How to File Bankruptcy in California: State Exemptions and Rules

Filing for bankruptcy can be a complicated process, but it may be the best option for getting out of debt and starting fresh financially. This article will walk you through everything you need to know about filing bankruptcy in California, including the state’s exemption laws and specific rules.

Overview of Bankruptcy in California

There are two main types of consumer bankruptcy filings in California – Chapter 7 and Chapter 13. Here’s a quick rundown:

• Chapter 7 bankruptcy – This type of bankruptcy liquidates your assets to pay back creditors. Any assets that are not exempt under California law can be sold by the bankruptcy trustee to pay creditors. With Chapter 7, most unsecured debts like credit cards, medical bills, etc. are eliminated after the bankruptcy is complete.
• Chapter 13 bankruptcy – Also called a wage earner’s plan, Chapter 13 allows you to keep your assets while repaying a portion of your debts over 3-5 years. You’ll make monthly payments to a trustee who distributes them to creditors. After payments are complete, remaining unsecured debts are discharged.

Most people filing bankruptcy in California choose Chapter 7 because it allows them to wipe out debt and start fresh quickly. But Chapter 13 can be a better option if you have assets you want to keep or need time to catch up on secured debts like your mortgage.

California Bankruptcy Exemptions

When filing for Chapter 7 bankruptcy in California, you are allowed to claim exemptions – assets and property the bankruptcy trustee can’t take and sell to pay back creditors. California has generous exemptions designed to help people keep essential property so they can get back on their feet after bankruptcy.

California has two “sets” of exemptions you can choose from when filing. You can’t mix and match – it’s one set or the other. The main exemptions in each set include:

Set 1 Exemptions

• Homestead exemption – Up to $75,000 of equity in your primary residence if single, $150,000 if married filing jointly. Covers proceeds from selling your home for up to 6 months.
• Motor vehicle exemption – Up to $2,300 in value for one motor vehicle. Fully exempt if modified for disability.
• Jewelry exemption – Up to $1,000 of jewelry.
• Personal property exemption – Up to $1,000 of household furnishings, appliances, clothes and other personal items.
• Tools of the trade – Up to $2,500 of tools and equipment used for your job.
• wildcard – $1,000 catchall exemption for any other property.

Set 2 Exemptions

• Homestead exemption – Up to $100,000 if single, $200,000 if married filing jointly. Covers proceeds from selling home for 6 months.
• Motor vehicle exemption – Up to $3,325 in value for one vehicle. Fully exempt if modified for disability.
• Jewelry exemption – Up to $750 of jewelry.
• Personal property exemption – Up to $600 of household goods, plus $1,000 of any property.
• Tools of the trade – Same as Set 1.
• Wildcard – $1,225 catchall exemption for any property.

As you can see, Set 2 has higher homestead and motor vehicle exemptions, making it preferable for homeowners. Set 1 offers more coverage for personal property. You can also use the federal non-bankruptcy exemptions in addition to the California exemptions.

The Bankruptcy Process in California

Filing bankruptcy in California involves several steps:

1. Complete pre-filing credit counseling

Within 180 days before filing, you must complete a credit counseling course and receive a certificate of completion. Many agencies offer low-cost online courses.

2. Decide which chapter to file

Assess your financial situation and decide whether Chapter 7 or 13 bankruptcy is better for your needs.

3. Gather documents

Compile information about your assets, debts, income and expenses. You’ll need pay stubs, tax returns, mortgage statements, credit card bills, etc.

4. Complete and file bankruptcy forms

Fill out all required bankruptcy forms accurately, including schedules listing your assets and debts. File them with the bankruptcy court to open your case.

5. Attend the meeting of creditors

You’ll attend a short meeting about 4-6 weeks after filing where the trustee asks questions about your finances. Creditors can attend but rarely do.

6. Complete post-filing debtor education

After filing, you must take a debtor education course on personal finance management. Submit the certificate of completion.

7. Receive bankruptcy discharge

Once all requirements are met, the court grants a discharge order eliminating most eligible debts. Congrats – you’re now debt-free!

The entire Chapter 7 bankruptcy process typically takes 4-6 months. Chapter 13 cases involve 3-5 years of repayment plan payments before discharge.

Pros and Cons of Filing Bankruptcy in California

There are many benefits to filing bankruptcy in California, but also downsides to consider:

Pros:

• Eliminate most unsecured debts like credit cards, medical bills, personal loans, etc.
• Stop wage garnishment, lawsuits, repossessions, utility shut offs and other creditor collection actions.
• Keep exempt assets like your home, car, retirement funds and household belongings.
• Get a fresh start financially and rebuild credit over time.

Cons:

• Bankruptcies stay on your credit report for 7-10 years and can make it harder to get loans and credit initially.
• You may have to surrender non-exempt assets like a second car, valuable collections, etc.
• Certain debts like student loans, alimony, child support and recent taxes can’t be discharged.
• Legal fees and court costs involved, typically $1,500-$3,500 for Chapter 7.

For many in severe financial distress, the pros often outweigh the cons of filing bankruptcy in California. It’s about doing what’s necessary to get back on your feet.

Alternatives to Bankruptcy

If bankruptcy isn’t the right solution, consider these alternatives:

• Debt management plan – Work with a credit counseling agency to consolidate debts and negotiate lower interest rates and payments.
• Debt settlement – Hire a debt settlement company to negotiate lump sum payoffs of your debts for less than you owe.
• Sell assets – Downsize your home, sell valuables, or liquidate assets to pay off debts.
• Borrow money – Take out a debt consolidation loan with lower payments or borrow from 401(k) or home equity.
• Payment plans – Work out extended payment plans directly with creditors.
• Ignore debts – Simply stop paying unsecured debts not being actively collected on.

These options may provide relief, but won’t eliminate debts like bankruptcy. Talk to a credit counselor or debt relief attorney to discuss your best path forward.

Finding the Right Bankruptcy Lawyer in California

Hiring an experienced bankruptcy attorney is highly recommended to guide you through the process and ensure your rights are protected. When choosing a lawyer:

• Look for someone experienced in consumer bankruptcy law, not general practice.
• Find a lawyer familiar with California’s exemption laws and courts.
• Understand fee structures – many charge flat rates for Chapter 7 cases.
• Ask about their case load – can they give you proper time and attention?
• Read reviews and talk to past clients to evaluate their service.
• Meet for a free consultation so you can assess if it’s a good fit.

Don’t hesitate to contact multiple attorneys before deciding who to hire. This is a big decision, so take your time choosing.

Conclusion

Filing bankruptcy in California can provide a fresh start if you are burdened by excessive debt you can’t reasonably pay back. Understanding the state’s exemptions, rules and process will help you make an informed decision about your options. With a good bankruptcy lawyer guiding you, you can take the necessary legal steps to eliminate debts and regain financial freedom.