Let's assume you've decided you want or need to file for bankruptcy. You need a fresh start. How do you go about doing it? When most people think of bankruptcy they are thinking about Chapter 7. This is the traditional type of bankruptcy where all your unsecured debts are cancelled. (Except for a few that are not dischargeable such as most taxes, student loans, child support, etc.) You still have to pay your secured debts (such as your mortgage and your car loan). But before you go ahead and decide to file a chapter 7 bankruptcy you need to at least consider filing a chapter 13 instead. Chapter 13 has disadvantages in that it is more costly and you only reduce your debts as opposed to completely discharging them. But some people are stuck filing a chapter 13 because they earn too much money or they risk losing property if they file a chapter 7. For other people a chapter 13 can do more for them than a chapter 7. Usually, these are people that want to strip off mortgages that have essentially become unsecured due to the decline in the value of the property. It's a complicated question as to whether you should file a chapter 7 or a 13. You really should have an experienced attorney help you decide. Ok let's assume you elect to file a chapter 7. The theory behind chapter 7 bankruptcy is that you hand over your property to the bankruptcy trustee and he divides it up among your unsecured creditors in a proportionate manner. Of course, most people do not want to lose any property in the bankruptcy. They want to get rid of the debt but they want to keep all their property. The law recognizes that in order to get a fresh start you need to have some property to get yourself going financially. That property is called "exempt". So in order to keep your property it must be exempt. The exemption system we have in California is a little complicated. We have 2 sets of exemptions: The 703 exemptions and the 704 exemptions. They are like 2 separate menus. You choose which one you order from but you can not pick and choose from both. So you need to decide which set of exemptions to use. Here again you should have an attorney advising you. The biggest difference between the 2 sets of exemption is that one set (704) allows a larger exemption for equity in your home ($75,000 for a head of household). The other set (703) has a smaller exemption for equity in your home (around $22,000) but if you don't have any equity in your home you can use the exemption for any property. For this reason it's called the "Wildcard" exemption. In the 703 system you can combine smaller exemptions with the Wildcard exemption. For example, if equity in your vehicle is $5,000 and the vehicle exemption is $3,300 that leaves $1,700 unexempted. But if you have at least $1,700 of unused Wildcard exemption left over you can use that exemption to fully exempt the vehicle. No matter what exemption system you use properly documenting valuations can be important. For example, if you do not convincingly document that you have less equity in your home than the exemption amount then the trustee can take your home and have it sold. An experienced bankruptcy attorney will review your documentation to minimize the risk of something like that happening. As mentioned above you must pass an income test. If you don't pass because your net income is too high then your bankruptcy case will be dismissed as "abusive". This income test, or "means test" went into effect in 2005. As a result, the bankruptcy petition has become much more complicated than it was before 2005. It's a lot like an income tax return. You state your gross income and then you are allowed deductions. But just like a tax return, the rules for calculating your net income on the bankruptcy petition can be a little surprising and somewhat strange. In general, you are not allowed to deduct all your actual expenses. You are only allowed to deduct the amount that the government thinks are reasonable. The IRS standards are used. According to these IRS standards, a family of 3 in San Diego is allowed to deduct only $1,732 for rent or mortgage expense. But there is a rule that says that you can deduct 1/60th of all the payments that are due in 5 years on secured loans. This means that you can, in effect, deduct your mortgage payments even if they are more than $1,732. But some judges won't let you deduct the mortgage payments if it looks like your home is going to go into foreclosure. Like I said the means test can be complicated. And if you don't pass it your case will be dismissed. Like I said the means test can be complicated. And if you don't pass it your case will be dismissed. It's best to work with an attorney who specializes in bankruptcy.
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