After trying everything from picking up a side hustle to cutting back on everyday spending, it’s entirely possible that your chances of climbing out of debt still seem slim at best. Though it should always be considered a last resort, filing for bankruptcy sometimes does offer the most realistic path to getting out of debt and reclaiming your financial life.
Maybe you are considering bankruptcy as a strategy for getting out of debt. However, before making any life-altering decisions, it’s important that you carefully explore all of your options. In this article, we give you a basic guide to filing for bankruptcy in California. It might be one of the toughest decisions you’ll ever have to make, but doing something about your debt is the first and most important step to getting back on your feet.
What is Bankruptcy?
When you file for bankruptcy, you are officially declaring in a court of law that you are unable to pay off your debts. If, after evaluating your assets and liabilities, the court finds that you truly have no means of realistically paying back your creditors, then you are granted legal permission to declare bankruptcy. This gives you the opportunity to discharge your debts, which means you are no longer obligated to pay them off. Though some debts, such as student loans, taxes, child support and traffic tickets, cannot be discharged in bankruptcy, this could still give you the financial flexibility you need to get back on your feet.
Which type of bankruptcy you file for, Chapter 7 or Chapter 13, depends entirely on your personal outlook. Each comes with its own advantages:
- Chapter 13:By declaring Chapter 13 bankruptcy, also known as “reorganization,” you and the court agree to a plan in which you’ll pay off some or all of your debts over a set period of time, between 3-5 years. Filing Chapter 13 is advantageous because it allows you to keep anything you own, such as your car or your house, while you catch up with all current and past due debts. To confidently file for reorganization, you should already have a dependable source of income. You’ll have to carefully follow a court-mandated payment plan and monthly budget — both of these will be closely monitored over the course of the set time period. If you adhere to your plan as scheduled, any outstanding debt that remains at the end of the 3-5 years will be discharged. A Chapter 13 bankruptcy declaration, however, will remain on your credit report until seven years after your original filing.
- Chapter 7: When you declare Chapter 7, you’re agreeing to let the court seize and sell almost all of your property, making exceptions for little more than sentimental and essential objects — your home, your car, and your furniture will almost certainly all be re-possessed, even if you own them in full. The court will then use the proceeds from the asset liquidation to pay back your creditors as much as possible. After a few months, you’ll receive a notice of discharge, which officially releases you from all debts that qualify for discharge. Since it does not come with a long-term payment plan and basically amounts to a complete financial reset, Chapter 7 is also referred to as a “straight bankruptcy.” Chapter 7 bankruptcies stay on your credit report for ten years after the original filing.
Bankruptcy Law in California
Like any other state, California has its own list of bankruptcy exemptions — these are the types of property you’re allowed to protect from creditors and the maximum amount of equity in that property that you’re entitled to keep when you file for either type of bankruptcy. In California, each person is entitled to a certain amount in homestead exemptions, depending on their demographic information: a single 40-year-old, for instance, is entitled to $75,000 in homestead exemptions, whereas a 70-year-old married couple is entitled to $350,000 in exemptions.
In California, there are two separate exemption “systems” — you’ll likely want to use System 1, since System 2 is mostly geared towards farmers. You can also look into which Federal exemptions can be used in California to supplement your state exemptions,
If you’re trying to file for Chapter 7 bankruptcy and your household income is greater than California’s median income for your household size, you’ll have to take The California Means Test to prove that you can not realistically file for Chapter 13. If, on the other hand, your household income is below the state median income for its size, then you’ll be exempt from the means test, and you’ll immediately qualify to file for Chapter 7 bankruptcy. Since California’s median household income is slightly greater than the national median, the maximum amount you can earn without having to take the Means Test is slightly higher for Californians than it is for most other Americans — for some, this will come as good news.
Do You Really Need to File for Bankruptcy?
