Facing financial challenges is a part of life. But if you're one of the millions struggling financially due to a job loss, illness, or another event in California, bankruptcy can help. Here, you'll find an explanation of Chapters 7 and 13, checklists to help you understand the process and stay organized, and California's property exemption laws and filing information.
However, we couldn't squeeze everything into this article, so be sure to check out its companion, What You Need to Know to File for Bankruptcy—you'll find lots more details there.
In most respects, filing for bankruptcy in California isn't any different than filing in another state. The bankruptcy process falls under federal law, not California state law, and it works by unwinding the contracts between you and your creditors—that's what gives you a fresh start.
But California's laws come into play, too, in a significant way. They determine the property you can keep in your bankruptcy case. You'll also need to know other filing information, which we explain after going over some basics.
Most people file either Chapter 7 or Chapter 13. If you don't know the differences between the two, you're not alone. The short explanation below and our handy Chapter 7 versus 13 chart will help clear things up.
Chapter 7 bankruptcy. Chapter 7 is often a bankruptcy filer's first choice for several reasons. It's quick—it only takes a few months to complete. And it's cheap—you don't pay anything to creditors. It works well for those of us whose property consists of the essential items needed to live and work.
However, people with more assets could lose them, especially if they own unnecessary luxury items. For instance, you might have to give up your RV, baseball card collection, or timeshare in the Bahamas—even your house or vehicle if you have too much equity in it or you're behind on the payments. Unlike Chapter 13, Chapter 7 doesn't have a payment plan option for catching up on late mortgage or car payments. So you could lose your home or car if you're behind when you file.
Chapter 13 bankruptcy. By contrast, Chapter 13 filers must pay creditors some or all of what they owe using a three- to five-year repayment plan. But the payment plan allows Chapter 13 to offer benefits not available in Chapter 7. For instance, not only do you keep all of your property, but you can save your home from foreclosure or your car from repossession. If you need time to repay a debt you can't discharge in bankruptcy, you can use this chapter to force a creditor into a payment plan. The biggest downside to this chapter? It can be expensive. Many people can't afford the monthly payment. Learn more about when filing Chapter 13 is better than Chapter 7.
Caution for businesspeople. Be sure to learn about the ins and outs of small business bankruptcies. The principles discussed apply to consumers only.
Bankruptcy wipes out many bills, like credit card balances, overdue utility payments, medical bills, personal loans, and more. You can even get rid of a mortgage or car payment if you're willing to give up the house or car that secures the debt. (Putting property up as collateral creates a "secured debt"—if you don't pay what you owe, the lender gets to take the property back.)
But you can't discharge all debts. Nondischargeable debts, like domestic support arrearages and recent tax debt, won't go away in bankruptcy, and student loans aren't easy to wipe out (you'd have to win a separate lawsuit). You'll want to be sure that bankruptcy will discharge (get rid of) enough bills to make it worth your while.
We all know that seeing the forest helps us recognize the trees, so it's probably a good time to consider the significant steps you'll take during your bankruptcy journey. Think of this checklist as a roadmap and use it to track your progress. The good news? You've already made headway on the first two items!
You won't lose everything in bankruptcy. You'll use your state bankruptcy exemption laws to protect your property. We list the significant exemptions below, but understanding the following information will help you maximize what you'll keep in your case.
California is one of the few states that gives you two separate lists of assets you can exempt (protect). You can't mix and match between the two exemption schemes, so be sure to select the list that will work best for you. Most figures apply to bankruptcy cases filed between April 1, 2022, and March 31, 2025.
The homestead exemption protects a certain amount of equity in your principal residence. In System 1 (also known as § 704 exemptions), you can exempt real or personal property you reside in when filing for bankruptcy, including a mobile home, boat, stock cooperative, community apartment, planned development, or condominium, up to $600,000. (704.730.) For more information, see The California Homestead Exemption.
California's System 2 (also known as § 703.140(b) exemptions) only applies in bankruptcy (you can't use them to protect your property against creditors outside of bankruptcy). Certain courts have deemed bankruptcy-only exemption systems to be unconstitutional, while others allow debtors to use them. Under System 2, California's homestead exemption is $31,950 for real or personal property used as a residence. (703.140(b)(1).)
