Bankruptcy is a significant financial decision with a lasting impact on your assets, income, business, and loan eligibility. Chapter 13 can take three to five years, while Chapter 7 can take many months. Therefore, you should prepare before filing to make your path toward a clean financial start smoother. In this article, Sacramento Bankruptcy Lawyer, a seasoned Roseville-based law firm, discusses preparing for bankruptcy with simple, helpful tips.
Understanding the Types of Bankruptcies
When contemplating bankruptcy in California, you should choose between Chapter 13 and Chapter 7, depending on what you want to protect.
Commonly referred to as liquidation bankruptcy, California Chapter 7 bankruptcy allows you to discharge or eliminate all debts. The trustee will sell your non-exempt assets and use the sale proceeds to repay the creditors. You can keep exempt property up to a given limit. After the process is complete, the remaining debts are discharged.
Chapter 13 bankruptcy is called a wage earner’s plan. It allows filers with regular income to develop a repayment plan to clear part of or all the debts. You can propose a repayment plan between three (3) and five (5) years.
Understanding how each works can help you make an informed decision. For instance, one advantage of Chapter 13 over Chapter 7 is that you can keep your home by making mortgage payments over the repayment period.
Collect the Relevant Paperwork
You should reveal information about your financial affairs when filling out your relevant paperwork. You should also submit specific documents to your trustee to establish the authenticity of your information.
The documents you require are identical, with minor differences, whether you are bringing Chapter 13 or Chapter 7. Nevertheless, check the relevant guidelines with your bankruptcy trustee and district for the exact paperwork requirements.
Some of the commonly required bankruptcy documents include the following:
Tax returns
You should present copies of tax transcripts or returns for the previous four (4) and two (2) years in Chapter 13 and Chapter 7, respectively. If you have unfiled tax returns because you were not supposed to bring them (for instance, if your income was nontaxable disability benefits), you should write a letter explaining this.
Income Documentations
If you are self-employed and preparing for bankruptcy, you should provide a year-to-date profit and loss statement for two years before bankruptcy. You should also submit your business bank statements.
If employed, you must present copies of your pay stubs for six months before filing your bankruptcy case and your previous two W-2s.
Mortgage Statements and Evidence of Real Estate's Fair Market Value
You will require evidence of the property’s fair market value if you have real estate. Depending on your district's guidelines or the potential equity amount, you can choose a broker’s price opinion, an appraisal, or an online valuation.
Additionally, you must submit mortgage statements indicating payment amounts and loan balances. Some bankruptcy trustees need evidence of home insurance and a deed of trust.
Proof of Identification
When you go to a hearing with the bankruptcy trustee, you must demonstrate valid photo identification, like evidence of your social security number and a driver’s license.
Bank and Retirement Account Statements
The trustee will require your recent retirement and bank account statements for every account.
Car Registration, Evidence of Insurance and Value
If you have a motor vehicle, you will require evidence of its value. Many bankruptcy trustees accept printouts from kbb.com or nada.com.
You should provide your latest loan statement proving your balance and monthly payments if you have an auto loan. You should also submit it with evidence of insurance and copies of your car registration.
Legal Records
You should also reveal to your lawyer any pending litigation or legal history. Prior judgments against you show debts that determine the appropriate type of bankruptcy to file, depending on your financial situation. Additionally, a court order or pending litigation can help determine how much you can repay your lenders.
These legal records include the following:
- Files from your previous lawyers.
- Court orders that require you to pay your child support.
- Divorce decree.
Seek Legal Representation
Paying attorney’s fees to assist with your financial challenges can feel counterintuitive. However, professional legal help can make a difference between a total loss and a setback when you have severe debt challenges.
You can consult with your attorney to determine whether you qualify for bankruptcy. One brilliant way to begin a meeting with your lawyer is by explaining why you are there. You could be facing repossession, a creditor lawsuit, foreclosure, or wage garnishment. Next, ask the lawyer whether bankruptcy will solve your financial challenges.
If their answer is yes, you should ask the following follow-up questions:
- Which type of bankruptcy should I file?
- Will bankruptcy erase your debts?
- Will you lose property in bankruptcy?
- What does the bankruptcy process entail? How long is the process?
- How much does it cost to file for bankruptcy?
Importance of Bankruptcy Attorney
There are no legal obligations to have a lawyer when you file bankruptcy. Nonetheless, California bankruptcy laws are ever-changing and complicated, making legal assistance necessary. Your attorney can assist you with the following:
- Preserve your valuable properties and explain California exemptions.
- Lower future adverse outcomes and effects of filing for bankruptcy.
- Avoid making common mistakes and pitfalls.