Deciding whether or not to file for bankruptcy can be one of the toughest decisions you’ll ever make in your life, and there are plenty of factors to consider before coming to a conclusion:
Reasons to File for Bankruptcy
If you’re absolutely certain that the debt you’ve amassed is significantly greater than the value of your assets (both liquid and otherwise), then declaring bankruptcy is a reasonable option. Here are some reasons you might want to go ahead and declare either type of bankruptcy
- A Chapter 13 Bankruptcy could save you from losing some of your most essential possessions, such as your home or your car, as you follow through on a long-term reorganization. Instead of having your home foreclosed or your car seized, you can get the time you need to catch up on payments and get back on your feet while you adhere to the state-mandated payment plan.
- A Chapter 7 Bankruptcy should always be considered a last resort, but it could present your only chance at surmounting debts that have ballooned to astronomical proportions. Relinquishing almost all of your property might be a small price to pay for the relief that would come with an immediate discharging of your debts.
Reasons Not to File for Bankruptcy
No matter which type of bankruptcy you file for, the process will demand a great deal of emotional and personal sacrifice. Here are some reasons you might not want to declare bankruptcy:
- Your Credit Score Will Plummet: As soon as you declare bankruptcy, your credit score will plunge to record lows, and it’ll sustain this damage for several years to come. This virtually guarantees that you’ll be unable to take out loans, like home mortgages and auto loans, or open lines of credit for the foreseeable future (usually 1-4 years).
- Your Financial History will be Made Public: Since you’ll be required to share all of your personal financial information in a public court of law, all of the nitty-gritty details of your current finances will be made available in the public domain. Potential employers, lenders, clients and business partners will readily have access to your bankruptcy filing for the rest of your life — you might think twice if there’s a detail or two you’d prefer to keep out of the public eye
- Filing is Expensive: The process of filing for bankruptcy itself isn’t cheap. According to this article, the filing fee for Chapter 13 bankruptcy is $310, and attorney fees typically fall somewhere between $1,500 – $6,000. In the case of a Chapter 7 bankruptcy, you’d pay $335 for filing fees and $500 – $3,500 for your attorney. In either case, you’ll need a chunk of change just to legally proclaim that you have no money
Alternatives to Filing for Bankruptcy
Before turning to bankruptcy once and for all, it would be wise to consider all of your options for a full financial recovery. First, balance transfer cards can be a great resource if you’re struggling to manage credit card debts that are spiralling out of control as the interest and fees mount up. By transferring your debts to a card that offers a promotional 0% APR for the first 12-24 months after you open the account, you might give yourself the time you need to get your finances back in order.
Similarly, a personal loan could provide the cushion you need to start reaching towards a new financial equilibrium. It might sound ironic, but sometimes it’s a good idea to borrow some money in order to start climbing out of debt — taking out a loan so that you can buy a car, for instance, might open up a number of new doors as far as employment goes. There are also plenty of quick budgeting tips that could go a long way towards turning your financial life around.
How Trim Can Help
If you’re looking for support, Trim’s debt payoff program can provide a great tools for understanding and managing your finances so you can finally kick your debt. Trim will negotiate your APR with your credit card companies, potentially saving you thousands in interest by having your rates lowered in a matter of days. Unlike a balance transfer card or personal loan, which could damage your credit score, a lower APR will make your debts more manageable without having the slightest impact on your credit history.
Using Trim’s debt payoff program, you can also build a monthly payoff plan that will help you create goals as you set out on the path to a full financial recovery. You can use the Trim dashboard on your phone to track your progress and make sure you’re on pace. All the while, our financial coaches will provide you with personalized advice and coaching to ensure that you’re doing everything you can.
Best of all, Trim’s debt payoff program is only $10/month, offering an affordable and comprehensive alternative to almost every other financial counseling service. And with a 90-day refund period, you run no risk of having to pay for a service that isn’t right for you.
