For those facing an uphill battle with trying to get control over debt, every day is a source of stress. Not only are creditors calling with threats, but you are watching your debt grow through late fees and interest. There may come a point where you consider bankruptcy in California, and the process is an effective way to get a fresh start with your finances. However, one critical factor to understand is what debts you can file bankruptcy on in CA. You may be surprised to learn what you can and cannot discharge.
With both Chapter 7 and Chapter 13 bankruptcy, you can eliminate qualifying debts at the end of the case. The key difference between the two is how you pay back creditors if you pay any amount at all. There are special rules under the US Bankruptcy Code about debts that are not dischargeable, while others cannot be wiped out because of the nature of the debt.
It is essential to have in-depth knowledge of the rules and how they apply to your situation when evaluating whether you can eliminate a debt. A California bankruptcy attorney can explain details, as well as advise you on Chapter 7 versus Chapter 13. An overview is also useful as you consider filing.
Basics on Chapter 7 and Chapter 13 of Bankruptcy in California
Most individuals will look into two types of cases established under the US Bankruptcy Code:
- Under Chapter 7, debtors can discharge debts if they qualify under the strict eligibility rules. This type of bankruptcy is harsh for creditors who suffer losses, so it is reserved only for those who truly need it. Your earnings must be lower than the state median income for California, but you may also qualify if you satisfy the criteria for the Means Test. This evaluation takes your income and subtracts the important bills you pay monthly, such as your mortgage, rent, utilities, food, and transportation.
- The focus of Chapter 13 bankruptcy is on creating a debt repayment plan to pay back creditors before the court discharges qualifying debt. Chapter 13 may be your only option if you do not meet the income requirements of Chapter 7. The only eligibility rule is that you must have a steady income to stay current with the debt repayment plan. Plus, if you want to keep your assets in bankruptcy, Chapter 13 might be your first choice even if you do qualify for Chapter 7.
Secured v. Unsecured Debts
With both Chapter 7 and Chapter 13, the discharge will only apply to unsecured debts. These are amounts you borrow or bills you incur where there is no collateral put up to secure the debt. Examples include:
- Credit cards;
- Personal loans and lines of credit;
- Contracts and leases;
- Medical debt;
- Judgments from debt collection lawsuits;
- Judgments from other court cases, unless they were based upon fraudulent acts by you; and,
- Past due utility bills.
Secured debts are those where the creditor has a vested interest in the collateral that is the subject of the loan. With your mortgage and auto loans, the lender has a security interest in the home or vehicle. The bankruptcy process cannot take away this perfected security interest. If you do not pay the debt, the remedy for the creditor is to pursue foreclosure or repossession proceedings. Filing for Chapter 7 or Chapter 13 imposes the automatic stay on creditor activities, so a lender cannot pursue you while it is in effect. However, it will only be a temporary pause on foreclosure or repossessing your car.
Discharge Debts in Chapter 7 Bankruptcy in California
All of the examples of unsecured debts mentioned above could be eliminated in Chapter 7 bankruptcy, and you will not have to directly pay any amounts to them during or after the case. However, you may be indirectly paying creditors because Chapter 7 is a liquidation bankruptcy. The bankruptcy trustee has the power to sell your assets, but only those that are nonexempt under bankruptcy rules. Bankruptcy laws do not aim to make you destitute, so you will be allowed to keep exempt assets that you need to live and work. With nonexempt assets, you will need to protect them from liquidation through the use of exemptions.
In practice, bankruptcy trustees will not make the effort to sell many nonexempt assets. Items like clothing, costume jewelry, your music collection, kitchenware, and related personal goods will not bring a profit. Unfortunately, there may be a risk of losing:
- Art collections;
- Luxury furniture and fixtures;
- Electronics, TVs, and nonessential computer equipment; and,
- Your second vehicle.
Knowing what debts you can file bankruptcy on may help you decide whether Chapter 7 is the right move since the risk of losing assets is considerable.
