By special contributor to the News, Ronald E. Ostrin, Esq.
A popular misconception about filing bankruptcy is that people think they should be broke before consulting an attorney to discuss the possibility of a bankruptcy. This is often a tragic mistake, as they may actually be too broke to file bankruptcy. It is best to obtain professional advice sooner rather than later to get the best result.
One should not consider bankruptcy lightly; it is a life-altering event. However, we live in troubling times and for those people who find themselves financially upside down, bankruptcy can be a powerful tool to get a fresh start. Unemployment in California is over 12% and real property prices continue to fall. Ordinary people who never contemplated the possibility of bankruptcy find themselves having to consider it. In order to survive in these financially challenging times, it is important to understand the basics of bankruptcy and to be prepared to act proactively if one’s situation demands it. By researching options, you may be able to save more property and have a smoother glide path towards economic recovery.
In order to understand bankruptcy, think of it as a living probate. In a probate, someone dies and his or her property creates an estate. That property is then administered and distributed through the laws of probate. From the decedent’s estate, property will first be distributed to pay debts and administrative claims, then to the beneficiaries or heirs as determined either by a will, trust or priorities created under the law.
Bankruptcy, like probate, deals with the distribution of a person’s property when he is insolvent, which is “[t]he condition of a person who is unable to pay his debts,” according to Black’s Law Dictionary, Revised Fourth Edition. However, unlike probate, bankruptcy does not involve a physical death, but merely a financial one, and unlike a deceased person, a successful bankruptcy allows a person a fresh start, either unencumbered by [most of] the pre-bankruptcy debts or, alternatively, to pay them off through a plan of reorganization, usually at a discount.
Upon the filing of a bankruptcy petition, a bankruptcy estate is created, which consists of all of the debtor’s assets at the time of filing. From the bankruptcy estate, the debtor is allowed to exempt certain items of property so that he or she is not left without the basic necessities of life. Understanding the allowable exemptions is the key to obtaining the maximum benefit of a bankruptcy and by failing to seek the advice of a competent bankruptcy attorney or seeking too late, one might lose the ability to maximize those exemptions or lose them entirely.
In California, there are two different exemptions schedules: State and Federal (CCP§ 703.140(b)). You can only use one of these schedules and each has a different emphasis. Under the California exemptions, anyone can exempt $75,000 of equity in a residence and for people over age 65 or with physical or mental disabilities, you can exempt up to $175,000 of equity. This means that if you could afford to keep your mortgage current and had less equity than the homestead and the costs of sale, you might keep your residence if you file bankruptcy as long as you continued to make the mortgage payments and taxes. Therefore, if you are saddled with crippling credit card debt, but have some equity in the house, you should consider filing bankruptcy or at least get bankruptcy counseling to determine if you might keep your house while eliminating your unsecured debt.
It is better to make that decision sooner rather than later; before equity is eaten up or property foreclosed because one could not afford to pay his mortgage payments and credit card debt.
The federal type of exemptions are more flexible as to the type of property you can keep but has a very small real estate exemption ($22,075) § 703.140(b)(1) compared to the California exemptions. However, for those people who don’t own real property or have no equity the federal exemptions can protect any other property. Under California Code of Civil Procedure § 703.140(b)(5), you can exempt $1175, plus any amount of the homestead exemption § 703.140(b)(1) not used for a total of $23,250. Therefore, a renter with a savings account of $21,000 could theoretically file bankruptcy, discharge all of his credit card debt and other dischargeable unsecured debt and still keep his savings account. This is a tremendous opportunity to get a fresh start that would be lost if one waited too long to consult a bankruptcy attorney.
This is a simplification of the bankruptcy system, as requirements for filing and actual filing are complex, and some people simply make too much money to file bankruptcy. However, the determination of income, called the “means test,” is usually based on your last six months of income, and if you are retired or out of work, you may qualify. The important message is that to file bankruptcy intelligently, you must plan and are best served by having a qualified and experienced attorney guide you through the system. It is better to see that attorney too soon, rather than too late, as filing bankruptcy is never easy or pleasant, and sometimes it is the most intelligent thing to do in difficult times. If you wait too long, you may make mistakes or miss opportunities to get your best fresh start.
This article is not intended to constitute legal advice or substitute for the advice of an attorney and the author recommends that you see a qualified attorney for your legal issues.
