a checking or savings account. Others apply it to a vacation home.
Section 703 exemptions are bankruptcy-only exemptions. They are only available to bankruptcy debtors. For this reason, some courts see them as a violation of the Fourteenth Amendment's equal protection guarantee. Talk to a bankruptcy lawyer about whether they will work in your case. Generally, these exemptions are the same for both individuals and married couples.
Section 704 Exemptions
If you have lived in the same home for more than ten years, California's Section 704 exemptions might be for you. That's especially true since the coronavirus outbreak prompted lawmakers to expand the 704 exemptions. These exemptions now protect:
Motor vehicle equity ($3,325)
Life insurance policy benefits (full protection)
Checking or savings accounts with a $1,788 minimum balance
Social Security and other public benefits (full protection)
Home equity ($300,000 or $600,000, depending on median home prices in the area)
Retirement account (full protection)
Household goods (full protection)
Personal jewelry ($8,000)
The big downside to 704 exemptions is the lack of a wildcard exemption. The recent demand deposit account (DDI) exemption partially makes up for this deficiency.
Note that these values are not the fair market value. Instead, they are the as-is cash value. A home is a good example of the difference. Your house might have a fair market value of $500,000. But if you sold the house to a home investor, the as-is cash offer might be pennies on the dollar. So, the bankruptcy value of your home (a/k/a the garage sale value) could be much lower than the value listed on the tax appraiser's website.
Only an experienced bankruptcy lawyer should address complex issues like bankruptcy values. Even an honest mistake could trigger a bankruptcy fraud probe.
Where Do I File Bankruptcy in California?
As mentioned, bankruptcy is part of the federal judiciary system. There are four federal court districts in the Golden State.
If you live in Los Angeles, Riverside, Santa Ana, San Bernardino, SLO, Santa Barbara, or Orange County, you should file your petition in the Central District. There is an east, west, and south division. If you live east of Sacramento or Fresno, you probably need to file in the Eastern District. This district includes the High Desert and most of the Sierra Madres. People in the San Diego area should file in the Southern District. Everyone else would file in the Northern District.
The bankruptcy case trustee usually has an office outside the courthouse. Most trustees are not judges. Many of them are not even lawyers. But they are highly experienced in bankruptcy matters. Generally, the 341 meeting occurs about six weeks after you file your petition. The court paperwork will list all the details.
How Much Does a California Bankruptcy Cost?
Much like the qualifications of bankruptcy, the costs associated with bankruptcy often vary significantly.
Filing fees are fixed by law. Generally, filing a new case costs about $350. You might be able to pay this fee in installments. You might even be eligible for a fee waiver. Filing fees also apply for official motions, like a motion to convert to a different chapter or a motion to amend the documents.
There are basically three different levels of professional fees. Since the forms are available online, some people try to file bankruptcy themselves. This is roughly like filing a small corporation's tax return without consulting an accountant and without using any official instructions. Other people hire non-lawyer bankruptcy petition preparers to help them. But these individuals might not have any training whatsoever. Plus, they can only fill out forms. They cannot give advice, and they certainly cannot represent you in court.
A California bankruptcy attorney is the most expensive option, but it's also the most cost-effective option. DIY filers often miss deadlines or fill out forms incorrectly. These errors, even if unintentional, could have serious consequences. A bankruptcy attorney will properly submit paperwork, give you solid advice, and stand up for you if things go sideways.
Frequently Asked Questions About California Bankruptcy Exemptions
The bankruptcy exemption process is always complex. To make it a bit easier, we have answered some of the questions that California bankruptcy lawyers hear most often.
What property is exempt from creditors in California?
The Golden State has two bankruptcy exemption schedules. Both schedules protect your house, motor vehicle, and personal property from creditor seizure. A 2020 law greatly increased the homestead exemption and also protects money in a checking or savings account.
What is the exemption amount in California?
Some assets have value-based exemptions in the Golden State. For example, you can protect up to $600,000 in home equity in some cases. The motor vehicle equity exemption usually varies between $3,325 and $5,350. Other exemptions are item-based. For example, retirement accounts are normally 100% exempt, regardless of their value.
What is the income limit for Chapter 7 in California?
You can file Chapter 7 if your income is lower than the average amount for that household size. A family of four must normally earn less than $104,000 a year. Some other income and non-income qualifications apply as well.
How much cash can you keep when filing Chapter 7?
It depends on which exemption track you and your lawyer decide is best. Section 703 includes a wildcard exemption. Some or all of this exemption could protect cash. Section 704 allows you to keep control of a checking or savings account. The account must meet a minimum balance requirement.
Can I keep my car if I file Chapter 7 in California?
State law usually exempts $3,325 of vehicle equity. Assume Jocyln has $1,000 of equity in a $35,000 car she bought new a year ago. Her vehicle is exempt. The equity value is all that matters in this context.
Partner With a Dedicated Attorney
To make the most out of the fresh start which the Bankruptcy Code guarantees, reach out to a California bankruptcy lawyer today. An attorney will help you maximize your exemptions and stand with you during the whole process.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.
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