One of the best ways to take control of your dire financial situation is filing for bankruptcy. In California, specific laws govern how to file for bankruptcy. These laws have changed with time, making it necessary to learn about them to avoid making mistakes during the filing process.
Hiring an attorney is the best thing you can do since you can receive help understanding and interpreting these laws accordingly. Contact us at the San Diego Bankruptcy for a detailed interpretation of California's new bankruptcy laws and guidance on how to use them in your bankruptcy filing process.
History of Bankruptcy Laws in California
The federal bankruptcy laws govern most of the aspects related to bankruptcy in California. Therefore, any reforms made on federal laws affect California bankruptcy procedures. The first bankruptcy laws in the United States came into effect in 1800. This law was repealed in 1803 and was followed by the Bankruptcy Act of 1841. The 1841 law was repealed in 1843, and then it was succeeded by the Act of 1878.
The Nelson Act of 1898 became the first modern Bankruptcy Act in the country. The next modern bankruptcy law came into effect in 1978 through the Bankruptcy Reforms of 1978. Finally, in 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted. It is considered as the most recent bankruptcy law in the United States.
Bankruptcy Law Reforms of 2005
The bankruptcy law reforms of 2005, commonly referred to as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), was enacted on 20th April 2005. This was a legislative act that made several significant amendments to the United States Bankruptcy Code. One of the significant purposes of this act is to make it difficult for consumers to file bankruptcy under Chapter 7 and instead utilize Chapter 13.
Presumption of Abuse while Filing for Chapter 7 Bankruptcy
Under the new Chapter 7 bankruptcy requirements, debtors can have part or all of their debts discharged. Before the BAPCPA, debtors would have all their debts discharged, whereas they could repay part or all the debts they owed their creditors. However, the 2005 act would subject debtors to a mean test to determine whether they have a low income that qualifies them for Chapter 7 bankruptcy.
Suppose the mean test showed that the debtor has a high income, it is presumed that the debtor is trying to abuse the bankruptcy code through chapter 7 bankruptcy charge. This will subject the debtors to Chapter 13 filing, thereby requiring them to pay part of their unsecured debts.
The Bankruptcy Act of 2005 made several reforms to how a creditor would file for bankruptcy. You should learn about these changes to follow through every process accordingly and avoid being presumed to be abusing the bankruptcy law. Here are the top technical changes in the new bankruptcy laws.
Subjection to a Mean Test
The bankruptcy Mean test determines who should file for debt forgiveness through Chapter 7 bankruptcy. It considers your income, family size, and expenses and checks whether you have enough income to pay off your debt. Most people who take the test usually pass it, although it is meant to reduce the number of people who can have their debts forgiven through a Chapter 7 bankruptcy.
The mean test has two parts designed to check if you have a disposable income that you can use to pay off your debts. It is meant for those with consumer debts like medical and credit card debts. Therefore, if your debt is primarily from your business, you do not need to pass the mean test.
Step 1 of the Mean Test
The first part of the mean test checks whether your household income is below the state's median income. Start by gathering all your documents that show your income for the past six months. In California, the median income for cases filed between 1st April 2020 and 30th April is as follows:
- The median income for one-earner is $ 60,360
- The Median for an earner with a family size of two people is $79,271
- An earner with a family size of three people is $88,235
- An earner with a family size of four people is $101,315
- For each individual above 4, you should add $9,000
The mean test is based on the past six months and is usually revised from time to time. Therefore, you should check for recent and upcoming changes while filing for bankruptcy.
Suppose you had a job for the past four or six months, but now you are unemployed, the mean test should factor in the drop of your income. The same should happen if you got a new job and are making more money.
If your income is below the median income, this means that you have passed the mean test and can file for Chapter 7 bankruptcy.
Step 2 of the Mean Test
In the second step, you should gather all your expenses for the past six months. Consider different things such as medical costs, groceries, rent, and medical costs, commonly referred to as allowable expenses. Ensure that you are thorough with these expenses to avoid making crucial mistakes like omitting items or listing conflicting amounts for the same expenses that would have your case thrown out.