How to Get Started with Filing for Bankruptcy in California
If you’ve decided that declaring bankruptcy is your best option, you’ll need to find the bankruptcy court that oversees your county. There are four separate bankruptcy courts in California: one for the Central District, another for the Northern District, one for the Southern District, and one for the Eastern District. The Eastern District is the largest and is broken into three separate divisions: the Sacramento Division, the Modesto Division, and the Fresno Division. Each court has multiple locations and covers several counties. Here’s a quick directory of the counties that each district covers:
–Central District: San Luis Obispo, Santa Barbara, Ventura, San Fernando Valley, Los Angeles, Orange, San Bernardino, Riverside
-Northern District: Del Norte, Humboldt, Mendocino, Lake, Sonoma, Napa, Marin, San Francisco, Contra Costa, Alameda, San Mateo, Santa Clara, Santa Cruz, San Benito, Monterey
-Southern District: San Diego, Imperial
-Eastern District: Sacramento Division (Siskiyou, Modoc, Trinity, Shasta, Lassen, Tehama, Plumas, Butte, Glenn, Colusa, Sutter, Yuba, Nevada, Sierra, Placer, El Dorado, Sacramento, Yolo, Solano, San Joaquin, Amador, Alpine, Mono), Modesto Division (Stanislaus, Calaveras, Tuolumne), Fresno Division (Merced, Mariposa, Madera, Fresno, Kings, Tulare, Inyo, Kern)
Once you’ve figured out which district court covers your county, you’ll need to get in touch with a bankruptcy attorney who works in that district. Keep in mind that attorney fees for the same service can vary drastically from firm-to-firm, so you’ll want to compare pricing before committing to a specific lawyer. Avvo can help you get started in your search for the right bankruptcy lawyer. You can also contact your local bar association’s Legal Referral Service and request referrals to bankruptcy attorneys. This website provides a list of Legal Referral Services throughout California.
Filing Fees & Costs
Filing fees in California are the same as in any other state: Chapter 13 costs $310 and Chapter 7 costs $335. If your household income is less than 150% the federal poverty line and you’re filing for Chapter 7, you can apply to have your filing fees waived. The bulk of your expenses, though, will be in lawyer fees, making it doubly important that you find a lawyer whose fees are affordable.
If you can’t afford to pay for legal fees, you still have a few options — hundreds of bankruptcy attorneys around the nation offer pro bono guidance for people in need. This website offers a great list of legal aid and pro bono services throughout the state of California — their waitlists are probably long, so it might be a good idea to contact every clinic if you need to file for bankruptcy but can’t afford to spend a cent on legal fees.
Another cheap option is hiring a petition preparer in lieu of a bankruptcy attorney. Though they aren’t authorized to provide you with legal advice, petition preparers are much cheaper, and they’re equipped to help you fill out the bankruptcy forms accurately. They can help you turn in your forms as quickly as possible, ensuring that you put a stop to collection efforts while your application is considered by the district court.
Be warned, though, that taking care of the process without assistance should never be considered one of your options. The ins-and-outs of bankruptcy law are extremely complicated, and chances are good you’ll make a major mistake along the way if you try to do everything on your own. If that happens, the bankruptcy court will simply keep your filing fees and reject your filing. At that point, you’ll have spent a whole lot of money for no financial relief.
- Forms for filing Chapter 7 or Chapter 13 can be found at any of the district court’s websites:
- Central District Court: All forms for Chapter 7 and Chapter 13, including petitions and rules forms, can be found here
- Northern District Court: All forms for Chapter 7 and Chapter 13, including petitions and rules forms, can be found here
- Southern District Court: All forms for Chapter 7 and Chapter 13, including petitions and rules forms, can be found here
- Eastern District Court: All forms for Chapter 7 and Chapter 13, including petitions and informational packages, can be found here
The Bottom Line
Filing for bankruptcy is a demanding and complicated process, but it could be the change you need to jump-start your complete financial recovery. Whether you’re embarking on the slower process of reorganization (Chapter 13) or filing for a straight bankruptcy (Chapter 7), it’s important that you do everything you can to make sure you’re prepared for the years ahead.