Filing for bankruptcy can be a potential lifeline for individuals suffering from massive debt. Although debt is part of our economic system and is typical for an individual with an average income, if said debt becomes too great then you may find it impossible to pay it off. In this scenario, you are known as the debtor and the people or companies you owe the money to are creditors. Sometimes it is necessary to turn to a legal agreement known as bankruptcy to help you either wipe away or restructure your debt so that you may stabilize your finances and stop hemorrhaging money. If you are in financial straits and live in San Diego or the greater San Diego county area, then the legal firm of San Diego Bankruptcy Attorney is the perfect representation you will need during your bankruptcy case.
Overview of Bankruptcy
Bankruptcy is a legal arrangement that is governed by United States Code, Title 11 (also known informally as Bankruptcy Code). Because it is a federal statute, San Diegans are subject to its specifications as residents of the state of California. Bankruptcy is, in essence, a way for a debtor to seek relief while they try to rebuild their financial standing. It is unfortunately frowned upon as a taboo, even though it is fairly common: in 2015 in the United States there were approximately 800,000 bankruptcy cases.
The specifics of a bankruptcy case are also influenced by California laws as there are certain exemptions for assets and/or property that the debtor may own. Despite this, however, it is a procedure in federal bankruptcy courts that are presided over by special bankruptcy judges.
There are two fundamental types of bankruptcy filings: liquidations and reorganizations. Each of these has different outcomes and legal obligations for the debtor filing the bankruptcy petition. Furthermore, the question of which type is most beneficial depends almost entirely on the specifics of the case and the particular needs of the client. Some benefit more from liquidating their assets to pay their creditors while others benefit more from reorganizing their debt to give them some breathing room with which to repair their financial status.
There are various warning signs that a person may be edging ever closer to total financial collapse. Once this happens, it is virtually impossible to make any progress without filing for bankruptcy. These warning signs can include the persistence of various debt collectors contacting you constantly, the threat of lawsuits from certain creditors, credit cards that have hit or surpassed their limits, falling prey to predatory loans, and using collateral to pay for other types of debts (also called debt consolidation).
Many of these actions are last-ditch efforts to stave off total insolvency, and as such are indicative of the old saying: “robbing Peter to pay Paul”. They only delay the inevitable but fail to actually address the underlying problem. Meanwhile, this underlying problem only grows larger as interest accrues on premiums that have not been paid in years.
However, there are certain immediate and considerable advantages to filing for bankruptcy. For one, the moment that the petition is filed an automatic stay goes in to effect. This effectively halts any and all methods or means used by creditors to recover their debts. The incessant calls, letters, and threats will evaporate instantly and you can start working with a bankruptcy legal firm to determine what the best strategy for you is. If the creditor continues to try and recover the debt beyond the imposition of the automatic stay, then United States Code, Section 365 (also known as the Securities Investor Protection Act) states that they may be held financially liable for penalties.
Your attorney will also help you find out if you are eligible for liquidation (Chapter 7) or a restructuring (Chapter 13) bankruptcy. Both of which have considerable advantages that are largely dependent on your particular case and its circumstances.
Chapter 7 Bankruptcy
This type of bankruptcy is a liquidation bankruptcy. It is sometimes colloquially referred to as complete bankruptcy and is generally perceived to be the more drastic option. In the legal context, liquidation is defined as the process of taking some asset and selling it to create liquid capital (this is the financial term for cash). The asset in question must have objective value, meaning that in a free market system there is a general consensus as to its worth. Assets with objective value include cars, real estate, jewelry, boats, and so forth. These assets can also be used as collateral, which means that the debtor leverages the asset to get a secured loan and ends up with a secured debt.
This process of liquidation occurs under the supervision of a bankruptcy trustee, who is a legally-designated representative of the bankruptcy court and is responsible for the liquidation of all assets. In most bankruptcy cases, this is done via an auction that is overseen by the trustee. Once everything is liquidated, the trustee then distributes it to all the creditors and any debt that is left over will become discharged by the court. This is why Chapter 7 is known as the liquidation bankruptcy.
