CALIFORNIA BANKRUPTCY LAW
NEW CALIFORNIA BANKRUPTCY LAW
The New California Bankruptcy Law
President Bush signed into law a bankruptcy reform bill that will make it harder for individuals to clear their debts through bankruptcy.
If you were thinking about filing for bankruptcy, you might think twice -- or act twice as quickly, since major provisions of the law will go into effect six months from the day the law is signed.
Individuals filing for bankruptcy usually do so either under Chapter 7 or under Chapter 13.
In a Chapter 7 bankruptcy, your assets (minus those exempted by your state) are liquidated and given to creditors, and many of your remaining debts are cancelled, giving you what's known as a "fresh start." In 2004, over 1.1 million people filed for Chapter 7, accounting for roughly 72 percent of non-business bankruptcies. Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors sometimes get nothing.
In a Chapter 13 bankruptcy, you're put on a repayment plan of up to five years. Any debts not addressed by the repayment plan don't have to be paid. Last year, there were 445,574 Chapter 13 filings. Under the new law, fewer people will be allowed to file under Chapter 7; more will be forced to file under Chapter 13.
Key Changes:
A qualifying test: Currently, it's up to the court to determine if your case qualifies for Chapter 7 bankruptcy.
Under the new law, your income will be subject to a two-part means test. First, it will be subject to a formula that exempts certain expenses (rent, food, etc.) to determine whether you can afford to pay 25 percent of your "nonpriority unsecured debt" such as your credit card bills. Second, your income would be compared to your state's median income.
You won't be allowed to file for Chapter 7 if your income is above your state's median and you can afford to pay 25 percent of your unsecured debt, but you may be allowed to file for Chapter 13. If your income is below the state's median but you can pay 25 percent of your unsecured debt, you may be able to file Chapter 7, but the court can still require you to file Chapter 13 instead if it believes that you would be abusing the system by filing for Chapter 7.
Under current law, the court has great latitude in deciding whether debtors may file for bankruptcy in consideration of their personal circumstances. Under the new law, there will be few if any exceptions made to the means test, no matter how sympathetic your case.
Determining what you can afford to pay: Currently, if you file for Chapter 13 today, the court determines what you can afford to pay based on what you and the court deem to be reasonable and necessary expenses.
Under the new law, the court will apply living standards derived by the IRS to determine what is reasonable to pay for rent, food and other expenses to figure out how much you have available to pay your debts. The IRS regulations are more stringent, and to contest them means asking for a hearing from a judge, which can mean more time and expense.
Tougher homestead exemptions: Currently, if you declare bankruptcy, the state where you file may allow you to protect from creditors some or all of your home equity. In Florida, for instance, your home may be entirely exempt, even if you bought it soon before filing. In Nevada, you may exempt up to $200,000.
The new law, however, places more stringent restrictions on the homestead exemption. For instance, if filers haven't lived in a state for at least two years, they may only take the state exemption of the state where they lived for the majority of the time for the 180 days before the two-year period.
Filers may only exempt up to $125,000, regardless of a state's exemption allowance, if their home was acquired less than 40 months before filing or if the filer has violated securities laws or been found guilty of certain criminal conduct.
If you are having financial hardship and are considering filling for bankruptcy, please call our office at
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