Many honest and upright taxpayers are having a tough time making ends meet. This is because of the overwhelming debts accumulated thanks to numerous credit card bills, medical bills, etc. Though undesirable, bankruptcy provides you with a clean slate to get a fresh start as far as unpaid dues are concerned, it is not a child’s play to declare bankruptcy, especially in California. With unforeseen expenditures like huge medical bills or divorce causing you to spend double the amount of money, there is a serious requirement for debt relief among people. It is important to be prepared for bankruptcy, says, Los Angeles bankruptcy lawyers Recovery Law Group.
The very first step to prepare yourself for bankruptcy is to decide which chapter of bankruptcy would work best for you since each has a specific requirement and offers different protections. Choosing the correct chapter is important as they will affect your finances. It is also important to consult an experienced bankruptcy attorney, who will suggest the proper bankruptcy chapter depending on your financial circumstances.
The Workings of Chapter 7 Bankruptcy
This is also known as liquidation bankruptcy through which debtors can eliminate all debts eligible for discharge. Some debts like government taxes, student loan, spousal or child support, debts owed for injury caused to another due to DUI and restitution as a result of a criminal conviction are discharged only under specific conditions. Mostly, all eligible debts are discharged, however, sometimes some assets of the debtor might be sold off by bankruptcy trustee to pay off the creditors. The assets which are protected from going under the hammer include –
- The “homestead” or primary residence up to a specified equity limit
- The primary vehicle used for transportation (especially if you live in an area where public transport is limited)
- Your retirement accounts including IRAs, stock bonus plans, profit sharing, pension and deferred compensation plans like the 401(k) account
- A single household item with worth less than $675 which may include jewelry, valuable antiques, etc.
The state of California has 2 systems of exemptions wherein most debtors do not require to surrender any of their assets during bankruptcy. To qualify for chapter 7 bankruptcy, you need to pass a means test as this provision is primarily for those who are in dire need of debt relief.
Details of Chapter 13 Bankruptcy
The 2nd option available to individuals who fail to qualify for chapter 7 includes chapter 13 bankruptcy. This is commonly known as the repayment plan option, wherein the debtor has to repay a certain amount of the dues owed within a 3-5 year time frame. In chapter 7, the eligible debts are discharged within a few months of the bankruptcy filing, however, chapter 13 requires a lot more time to get discharged. The repayment plan is devised in consultation with the bankruptcy trustee wherein the entire debt or a percentage of it (depending on the debt accumulated and your assets) is paid. Monthly payments are made to the trustee who then distributes the amount amongst the various creditors.
This chapter provides you time to catch up on car payments, mortgages while making continuous payments towards your debts. The unsecured creditors like credit card companies are given the remaining amount every month. Post the duration of the repayment plan, the remaining debts are discharged.
How to file for Bankruptcy in California?
Once the chapter for bankruptcy is decided, it is important to prepare properly for a bankruptcy filing. Missing out on any step can prove to be quite a costly mistake as you might not get a discharge for bankruptcy.
Here are the steps required for filing of bankruptcy:
- Accumulate essential documents
The court proceedings require you to have all documents containing pertinent information. Some of the necessary documents include valid ID card (birth certificate, driver’s license, birth certificate etc.); a list of all of your bank accounts and insurance policies which could result in a claim for or against you; all tax returns filed for the past 2 years; proof of income for the previous 6 months as well as proof of ownership of assets like property; as well as circumstances of your situation (divorce, expensive medical care etc.)
- Credit counseling
The court approved credit counseling sessions are mandatory for people who wish to file for bankruptcy. During such sessions, your finances are seen by professionals to conclude whether bankruptcy is the best way to get out of the financial mess. The counseling sessions are mandatory and inability to attend them might get your bankruptcy case dismissed.
- Consult bankruptcy attorney
Though having an attorney isn’t a requirement for a bankruptcy filing, having one by your side definitely helps the case. Compared to pro se filings, the success rate of attorney handled cases are much better. The entire paperwork, communication with creditors and all other requirements are taken care of by the attorneys since they are familiar with the rules. Consult bankruptcy attorneys at 888-297-6023 to find out more about your case.
Things to avoid while declaring bankruptcy in California
For all those people who wish to get rid of their financial problems and are contemplating filing for bankruptcy, it would be beneficial to avoid making some common mistakes, like specific transactions in a particular timeframe, which could cost them dearly. The court does not look kindly on unnecessary expensive purchases and transferring huge sums of money within a few months prior to a bankruptcy filing. This is construed as hiding of assets. Such a practice may be considered illegal, resulting in dismissal of a bankruptcy petition or worse, filing of criminal charges.
Many people think that transferring assets to other people will result in those assets not becoming a part of the bankruptcy estate and therefore are not liable to be sold off to pay creditors. However, such transaction, even in your spouse or children’s name can be viewed as a fraudulent action by the court. Generally, transactions made 90 days prior to the filing of bankruptcy come under the scanner of the court. If any such aforementioned transactions are spotted, the court can and does reverse them to make the said assets part of your bankruptcy estate. Other transactions that can be interpreted as fraud include –
- Selling your interest in your business
- Taking your name off as an owner
- Taking your name off joint bank accounts
- Transferring money from your account to someone else’s
- Selling off real estate despite not getting a fair market price for the same
While filing for bankruptcy, people should keep certain things in mind, like:
- Treat all creditors equally
Despite your desire to pay off a creditor full amount due to them since they have patiently waited for you to get a hand on some money while your payments were due, is not looked upon kindly by the courts. Such kind of transfers come under “preferential transfers” which can have a negative impact on your bankruptcy proceedings and result in clawback. The bankruptcy trustee can assume that such a payment is made to exclude the particular creditor from bankruptcy plan. In this case, they can sue the creditors and obtain the amount paid back to the bankruptcy estate. Thus the situation can prove to be detrimental for both the debtor and the creditor in this case.
- Don’t make unnecessary expenses on credit cards
If possible, avoid using your credit cards completely; if not, then you definitely need to curtail spending on unnecessary stuff like any expensive items, etc. The court is likely to accept the usage of credit cards for payment of utilities, gas, groceries, etc. but not of any item worth over $650 within 90 days of the bankruptcy filing. Thus if you don’t want your bankruptcy case to be dismissed, dodge making avoidable expenses through credit cards.
- Avoid filing a lawsuit
In case there are people who owe you money or a business dispute that needs resolving and you wish to take the legal recourse of filing a lawsuit; avoid it if you are considering filing for bankruptcy. This is because any recovery you make through the lawsuit will become the property of the bankruptcy estate, thus leaving you with next to nothing.
- Avoid making any business deal resulting in payments being made to you
Any business deal you make which results in you acquiring some money might not be what you desire especially when you are about to file for bankruptcy. This is so because any money you receive ends up becoming a part of the bankruptcy estate which is used to pay off your debts. In case you are expecting an inheritance, bonus, tax refund or similar monetary transactions, you should avoid or delay filing for bankruptcy. The court inspects all transactions 90 days prior to the bankruptcy filing to check for any transactions it considers prohibited.
If you are amongst the various people who are struggling with unsurmountable debts bankruptcy is an ideal choice for you. Whatever your way of getting a bankruptcy discharge, whether a wiped clean slate via chapter 7 or a new financial path via debts management as per repayment plan under chapter 13; you are in for a fresh lease of life. To get a better idea about your case, get a consultation with a bankruptcy attorney.