It is important to note that the type of debt determines if the trustee pays it or not. Unsecure debts are always non-priority debts because the creditor does not have a piece of collateral that they can put a lien on to ensure that they receive their payments. Unsecure loans basically work on an honor system, whereby the debtor promises to pay the debt at some later date. Under Chapter 7, these non-priority unsecure debts get discharged and wiped away within three (3) to four (4) months.
In order to file for Chapter 7 bankruptcy, the debtor will have to file a petition that includes a listing of monthly expenditures, monthly income, evaluation of assets and debts, and a financial statement that contains monthly expenses. These expenses include any active leases and/or financial contracts.
However, within sixty (60) days of the Chapter 7 bankruptcy being filed, the debtor and the trustee need to meet without the presence of the bankruptcy court judge. It is also optional for the creditors to attend. During this meeting, the trustee will explicitly inform the debtor of how their bankruptcy agreement will proceed. The trustee will also inform the debtor about their credit score being affected and what they must do in order to regain a good financial standing while fulfilling all their obligations to the bankruptcy court. It is best if the debtor has their bankruptcy lawyer present to ensure that they have qualified counsel.
Chapter 7 Bankruptcy and Reaffirming Debt
A Chapter 7 proceeding requires that the debtor liquidate their assets. However, under certain conditions, it may be beneficial to the debtor to keep certain debts so that they may also keep the asset that is attached to said debt. This is known as a reaffirmed debt.
A mortgage is the most commonly reaffirmed debt. It is possible to reaffirm a mortgage if the debtor can afford to pay their mortgage and continue to do so once their non-priority unsecure debts have been discharged. Reaffirming the debt must be done with the lender’s permission; in this case, it is usually the bank that sold the mortgage.
During the Chapter 7 proceedings and liquidation, the reaffirmed debt will be “set aside” and left untouched until the debtor can return to functional financial standing. Many lenders are willing to make this compromise as a Chapter 7 filing results in drastically lower debts for the debtor in question. This effectively frees up large chunks of their income that can then be used to pay their mortgage.
This type of reaffirmed debt is shrewd because a house, barring some catastrophic housing market crash, is an asset that accrues value. Non-priority unsecure debts, on the other hand, do not. For example, most of the things that are purchased with a credit card plummet in value the moment they are removed from the store. Some lenders will also be willing to allow a debtor to reaffirm the debt on their car, particularly because cars may not accrue in value but they generate income by allowing the debtor to move effectively to and from their place of work.
Chapter 13 Bankruptcy
A Chapter 13 filing is significantly different from a Chapter 7 filing. For one, it is a type of bankruptcy that results in a restructuring rather than outright liquidation. Consequently, it is also referred to as consumer debt adjustment. Unlike Chapter 7, Chapter 13 also allows debtors to keep their property and/or assets.
This form of bankruptcy is generally available to those debtors who have higher incomes, thereby allowing them to take their various debts and spread out their repayment over an extended period of time. This period of time is most frequently three (3) to five (5) years. This repayment plan must be approved by the bankruptcy court judge as well as the bank that is acting as a creditor. Furthermore, the plan has to be fully fleshed out and developed before any approval is possible. Working with a bankruptcy legal firm who are experts in these repayment plans can help ensure that you develop a plan that is most beneficial to you and your family.
In order to qualify for Chapter 13, the debtor must have:
- Unsecured debts that are less than $394,725,
- Secured debts that are no more than $1,184,200.
Some of the unsecured debts may be discharged, but ultimately the court and your legal firm will develop a repayment plan that takes into consideration your monthly income (minus monthly expenses) and that will not cripple you with excessive payments. Consequently, you will need to provide all the same paperwork that is necessary for a Chapter 7 filing as well as tax statements from the IRS for the previous four (4) years. Proving your income and ability to adhere to a repayment plan is the crux of any Chapter 13 bankruptcy hearing.
