Bankruptcy gives a fresh start to debtors who are either individuals or businesses that are unable to pay creditors. This debt resolution process can happen through liquidating assets to pay a debt (Chapter 7) or devising a repayment plan, as outlined in Chapter 13 of the Bankruptcy Code. The qualifying criteria for bankruptcy vary with the particular Chapter you are filing for and the prevailing circumstances. San Diego Bankruptcy Attorney has prepared this guide to help you determine the specific filing that you qualify for, and this starts with a mean test.
Statistics on Bankruptcy Filing
Since October 1, 2005, to September 30, 2017, there were 12.8 million consumer bankruptcies filed in federal court nationwide. 68% of these petitions (8.7 million) were filed under Chapter 7 while 32% (4.1 million) were filed under Chapter 13 of the code. Chapter 7 bankruptcy is the most prevalent one, accounting for 97% of consumer debt comprised and 99% of Chapter 13 bankruptcies.
The law is continually being amended to accommodate the evolving nature of handling debt, and the southern district of California is no exception. On June 29, 2018, the Bankruptcy Court announced changes to the Local Bankruptcy Rules as outlined in General Order 190 and 190-A and they came into effect on July 1, 2018.
Seeing how pervasive filing for bankruptcy is for business and consumer debt, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005 to prevent misuse of this debt resolution process. This law stipulates that anyone filing for bankruptcy must first complete a qualifying test and therefore discourage Chapter 7 filing and more of Chapter 13 filing.
The Bankruptcy Means Test
The California disposable income means test prevents high-income earners from abusing the system by filing under Chapter 7, which erases all debts. In this case, you can file under Chapter 13, where you repay a fraction of outstanding debts and obligations. The means test applies to higher income earners, and exemptions only apply when most liability is business-related or if you are a disabled veteran who incurred debt in the line of active duty.
From November 1, 2016, a family of four earning below California's median income of $83,012 (sans Social Security) doesn't have to take the means test while everyone is a must. The median income for a single-person household is 51,764 and for two-persons or more households are $69,370 and above.
Your income comprises of salaries, rental income, business income, dividends and interest, retirement and pensions, unemployment income, etc. Any financial help obtained from family or other sources is part of your household income. If you foresee a loss of revenue, wait until such a time before filing under Chapter 7.
The disposable income means test factors in local and national standards provided by the IRS and Census Bureau for most living expenses. For Chapter 13, you must first determine if you can repay part of the debt by establishing your total monthly income then deducting the permitted monthly expenses. If your disposable income is below $125, you qualify to file under Chapter 7 bankruptcy code.
If your financial crisis is dire and you don't pass the means test, filing under Chapter 13 is the next best option.
Filing Bankruptcy under Chapter 7
This debt solution is also known as liquidation bankruptcy as it discharges the majority of your unsecured debt such as personal loans, credit cards, and medical expenses. The court sees your assets as a means of repaying outstanding debts. It is fast to implement (within four months) although you could lose property (such as your home) to foreclosure. You can only file under Chapter 7 if you meet the following criteria:
- Your monthly income in the six months leading to this juncture is below the state median for a comparable household.
- Your monthly disposable income is less than the threshold established by a legal means test.
In addition to filling under Chapter 7, the debtor should provide the following information to the court:
- Schedules of assets and liabilities
- Schedule of current income and expenditures
- Updated statement of your financial affairs
- Schedule of executory contracts and unexpired leases
- Copy of the tax return or transcripts for the most recent tax year
- Tax returns filed during the bankruptcy case
- Comprehensive list of creditors and respective amount and nature of claims
- Source, amount, and frequency of your income
Separate of Joint Bankruptcy Petitions
If you are married, deciding whether to file a single or joint petition is a serious decision that necessitates a bankruptcy attorney. Even if you submit alone, you still have to provide a detailed account of the non-filling spouse's income and expenditure so the court can evaluate the financial position of your household.
Once the process is underway, your assets become part of the bankruptcy estate, but some can be exempt while others remain nonexempt. These assets comprise of any property that can be sold by the bankruptcy court. The trustee will gather and dispose of your unsecured assets maybe through an auction then use the proceeds to repay holders of claims. If there are no nonexempt assets, the court declares it a "no asset" case, which means your creditors cannot get payment from you.