- Exercise your legal rights and protect your interests and financial objectives.
- Explain informal debt relief action options.
- Communicate with your lenders.
- File your bankruptcy paperwork correctly and on time.
- Create a fair debt repayment plan.
- Discuss acquiring assets after bankruptcy.
- Discuss foreclosure and your future credit report options.
- Ensure you pay the correct filing fees.
Meeting Credit Counseling Requirement
You must complete credit counseling within six months before filing your bankruptcy case. Moreover, you should enroll in an educational debt management course before qualifying for debt discharge. Debtor education and credit counseling requirements ensure you have exhausted all other options and lower your chances of filing for bankruptcy again.
The United States Trustee Program approves credit counseling companies.
To find the right provider, follow the following steps:
- Visit the United States Trustee’s official website.
- Click “Credit Counseling and Debtor Education” and then “List of Approved Credit Counseling Agencies.”
- Next, scroll down the list to find your court’s jurisdiction.
Why You Should Complete Pre-Bankruptcy Credit Counseling
Credit counseling helps you understand what you require to bring your bankruptcy case or whether a repayment plan could give you a clean financial start. Counseling is mandatory even when:
- Your repayment plan is not feasible, or
- You have loans you do not want to repay or find unfair.
The counseling agency will prepare a budget based on your expenses and income before reviewing your debt repayment options. Typically, the agency verifies that you need viable alternatives to bankruptcy.
You do not have to agree to a repayment plan, even when feasible. Nevertheless, if the agency develops the plan, you should file it alongside your bankruptcy paperwork.
Generally, credit counseling sessions take an hour and can be done over the phone, in person, or online. Depending on your place of residence, among other factors, a session can cost up to $50. If you cannot raise this amount, you can request a fee waiver before the session (approved counseling forms should offer free services to filers who cannot afford them).
After meeting this requirement, the counseling firm will give you a certificate, which you will use as evidence when filing for bankruptcy.
Avoid Transferring Property Before Filing Your Bankruptcy Case
One document you should submit is a form called the Statement of Financial Affairs. In the SOFA form, you should offer information about your previous financial dealings, like:
- The financial history.
- Your business.
- Gifts you have given to loved ones and religious institutions.
- Property you have transferred or sold.
- Assets you are keeping for another person.
You should legally disclose in your paperwork if you transferred or sold your property to somebody else two (2) years before filing your bankruptcy case. Additionally, you should attend a meeting of creditors where the bankruptcy trustee will inquire whether you have sold or transferred any assets within the previous years.
Per the Bankruptcy Code, a transfer is when you give away or sell your legal rights to a property. For instance, selling your motor vehicle is a transfer. On the other hand, it is not a transfer if you allow a loved one to borrow the automobile for an extended period and your name is on the title.
Here are some possibilities of what would occur if you transferred your asset to a loved one to prevent a trustee from disposing of it for your lenders’ benefit:
- The trustee will request the property’s return or payment of its value.
- If you and the bankruptcy trustee cannot settle, they will file a fraudulent transfer lawsuit to recover your asset.
To win the lawsuit, the Chapter 7 bankruptcy trustee can establish either the following:
- Actual fraud — It occurs when you transfer property with the intent to defraud, delay, or hinder lenders, which would be the case once you signed your property over to somebody else to conceal it from the bankruptcy trustee.
- Constructive fraud — Even when the trustee cannot establish that you planned to defraud the lender, your bankruptcy trustee can sue you if your debts exceed the asset when transferring it or if you did not receive an equivalent value because you gave away the property.
Other transfers that can raise red flags with your bankruptcy trustee include the following:
- A transfer to an insider, like a relative or business partner.
- A transfer that occurs after your lender threatens to sue you or sues you.
- A transfer you have not highlighted in your paperwork.
Analyze Your Finances
Review your financial situation, including income, debts, and expenses.
You can start by listing your real estate, tangible personal property (cars, electronics, and jewelry), and intangible property (online accounts, patents, and stocks). Give the assets realistic current values instead of buying prices. Next, collect your recent bank statements, tax returns, and bills, among other documents that prove your cash flow. Finally, calculate your monthly expenses like food, transportation, housing, and medical care.
Understanding your finances’ scope permits you to:
- Determine the best bankruptcy type to file.
- Accurately complete the relevant paperwork.
- Create a budget and set money aside for bankruptcy costs.
Accept that Your Living Conditions Will Change
You should adapt to new living situations. If you lose your car or home, look for living options close to your work to avoid transportation costs.
Remember, you will not be able to take loans for a while after bankruptcy, which can affect your spending habits.