The court will assign you a partial trustee to act as your de facto guide and source of information. This partial trustee has far less power and oversight than the bankruptcy trustee assigned to the debtor in Chapter 7 filings. However, you will be required to meet with this partial trustee to discuss the particulars of your repayment plan and obligations in order to properly adhere to the bankruptcy court’s requirements. Creditors can attend if they so choose, but it is advisable that you have your legal representative present. Hiring a bankruptcy legal firm ensures that there will always be someone in your corner of the ring, advising you on what is best for you.
How to Determine Which Chapter Bankruptcy You Are Eligible For
This is a tricky part of the process and is best done under the guidance and tutelage of your legal firm. Essentially, you must take what is known as the means test. All of your financial bona fides will be extensively and exhaustively analyzed as codified in the 2005 Bankruptcy Act. After examining all this information, the court will extract your average income from the previous six (6) months to be then compared to the median income of California. This median income will be from a household that has a similar size and makeup to yours.
It is important to note that residents of San Diego not only have higher expenses compared to other parts of the state but higher median incomes. This may influence the outcome of the means test, either for the better or not, depending on your circumstances.
If your income is lower than the California median, then you can file a Chapter 7 bankruptcy. If it is higher, then your monthly expenses must also be calculated and subtracted from your monthly income. This data is then extrapolated to determine your likely income for sixty (60) months into the future. If this future income is:
- Lower than $7,475, then the means test has been passed and you are eligible for Chapter 7,
- Greater than $12,475, then the means test has been failed and you are ineligible for Chapter 7.
In the event of 2. occurring, it is likely that the debtor will be eligible for Chapter 13.
Discharged Debts and Exempt or Non-Exempt Properties
The strategy that your legal firm advises you to take will be largely based on a series of factors. Chief among these is your current income. This will determine what kind of bankruptcy proceedings you are eligible for. Furthermore, once the automatic stay has kicked in and you can stop worrying about making payments on past due bills, you will have to determine what your monthly expenses are.
Furthermore, there are certain kinds of debts that can be absolved (also referred to as discharged) by the courts. These are called non-priority debts. Depending on whether you are liquidating or restructuring, you may either not have to pay a large percentage of your debts or will qualify for a reduction in your debt amount coupled with a reasonable payment plan that is contingent on your income and expenses. It should be noted, however, that certain debts cannot be discharged (known as priority debts).
There are also exempt and non-exempt types of properties. In Chapter 7, you will likely lose assets or property that you own in order to pay off your debts. In Chapter 13, on the other hand, you will likely be able to keep the property while you pay off your debts in the long term. However, bankruptcy code specifies some property as exempt or non-exempt from these qualifications. California law also has a cap on the amount of exempt property.
California State Exemptions in Chapter 7 and Chapter 13
It is important that you meet with a bankruptcy legal firm as soon as possible. If you are located in San Diego, either the city or the county, then you will need a firm that is well-versed in California bankruptcy code to advise you on what exemptions may apply to you. This is because Article 1, Section 8 of the United States Constitution allows for states to determine some of their own regulations for bankruptcy proceedings.
In California, some of these regulations include exemption systems for bankruptcy filings. Once the debtor’s eligibility for either Chapter 7 or Chapter 13 has been established, then the debtor will also have to determine what exemption system they wish to use. California requires debtors to use the exemption system that is codified in state law (as opposed to the federal exemption system).
There are two sets of exemptions, and all debtors filing for bankruptcy must choose between one and the other. System 1 is preferred by debtors with considerable home equity while System 2 is preferred by debtors who have valuable property that is not home equity. Furthermore, if a couple is filing together (legally known as a joint bankruptcy), they may not double their exemption amount. A joint bankruptcy also necessitates that either Chapter 7 or Chapter 13 be filed to apply to both spouses.
Determining your eligibility for Chapter 7 or Chapter 13 can be complex. There are such substantial differences between the two - with each having attendant advantages and disadvantages - that it is prudent and wise to confer with a bankruptcy legal firm before filing for bankruptcy. Anyone located in San Diego who needs help fixing their finances should call San Diego Bankruptcy Attorney at 619-488-6168 right away.