Your Debts in Chapter 13 Debt Repayment
Instead of paying your debts by the potential sale of your assets, Chapter 13 includes a debt repayment plan where you pay from your income. The monthly amount will be one that you can afford, and it results in you paying a significantly lower amount than what you owe to creditors. You will be required to comply with the debt repayment plan for three to five years, at which point the remaining debts are discharged.
Again, only qualifying debts are eliminated with Chapter 13. However, there are some important points to note about secured debts with this type of bankruptcy. With your mortgage, you may include past due amounts and arrearages into your debt repayment plan. This is particularly important for those wanting to keep their home, but the automatic stay is the only thing preventing them from facing foreclosure.
You must stay current with mortgage payments during the three- or five-year period for the plan, but these past-due amounts can be discharged when the case is over. Of course, you need to continue to pay in full after bankruptcy to avoid problems.
Special Considerations with Certain Debt in California
Aside from the distinction between secured and unsecured debts, there are special bankruptcy rules regarding some types of debt. Basically, the issue comes down to fairness. For instance:
- You cannot wipe out amounts you owe for child support, which puts your child in financial hardship.
- Alimony is not dischargeable as a binding court order.
- Judgments from DUI lawsuits cannot be eliminated, if your drunk driving caused death or injuries to victims.
- If you owe fines, fees, or restitution for a criminal case, you cannot discharge these.
There is some confusion over student loan debt, which actually can be eliminated despite popular misconceptions. The problem is that it is very difficult and requires a special hearing. You need to prove extreme financial hardship and other facts to convince the court that student loans should be discharged.
Another source of misinformation is that you cannot file for bankruptcy on tax debt. To be clear, you will not be able to discharge a tax lien that has already been perfected on the property. However, you may qualify to discharge tax debt depending on your history of filings, dates of filing and paying taxes, and related factors.
Guidance with Bankruptcy Proceedings in California
It is a relief to know that you can discharge many types of debt through Chapter 7 or Chapter 13, but this overview helps you understand the need for legal representation. Bankruptcy lawyers have in-depth knowledge of the rules for eliminating debt, so you will know what happens when the case is complete. Your bankruptcy attorney will also help with all essential tasks, such as:
- Coordinating the credit counseling course that you are required to take within 180 days before filing;
- Helping you gather and organize relevant documents related to your financial situation, including paperwork on assets, real estate, debts, income, liabilities, and expenses;
- Preparing and filing the Chapter 7 or Chapter 13 bankruptcy petition with schedules;
- Developing your debt repayment plan for Chapter 13;
- Attending the meeting of creditors with you, where creditors ask questions about your financial situation to confirm the information you provided on your application;
- Applying exemptions where appropriate, enabling you can keep property in a Chapter 7 case; and,
- Obtaining the discharge order from the court when your case is complete.
A Chapter 7 case takes a few months, depending on whether the bankruptcy makes an effort to liquidate assets. Chapter 13 will last at least three to five years, plus the time of the initial case proceedings.
Your Future After Bankruptcy in California
When your case is over, you will experience a sense of relief after having the burden of overwhelming debt lifted off your shoulders. You will not be squandering money on late fees and interests, without the means to ever pay off the balance. Qualifying, unsecured debts will be eliminated once you receive your discharge order. You cannot wipe out certain types of debt and will still be obligated to secure debt, but you have more free income to pay them without other debts hovering over you.
A Chapter 7 case stays on your credit report for 10 years, while Chapter 13 remains for 7 years. During this time and after, you can rebuild credit by:
- Keeping up with your mortgage;
- Paying all utilities in full; and,
- Consider a secured credit card to improve your score.
Trust a California Bankruptcy Lawyer to Advise You on Dischargeable Debt
As you can see, Chapter 7 or Chapter 13 may be a good fit for eliminating many of the debts that you struggle to pay now. Discharging what you can through bankruptcy is still a benefit for getting your finances back on track. If you are considering your options, please contact Kostopoulos Bankruptcy Law. We can schedule a consultation at our offices in Oakland or Riverside to discuss details with a Chapter 7 and Chapter 13 attorney.
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