Stop Making Automatic Payments
Your creditors can continue making the automatic deductions you previously authorized until they receive notice that you have brought your bankruptcy petition to court. Notifying your creditors involves sending them an email or a letter with your bankruptcy filing date, court, and case number.
You should stop your authorized deductions from a credit card, bank account, or paycheck early. Since it might take time, you must allow time between filing your bankruptcy case and stopping automatic payments. Otherwise, you might need help paying for your expenses before your lenders stop making deductions.
Avoid Paying Specific Creditors But Not Others
Suppose a creditor was patient with you when you were behind on your payment. In that case, you might feel indebted and decide to repay them in full before other lenders in your bankruptcy petition.
However, the court considers the move preferential transfers, which can result in challenges to your proceeding and a clawback. If the trustee believes you made the payment to avoid highlighting the lender in your bankruptcy plan, they can sue the lender and ask them to return the amount to your bankruptcy estate.
Know Which Assets are Exempt
Some assets are exempt, and you can keep them during bankruptcy.
California has two (2) types of exemptions: 703 exemptions and 704 exemptions. Your exemption will depend on the kind of assets you want to protect. For instance, system 1 (704 exemptions) is ideal for owning a home with much equity.
Homestead Exemption
The California homestead exemption protects a specific equity amount in the principal residence.
In 704 exemptions, you can exempt personal or real property of your residence, including a boat, community apartment, condominium, or mobile home, up to $600,000.
California’s System 2 homestead exemption is $31,950 for personal or real property used as a residence.
Car Exemption
The motor vehicle exemption protects equity in a truck, motorcycle, or truck.
704 vehicle exemption is $3,625, while you can exempt $6,375 of your car’s equity in System 2.
Personal Property
The exemption covers your everyday items, like electronics, appliances, and clothing, among others.
System 1 exemptions include the following:
- Household goods.
- Burial plot and cemetery.
- Artwork, jewelry, and heirlooms up to $8,000.
- Personal injury damages.
- Bank deposits from Social Security payments up to $4,800 for married payees and $3,200 for a single payee.
703 exemptions include the following:
- Wrongful death damages required for support.
- Jewelry — $1,600.
- Appliances, animals, books, musical instruments, crops, and clothing — $675 per item.
Your Wages
System 1 exempts 75 percent of wages and public employee vacation credits.
On the other hand, System 2 does not have exemptions.
Tools of Trade
Your tools of trade are the equipment you require for your livelihood or business.
System 1 exempts the following items for a maximum of eight thousand dollars, or $15,975, if a couple in the same occupation uses them:
- Implements.
- Books.
- Instruments.
- Materials.
- Tools.
- A commercial car.
California System 2 exempts implements, books, and tools up to eight thousand dollars.
Child Support and Alimony
The exemption also covers the amount you receive for the child or spousal support from your ex-spouse. System 2 exempts the amount essential for help, while System 1 does not have exemptions.
Wildcard Exemption
System 2 allows you to protect $1,700 and any used homestead or burial exemption amount toward any asset of your choice.
Avoid Paying Bank Account Funds towards Your Auto Loan or Credit Card Before Filing Bankruptcy
Most people do all their banking at one bank, so you can expect them to have checking, savings, car loans, investment accounts, and credit cards in one institution.
Here is the issue: When you sign your loan contract for your auto loan or credit card, you allow the financial institution to withdraw money from the account and repay the loan balance (set off). It can be expensive after filing for bankruptcy.
To solve the problem, you should open a savings or checking account at a bank that will not service your loan and use it for banking purposes before bringing your bankruptcy case. Please do not interpret this, as you should close the account and fail to list it in your bankruptcy paperwork. You should not close any accounts and ensure you report them when filing for bankruptcy.
You will need your new account for another reason as well. After filing bankruptcy, the lender bank will close your account, which can be challenging because most banks do not open new bank accounts immediately after filing bankruptcy. The bank will not close your new account if you do not overdraw and owe any debts. However, that is only sometimes the case, and you should be cautious with credit unions.
Find Skilled Bankruptcy Legal Assistance Near Me
With thorough preparation, you can bring a bankruptcy case in compliance with all requirements while knowing what to expect during the entire process. It also helps you avoid making expensive mistakes. Analyzing your finances enables you to think of different ways to rebuild your life and finances in Roseville post-bankruptcy.
Sacramento Bankruptcy Lawyer understands that bankruptcy is not a simple financial solution but a remedy that can work if you effectively navigate the process. We can guide you throughout the process and handle your paperwork to ensure you make good decisions. Please call us at 916-800-7690 to get started on a journey to a new life. Once you contact us, we can treat you like family and sincerely care about your case outcome and emotional well-being.