While defining the allowable expenses, both national and local standards are used by the IRS. National standards usually cover your clothing and food, while most local standards cover car payments and housing expenses. Your attorney should work with you to ensure that all your expenses are well documented. If the disposable income is relatively low, you can still qualify for Chapter 7 at this point.
Passing the mean test means that you can file Chapter 7 bankruptcy and have most of your unsecured debts like credit card debts and credit card bills forgiven. However, filing for Chapter 13 bankruptcy still stands to be the best option since it allows you to catch up on debts such as overdue loans, back taxes, and mortgages and help you hold onto the asset.
Mandatory Credit Counseling
The new bankruptcy laws include mandatory credit counseling. This counseling program confirms whether creditors can adopt an informal repayment plan to get back on their economic feet or file for bankruptcy. You may be required to undertake the course even if your debts are too high, and you have a much lower income that cannot execute a repayment plan.
The counseling agency will help you make a budget based on your income and expenses, and review repayment plans that you can adopt. In most cases, these counseling programs reveal that most creditors have a feasible option to deal with their bankruptcy rather than filing for bankruptcy.
There are a few exceptions that apply to the credit counseling requirement in bankruptcy. For instance, you do not have to attend this program if the United States Trustee confirms that there is no agency available in your district. However, the counseling can be done online or by phone, so it is unlikely to have the counseling program unavailable.
You can also avoid credit counseling if you can prove that you had to file for bankruptcy to avoid situations such as foreclosure immediately or could not attend the counseling within five days after the request. If you verify that you cannot complete this program for the stated reasons, you will have to complete the course within thirty days. You can also request an extension of the deadline by fifteen days if you cannot adhere to the thirty-day deadline.
The class lasts for at least two hours and provides information on consumer protection, budgeting, saving money, setting and achieving financial goals, and money management.
Please note, if you are filing for Chapter 7 bankruptcy, you have sixty days after your first meeting with the creditors to complete this course and file the certificate of completion with the court. If you are filing a Chapter 13 bankruptcy, you should submit the completion certificate before your last repayment plan or before filing a discharge motion.
If you miss the deadline, the court will dismiss your case without prejudice. However, you can reopen your matter, but you have to repay the bankruptcy filing fees.
Filing Tax Returns
Under the new bankruptcy laws, debtors should file their tax returns before filing for bankruptcy. If you have qualified for a Chapter 7 bankruptcy, the trustee could ask for the most recent filed tax returns. In most cases, trustees usually request for tax returns for the last tax year, but if you cannot provide the most recent return, they will expect an explanation from you. Filing a tax return under Chapter 13 is quite different since it requires copies of returns for up to four tax years.
There is a possibility of acquiring a tax refund after filing your tax returns. The tax refund often results from the extra amount paid in taxes during the year. If you earned all or part of the tax refund for work you did before filing for bankruptcy, it becomes part of your bankruptcy estate. Therefore, this portion belongs to your trustee unless an exemption protects the refund.
The new bankruptcy laws provide an opportunity to exempt some of the creditors' property. In most states, creditors can choose between state and federal exemptions, but this does not happen under California bankruptcy laws. Instead, they allow you to choose between system 1 (California 704 exemptions), System 2 (California 703 Exemptions), and the federal nonbankruptcy exemptions.
You can only use the federal nonbankruptcy exemption if you work in particular professions or belong to specific people. These exemptions apply to people with exceptional circumstances such as:
- Survivor's benefit
- Death or disability benefits
- Retirement benefits
The specific professions who can apply this exemption include:
- Individuals who are receiving social security
- Government employees
- Military service members
- Railroad workers
Please note, each exemption has a maximum dollar value attached to it. This is the highest value of the property that you can protect under the exemption. Under Federal Laws, spouses can double the amount that they intend to protect. However, this is not the case with California since it expects all the exempted property to fall under the original value indicated in the exemption.