Debts not Discharged under Chapter 7
According to Section 523(a) of the Bankruptcy Code, certain debts cannot be absolved by filing under Chapter 7 as follows:
- Child support, alimony, and other domestic obligations covered by marriage dissolution settlement
- Fines, penalties, and restitution owed due to criminal charges, e.g., DUI charge
- Homeowners' or neighborhood association fees after the date of filing
- Property tax, fraudulent income tax, and business tax which was due inside the previous year
- Fees for court proceedings
- Paying for retirement plans
- Outstanding debts from previous bankruptcy filings
- Any other liability that was overlooked in a bankruptcy filing
Filing Bankruptcy under Chapter 11
While filing under Chapter7 is quick, it is not always the most feasible option, especially for those in business. Whether running a sole proprietorship, corporation, other business partnership, avoiding liquidation means you stay in business. In these situations, filing under Chapter 11 of the code is the best option.
Under this filing, you may seek debt adjustments in three ways: cutting down on what is owed; increasing the repayment time; or request a complete reorganization of debt.
Filing Bankruptcy under Chapter 13
Under BAPCPA, this debt resolution requires petitioners to allocate their disposable income over three to five years to repay unsecured creditors. The essence of Chapter 13 is to establish a repayment plan for outstanding debts, but nonexempt assets still apply. Nonetheless, you are legally obliged to repay creditors at least the value of nonexempt assets, and more of this is discussed further below. A discharge is granted after all payment plans are submitted, and this takes roughly three to five years. The credit reporting time limit is seven years from the day you file under Chapter 13.
Unfortunately, Chapter 12 does not protect cosigners or holders of joint accounts. Even when liability for the debt is removed after a bankruptcy discharge, your joint applicant or cosigner is liable for the balance owed, and creditors can collect from (or even sue) them. To negate this from happening, you can repay debt voluntarily to clear everyone's name, especially business associates, with whom you may partner in the future.
Debts not Discharged under Chapter 13
Filing under Chapter13 has similar limitations of Chapter7 bankruptcy, in addition to debts stemming from:
- Deliberate or malicious actions (routinely non-dischargeable)
- Personal injury or death caused by intoxicated driving
- Fraud or current extravagant purchases that cannot be discharged in bankruptcy
- Student loan debt is rarely released in these filings
Bankruptcy Exemptions in San Diego
What items and how much you remain with after filing is based on the bankruptcy exemptions in your area. Exceptions are legal guidelines that dictate what property and other assets, and how much of their equity you can retain upon filing for bankruptcy relief. Federal laws apply, but each state has the liberty to apply its unique exemption laws, and California residents have to use the state's laws. There are two kinds of exemptions:
- California exemptions
- California's Federal-like exemptions
When filing for debt relief, you must decide on which exceptions to use and enlisting legal counsel is highly advised. An experienced bankruptcy attorney will analyze your situation and advise on the best option to arrive at the best possible outcome.
The California exemption allows you to keep most equity of your primary residence, and as of 2019, you can legally exempt investment of either $75,000 or $100,000 or $175,000. This exemption is useful in cases where the home equity is substantial, and therefore, you wish to keep ownership. When it comes to other belongings like money in your account and cars, this law is not as generous, so you only get very minimal exemptions for these.
California's Federal-like exemptions mimic federal exemptions so if you choose this option; you don't get to enjoy the same level of exemptions on your home. As of 2019, the Federal homestead exemption only lets you keep $29,275 equity of your home, which is not much for highly valued homes. On the upside, the federal exempt law allows you to keep a more considerable amount of personal assets like finances as compared to the state's regulation.
Selecting which personal property to keep is done through a "wild card," and this wild-card exemption amounts to $1,550 plus any value of unused homestead exemption. The maximum possible wild-card amount is $30,825, and you can use this to exempt any assets that you hold dear. However, when you apply this maximum value on your bank account, a San Diego court may see this as a lack of good faith seeing that bankruptcy is for honest debtors.
As mentioned previously, the nonexempt property is gathered and sold by a bankruptcy trustee, and the value obtained is used to offset the debt. The trustee may choose to abandon some assets whose equity is too little to make a difference or if they are too expensive to market and find a buyer.
