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Options for Filing for Bankruptcy in California
There are many different types or “chapters” of bankruptcy, each named after its corresponding chapter in the U.S. Bankruptcy Code. While debtors have some flexibility when choosing which chapter to file under, the choice can be limited by means testing, a process that measures a debtor’s disposable income to determine whether he or she has adequate income to cover a Chapter 13 plan. The Chapter 13 plan, and other important aspects of Chapter 13, 7, and 11, are explained in the sections below.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also called “straight bankruptcy” or “ordinary bankruptcy” because it is the simplest, fastest, and most commonly used type of bankruptcy, not only in California but nationwide. According to U.S. Bankruptcy Court for the Eastern District of California, which has jurisdiction over Placer and Sacramento Counties (among many others), nearly 15,000 people filed for Chapter 7 in 2015, with a peak of nearly 45,000 filings in 2010.
Chapter 7, which generally takes about four to six months to complete, is also called “liquidation” because of the process involved. When a debtor files for Chapter 7, his or her non-exempt assets are sold by a trustee to various creditors, which helps pay off the filer’s debts. Filers in California can choose between two sets of exemptions, which are simply named System 1 and System 2. Your Chapter 7 bankruptcy lawyer can evaluate which system of exemptions will protect more of your property.
After the trustee has distributed sale proceeds among the debtor’s creditors, the bankruptcy court grants the debtor a discharge. The discharge has the effect of eliminating the debtor’s liability for most of his or her debts. Debts that are discharged in Chapter 7 bankruptcy include medical debt, credit card, certain tax-related debts, and debt from personal loans. While the debts continue to exist, creditors can no longer pursue the debtor for repayment.
Chapter 13 Bankruptcy
Chapter 13 is also called “reorganization” bankruptcy, or a “wage earner’s plan.” That is because, unlike Chapter 7, Chapter 13 requires filers to propose a reorganization plan, which must be approved by the bankruptcy court before the case can continue. The debtor’s creditors may object to the initial proposal, which is one of the reasons it is important to be represented by an experienced Chapter 13 bankruptcy attorney.
The reorganization plan is a three- to five-year plan under which the debtor makes monthly payments on various debts. The nature of each debt determines the order in, and extent to which, debts must be paid off. All of the debtor’s disposable income, or income left over after necessary living expenses have been accounted for, must be funneled into the reorganization plan.
The benefit of the reorganization plan is that it allows the debtor to keep his or her property, even without exemptions. By filing Chapter 13, a debtor can protect his or her vehicle from repossession, and even save his or her home from being repossessed. In short, the plan gives the debtor extra time to catch up on missed payments.
As long as the debtor stays on track with the plan, he or she can retain property that would otherwise be seized or repossessed. If the debtor misses too many payments, he or she may be forced to convert the case into a Chapter 7 bankruptcy. Once the Chapter 13 plan has been completed successfully, the bankruptcy court will grant a discharge, and, as in Chapter 7, the debtor will no longer be liable for debts that were addressed by the plan.
Because of the reorganization plan, Chapter 13 is more suitable for debtors with higher income, whereas Chapter 7 is usually utilized by debtors who have fewer assets and resources to draw upon. Chapter 13 is fairly common, but less widely used than Chapter 7, with about 3,000 filings in 2015.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is typically used by businesses. Chapter 11 for individuals is exceedingly rare, with just over 50 filings documented in 2015, but occasionally proves to be the most sensible filing option for individual debtors.
Chapter 11 is a complex process, but may be the right filing option if you have too much income to file for Chapter 7, and too much debt to file for Chapter 13. The process is similar to Chapter 13, and may require several years for completion. Our Chapter 11 bankruptcy attorneys can assess your debt and income levels to determine whether Chapter 11 is the most appropriate chapter for you.
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