Generally, you cannot automatically select and exempt any of your property in California. In most cases, you can only exempt properties that will help you maintain a job and household, such as clothing, vehicle equity, and furnishing. Therefore, you should select the California exemption that will best protect your property and list it on the Schedule C (Property you claim as Exempt) form and file it along with other paperwork.
The bankruptcy trustees are officially tasked to review the properties you wish to be exempted and usually determine whether you have the right to protect them. If the trustees disagree with your exemptions, they should file an objection with the court, and the judge will decide whether you should keep the property or not.
One of the significant changes brought along by BAPCPA is the use of Attorney's verification while filing for bankruptcy. Therefore, any failure to disclose an asset or commit a false oath in your bankruptcy schedules would put the attorney at risk of being sanctioned. However, the attorney cannot be sanctioned if he or she assumes that you are telling the truth.
For instance, if your attorney asks you several times about your previous filings and you deny them, this might put him or her at risk of being sanctioned. This might happen if the attorney did not do an independent bankruptcy search and believed in your word of mouth. Luckily, the new law requires every attorney to assume that their clients are lying to avoid being sanctioned. However, they must be thorough with their clients to ensure that they are not lying.
Changes in Time Limits for Multiple Bankruptcy Filings
Under the new bankruptcy laws, debtors can file for multiple bankruptcies, but under specific rules. This depends on the type of bankruptcy that you intend to file. These time limits are as follows:
- Filing a Chapter 7 to Chapter 7: 8 years
- Filing a Chapter 7 to Chapter 13: 4 years
- Filing a Chapter 13 to Chapter 7: 4 years or seven depending on the circumstances
- Filing a Chapter 13 to Chapter 13: 2 years
Inclusion of Automatic Stays
The new bankruptcy laws allow an automatic stay to creditors. An automatic stay in bankruptcy is a court order that requires all debt collection proceedings to stop once a debtor files for bankruptcy. However, there are reasons why an automatic stay can be delayed or does not go into effect. A bankruptcy court can lift an automatic stay, although this is rare. For instance, it can lift the stay in a divorce proceeding.
Some exemptions apply to the rule of the automatic stay. These exceptions are referred to as serial filings and would limit the automatic stays timeline. For instance, if you file two cases in one year, the second case's automatic stay will only last for thirty days, unless you successfully convince the court why you need the extended timeline.
Suppose you file three cases in one year, the automatic stay will not go into effect once you file the third case. However, you can set a hearing to convince the judge that all your three filings are reasonable based on your situation, and you are not attempting to take advantage of the bankruptcy system.
Please note, BAPCPA also limits the applicability of an automatic stay in an eviction. Eviction proceedings cannot be stopped if your landlord had already obtained a judgment of possession before you filed for bankruptcy. The stay also cannot be applied in an instance where your eviction is based on illegal use of controlled substances on the property or endangerment of a rented property.
Additional Requirements for Fillers Under BAPCPA
The new law adds a few requirements to make it difficult and costly for bankruptcy filers. These additional requirements include:
- Additional filing fees and requirements: The new law raises the filing fees since there is an increase in the paperwork involved in the bankruptcy filing process. The law also allows waiving of filing fees for debtors earning below 150% of the federal poverty level.
- Increased compliance requirements for small businesses: The new law increased the compliance obligations and shortened the deadline for Chapter 11 reorganization involving small businesses. However, they do not apply to larger businesses.
Find a San Diego Bankruptcy Attorney Near Me
Bankruptcy is a complicated area of the law. The existing bankruptcy laws have become more complicated after the change in 2005. This is why it is crucial to have an attorney advise you and help you with your bankruptcy. At the San Diego Bankruptcy Attorney, we are familiar with the new bankruptcy laws and can effectively help you through your bankruptcy filing process. Contact us at 619-488-6168 for a detailed review of your case and learn how we can help you.