If you have more assets than what is covered by the law, San Diego has a provision where you can buy back your nonexempt equity in assets from the bankruptcy trustee. You achieve this by paying the trustee an amount equivalent to what your nonexempt asset's value. Examples of nonexempt assets are:
- Non-primary residence, e.g., vacation home
- Jewelry collection
- Newer car model with equity
- Investments, e.g., in startups
- Pricey musical instruments not for work
- High art pieces
- Expensive clothing
- Valuable memorabilia or collectibles
Forum Shopping in San Diego Residency
In the past, people have relocated to California to take advantage of San Diego's generous tax exemptions when filing for bankruptcy. Since 2005, the laws changed to stop this wanton abuse of the Federal bankruptcy system by introducing a residency requirement proving that filers are indeed California residents. They must reside here for most of six months (180 days) before filing. However, fulfilling this requirement still doesn't accord you the right to utilize California's exemption laws to safeguard your home, vehicles, or other property. Different states apply differing exemption laws and so whatever exemptions applicable are based on the requirements of where you have resided in continuously for two years before filing for bankruptcy.
What Happens with Multiple Residences?
If you have lived in different states in the two years before the date of filing, you are not eligible for California's bankruptcy exemption laws not unless you wish to wait two years. Alternatively, the exemptions will be determined by the state where you lived in at least 180 days before the two-year residency requirement.
If this scenario resonates with you, it is imperative that you seek legal counsel to determine which exemptions laws work in your favor. States have different exemption laws, and it is possible that your former state will allow you to keep more assets than in San Diego.
How Can I Avoid Losing Assets?
Parting ways with valuable assets are heartrending but entirely legal to alleviate debt. If you wish to avoid the experience of handing over your property to bankruptcy trustees, you can decide to offload them yourself. For example, you may be well-versed with selling high art and pricey collectibles inside your networks. The same applies to everyday items like your car or inherited assets with significant equity to offset your debt. You may get a better deal to help offset liabilities, and more importantly, you evade having a bankruptcy filing inevitably hurts your credit score.
Nonetheless, offloading your property only to file for bankruptcy later will be seen as an attempt to defraud the court or hide assets from holders of claims. If the court does not rule in your favor, the bankruptcy trustee may recover the sold items and seize a portion of your exempt assets, including your primary residence. In extreme cases, they may refuse to discharge your debts after filing for bankruptcy.
What is a Bankruptcy Discharge?
A bankruptcy discharge is a court order that is issued after bankruptcy filed under Chapter7 and Chapter 13 is completed to indicate relief from the debtor's obligation to pay the debt. Filers must adhere to all requirements of the specific bankruptcy code they filed under, and once this discharge is granted, the creditor is barred from collecting that debt ever again. Holders of claim cannot call, email, send demand letters, or take you to court over said debt but they can legally enforce liens held against secured debt.
A lien is a court-granted right to retain possession of property belonging to another individual until their outstanding debt is discharged. For instance, when buying a home, the lender files documents with the local government office to become a lien holder of the house. This action secures debt if you are unable to meet the monthly installments or other payment terms. Liens are meant to satisfy obligations and are a matter of public record, so current and future creditors are aware of existing debts. They can sell your property and should you secure additional financing; the new lenders have to wait their turn before getting paid. With a lien in place, you can only resell or refinance your home or vehicle after clearing outstanding debts and obligations.
Upon getting a bankruptcy discharge with liens against assets, you can release these liens by selling the property. Another option is negotiating with creditors such as paying less than what you owe to end this debt collection process. If the claim seems suspect, reach out to the lien holder to see if the lien release was overlooked and if all else fails, enlist your bankruptcy attorney to pursue legal action to have the lien released. You can also check if the claim still holds or if the expiry date is near.
Find Bankruptcy Attorney Near Me
If you are struggling with mounting debt and there is no reprieve in the foreseeable future, filing for bankruptcy may be the best course of action. You need an experienced bankruptcy attorney to help you navigate through California and federal laws to safeguard your assets as you work toward repaying creditors. Reach out to San Diego Bankruptcy Attorney at 619-488-6168 to get your fresh start today!