California Debtor Facing Choice of Filing for Bankruptcy

One California debtor recently blogged his bankruptcy story over a bankruptcy website. The debtor has fallen on hard times due to a cocaine addiction, but rehab has given him a fresh new start. He lost his job and now makes 1/3 of his former salary. He owes unsecured creditors $90,000 and the IRS $35,000 in back taxes. His assets include a home with about $100,000 to $150,000 equity. He is being totally overwhelmed with collector calls, can only pay for food and mortgage payments, and wants to know what to do.

English: Sketch of Richard Mentor Johnson free...

Is there a Debtor’s Prison in California?

If there was ever a case for filing for bankruptcy protection, this may be it. The debtor must come to realize his financial problems won’t cease until he honestly deals with them. Here are a couple of bankruptcy options for this particular California debtor:

  1. File a Chapter 7 Bankruptcy. A chapter 7 bankruptcy is a bankruptcy for qualifying individuals and is often called the liquidation bankruptcy. A U.S. Bankruptcy Court trustee will take any non-exempt assets from debtors who qualify to file a chapter 7, liquidate the assets, and pay off any unsecured debts in a priority manner.

    In the illustrated case above, there is enough equity in the home for a bankruptcy trustee to want to seize and sell the house. In California, the bankruptcy homestead exemption is a little over $24,000 in 2013.

    One option for this debtor is to file a chapter 7 bankruptcy and give up the house to pay off his debts. Any proceeds from the sale of the asset after paying off the qualifying unsecured debts will be his to do with as he sees fit. This could enable him a fresh new financial start, but the debtor will have the record of filing bankruptcy placed in his credit report for ten years.

    Many people have used a chapter 7 bankruptcy as a way to begin over again, and they have gone on to lead financially productive lives. In the event proceeds from the sell of non-exempt assets do not pay off the claiming creditors, any portion of non-exempt debt left will be completely forgiven.

  2. File a Chapter 13 Bankruptcy. A chapter 13 bankruptcy is a type of bankruptcy for individuals who have a consistent income and who qualify to file. The debtor, under the jurisdiction of a bankruptcy court, makes either a 3 or 5 year plan to pay a portion or all of their unsecured debts while making payments on any secured debts they intend on keeping.

    In the case of the California debtor illustrated above, it does not sound like the debtor’s income is enough to support a chapter 13 bankruptcy in this particular case. Bankruptcy law states that to be eligible to file a chapter 13 bankruptcy, the creditors should expect to see a plan that would enable them to receive what they would have received if the debtor had filed a chapter 7 bankruptcy instead.

The California debtor facing the choice of whether or not to file for bankruptcy should contact a bankruptcy attorney to help him decide if filing for bankruptcy protection is really an option in this particular case, what type of bankruptcy to file, and how the unpaid back-taxes are handled in a bankruptcy court.

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