California Bankruptcy Law & ​​Exemptions

When an individual, business, or government is unable to repay its debt, the federal government offers different forms of resolutions under bankruptcy law, as well as exemptions. The idea behind bankruptcy law and exemptions is that you need to find a way as a business, individual, or a municipality to make as much of an effort as you can to repay your debt. However, in certain situations, you might need help doing that by way of liquidating any assets you have or developing a repayment plan. 

What is Bankruptcy Law in California?

Bankruptcy law is an area of law that falls under the Department of Justice; it has to do with situations where people are no longer able to comply with their monetary obligations. In other words, if a person, business, or county is unable to pay for their debt, this area of law provides ways to repay what little they can and give individuals or companies a fresh start.

What is the Purpose of Bankruptcy Law?

The purpose of bankruptcy law is to help people find a solution. When an individual or a company or even a municipality is unable to repay their debt, bankruptcy law helps them find solutions that can make the most out of a bad financial situation.This can include l liquidating physical assets, like selling off company property or vehicles in order to repay part of the debt. It can also include setting up an installment plan for situations where the debt is too large to pay off in its current form, but can be better managed with monthly payments. 

Types of Bankruptcies in California

California bankruptcy laws vary and provide lots of different types of bankruptcies in the state. At the state level, the different resolutions that are offered all fall under federal law and are designed to offer a fresh financial start by repaying whatever one is able to, either through a repayment plan without additional interest or a liquidation plan. The way in which the debt obligation is handled is divided into chapters. Each chapter refers to a different type of bankruptcy law or bankruptcy plan.

Chapter 7: Liquidation

If you file a petition for this chapter, then the filing process at the federal court focuses on liquidation. In such a case, whether you use bankruptcy attorneys or not, the legal proceeding will evaluate what assets you have and set up a process to liquidate (or sell) those assets for money that then gets used to repay loans. Personal property is used to pay creditors or repay things like secured debt or a car loan. 

Chapter 13: Repayment Plan

A petition for chapter 13 focuses more on a repayment plan, something that is designated for people who know they will have income to repay debt in a small amount over the next three or five years. This might include credit counseling as well to help a person manage their debt better now and in the future. 

Chapter 11: Large Reorganization

Designed more for companies, chapter 11 is for reorganization, which means a business can reorganize the debt that they have, stay in operation, and keep the business running while they work with their creditors to negotiate a plan for repayment. The business might also change the way the company is operated in order to provide money for repayments. 

Chapter 12: Family Farmers

As the name suggests, chapter 12 is specifically for family farmers, but it also extends to fishermen. This idea is similar to chapter 11 in that it allows for reorganization of a business. A fisherman or a farmer who needs to keep their business going but has unpaid debt they need to resolve can use chapter 12 to pay off some or part of their debt. They do this  through filing a bankruptcy petition with bankruptcy courts in the state they would like to keep their farm or fishing operation going.

Chapter 15: Used in Foreign Cases

This chapter is reserved for situations where a foreign individual owes debt within the United States. For example, if an individual fromAustria owes money in Austria and America, and they are undergoing a bankruptcy petition in Austria, chapter 15 will be used concurrently to resolve any outstanding debt issues in America.

Chapter 9: Municipalities

Chapter 9 bankruptcy law in California is for municipalities. This chapter provides protection for cities or towns that need to create a plan to resolve the debt they have. States are not allowed to file for this, only municipalities within the state. This is slightly different than a liquidation in that a municipality isn't forced to liquidate assets to repay their debt. It’s more similar  to chapter 13 because the municipality has to negotiate a good-faith settlement with their creditors.

How to File for Bankruptcy in California?

If you live in this state or you operate a company in this state, you will likely file under chapter 7, chapter 11, or chapter 13. Federal courts have complete jurisdiction over bankruptcy cases, so no matter what state you are in, you still have to file at the federal level. Of course, if you qualify as a family farmer or a foreigner, you would use chapter 12 or chapter 15 for bankruptcy. Regardless, it gets submitted to a federal court.

  1. The first step is to fill out a petition based on the chapter or type of bankruptcy you are utilizing. This petition is sent to a federal bankruptcy court. You can submit this petition as an individual,a married couple, or even as a corporation.
  2. For the most part, these forms will require that you list all information for any creditors to whom you or your organization still owes money, as well as your income, any liabilities you have, and each and every asset you have. This usually includes even the exact amount of cash you have in your wallet and any types of retirement accounts or collectors coins or artwork in your home.
  3. After the bankruptcy petition has been filed, creditors are not allowed to contact or harass you the way that they did before. When individuals or corporations owe debt, creditors can contact them on a regular basis in order to try and seek repayment. They can file lawsuits against the individual or the corporations or garnish wages taking a percentage of income. However, once the petition is filed, this legally must stop.
  4. A bankruptcy trustee is appointed, and they are the person responsible for your case, fighting on behalf of the creditors and the government. You can choose to hire an attorney who can then fight for you and your assets. The bankruptcy trustee will be responsible for liquidating your assets or determining exemptions.

Depending on the type of bankruptcy you use, the steps hereafter will differ. For example, if you file for Chapter 7 bankruptcy, whether on your own or through an attorney, the process involves liquidating all assets to accumulate as much money as possible in order to repay at least a portion of the debt. If, by comparison, you utilize Chapter 13 bankruptcy, this can help you set up a repayment plan again by yourself or with the help of an attorney.

California bankruptcy exemptions

There are some rare exemptions to bankruptcy laws. Bankruptcy exemptions are designed to give you what you need to survive the process. For example, if you are a craftsman with professional tools that you use for your job, those professional tools can be exempt, which means they are safe from any of the bankruptcy proceedings and you don't have to worry about them being liquidated. Similarly, you get to keep your clothes. You obviously need to wear clothes in order to keep a job and to live comfortably, so they typically don't take your clothes. If you have a retirement account, you might be able to get an exemption for that. You can also get an exemption for an inexpensive car. However, if you have a sports car and an old pickup truck, the sports car will likely be liquidated as part of a Chapter 7 bankruptcy petition filing, but the old pickup truck can be exempt because you need transportation to live and work.You can work with a bankruptcy attorney to petition for other exemptions

Similarly, there are exemptions that apply to your house. With chapter 7 or chapter 13, you can use the homestead exemption. This allows you to protect a certain amount of equity in your home. As an individual, if you are currently living in a home that is valued at $300,000, and your mortgage is $250,000, this means you have $50,000 of equity in your home. Using the homestead exemption allows you to protect that equity,and no bankruptcy court can go after it. In effect, if you have to sell your home in order to get money to repay your debt, the amount of equity that is protected through the homestead exemption is protected from this liquidation, and you would be able to take and use that $50,000 however you please.

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