Ever since late 2008, many Americans have been hit hard by the economic downturn.  That includes not only foreclosures, but delinquent car loans, credit card bills, medical bills and every other kind of personal expense.  Add in a weak job market and high unemployment and you have a scenario where many thousands of people can’t keep up anymore and bankruptcy looks like a better and better alternative.  Californians are no exception, and many wind up finding themselves in bankruptcy court.   

In California bankruptcy law, Chapter 7 is the most common filing.  The process for a Chapter 7 usually goes as follows:  

·        Court appoints a trustee, whose job is to administer many of the details of the bankruptcy process.

·        The debtor, trustee and creditors meet about 1 month after filing.  Under oath, the debtor is questioned by creditors about his assets and liabilities. Usually, this is a very brief meeting and consists of little more than the debtor affirming that all the details in his bankruptcy papers are a true and accurate rundown of his assets and debts.  In some cases, the debtor may be required to attend additional meetings, but this is infrequently the case. 

·        If the creditors raise no objections to the debtor’s discharge, the debtor will get a written notice from the court which declares that he has been discharged of all dischargeable debts.  A California bankruptcy will stay on the debtor’s credit report for ten years.   

CHAPTER 11 BANKRUPTCY      

Although it’s more common for businesses, sometimes individuals may elect to do a Chapter 11 bankruptcy filing.  As in most states, a Chapter 11 is a reorganization or restructuring of debt that allows the debtor to satisfy many of his debts over time.  A debtor can usually act as his own trustee (“debtor in possession”) and can retain possession of his house, car and other estate property.   

1.      The debtor and counsel will attend a meeting of creditors about one month after the following.  In corporate or business Chapter 11 filings, the debtor will be required to show monthly operating reports with a full breakdown of income and disbursement, profit/loss and a balance sheet, and may be required to pay quarterly fees to a U.S. Trustee, indexed against the amount of money disbursed.

·        The debtor can file his own plan for repayment during the first 4 months.  After that, creditors can come up with plans and file them.  The debtor’s plan will need to be accompanied by a disclosure statement laying out the debtor’s financial circumstances, including things like:

*Prior history and reasons for filing

*Assets and liabilities

*Liquidation analysis

*Projected earnings

*Income and expenses

·        The plan should put creditors with similar claims into the same class, unless the creditors’ claims are “impaired,” meaning that the creditor’s legal rights are altered by the plan.  In Chapter 11 business bankruptcies, a plan will typically call for the company to stay in business and begin a repayment schedule from future earnings or sale of assets.  Priority claims may include claims secured by real property or recent tax claims; these are required to be paid in full, with interest.  Unsecured claims should receive a dividend (usually negotiated).   

CHAPTER 13 BANKRUPTCY 

In California bankruptcy law, Chapter 13 filings are a debt adjustment procedure for people with regular income, unsecured debts under $269,260 and secured debts under $807,750.  After filing the bankruptcy petition (complete with a declaration of assets and liabilities and a statement of financial affairs), a Chapter 13 sets up a repayment schedule over a 3-5 year period, with a court-appointed trustee receiving payments and disbursing them to creditors.  After the plan is complete, the debtor will typically receive a discharge, even if less than 100% of the debts have been paid down.   

Debts that must be paid in full to be discharged include:

·        Child support and spousal support

·        Restitution or criminal fines

·        Debts related to a DWI

·        Student loans

·        Recent taxes 

In a Chapter 13 plan, creditors will typically receive various amounts of money depending on whether debts are priority, unsecured non-priority or secured debt.  Secured debt includes:

 

·        Real estate mortgage loans

·        Car loans

·        Second mortgages or home equity loans

·        Furniture or jewelry loans