The motor vehicle exemption protects equity in your car, truck, motorcycle, or another vehicle. The System 1 vehicle exemption is $3,625. (704.010.) Under System 2, you can exempt up to $6,375 of equity in motor vehicles. (703.140(b)(2).)
You can protect an unlimited amount of necessary household goods, but under System 2, an individual item can't exceed $800. (704.020; 703.140(b)(3).)
System 1 doesn't offer a wildcard exemption. Under System 2, you can use any unused portion of the homestead exemption plus an additional $1,700 to exempt any property of your choosing. (703.140(b)(5).)
This is a small percentage of the exemptions offered by California. For a more extensive list, visit California Bankruptcy Exemptions.
Exempt your property carefully. The bankruptcy trustee assigned to manage your case will review the exemptions. A trustee who disagrees with your exemptions will likely try to resolve the issue informally. If unsuccessful, the trustee will file an objection with the bankruptcy court, and the judge will decide whether you can keep the property.
Example. Mason owns a rare, classic car worth $15,000, but the state vehicle exemption doesn't cover it entirely. Believing that the car qualifies as art—at least in his mind—Mason exempts it using his state's unlimited artwork exemption. The trustee disagrees with Mason's characterization and files an objection with the court. The judge will likely decide the vehicle doesn't qualify as art.
Purposefully making inaccurate statements could be considered fraudulent. Bankruptcy fraud is punishable by up to $250,000, 20 years in prison, or both.
If you've never filed for bankruptcy before, you'll meet the initial requirement. Otherwise, check whether enough time has passed to allow you to file again. The waiting period varies depending on the chapter previously filed and the chapter you plan to file. Learn more about multiple bankruptcy filings.
You'll also need to meet specific chapter qualifications.
You'll qualify for Chapter 7 bankruptcy if your family's gross income is lower than the median income for the same size family in your state. Add all gross income earned during the last six months and multiply it by two. Compare the figure to the income charts on the U.S. Trustee's website (select "Means Testing Information").
Want an easy way to do this online? Use the Quick Median Income Test. If you find that you make too much, you still might qualify after taking the second part of the "means test." If, after subtracting expenses, you don't have enough remaining to pay into a Chapter 13 plan, you'll qualify for Chapter 7.
Qualifying for Chapter 13 can be an expensive proposition because the extra benefits come at a hefty price, and many people can't afford the monthly payment. To qualify, you'll pay the larger of:
Find out more about calculating a Chapter 13 bankruptcy payment.
Most people find it worthwhile to get counsel. A bankruptcy attorney will help you:
You can expect creditors to call until you file. It's usually best to ignore them because telling creditors about your bankruptcy can encourage them to take more drastic collection steps before losing the right to collect altogether. However, if you hire counsel and refer creditors to your lawyer, they'll have to stop calling you.
Are you curious whether your case is simple enough to file yourself? Our quiz will help you identify potential complications while educating you about the bankruptcy process. You'll find it here: Do I Need a Lawyer to File for Bankruptcy?
Now that you've decided to file, the fun begins! Well, not really. The first step—gathering your financial information—can be a bit of a chore. But using our bankruptcy document checklist should help you organize the things you (or your attorney) will need.
After assembling the documents, your next step will be to prepare the paperwork. Here's what you'll need and where to find it.
Your case starts when you file your paperwork with the local bankruptcy court and either pay the filing fee or request a fee waiver. California, being a large state, has four bankruptcy courts with multiple locations serving different geographical areas. Click on the district to go to the court's home page. It will provide information about where to file, local forms, and more.
Your creditors will stop bothering you soon after you file. It takes a few days because the court mails your creditors notice of the "automatic stay" order that prevents most creditors from continuing to ask you to pay them. Here's what will happen next:
These things all must happen before you get a Chapter 7 bankruptcy discharge. Chapter 13 filers will also attend a repayment plan confirmation hearing and complete the three- to five-year payment plan.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 18, 2022