Ronald E. Ostrin Bankruptcy Law Blog on Lawyers.com

             A popular misconception about filing
bankruptcy is that people think they should be broke before consulting an
attorney to discuss the possibility of a bankruptcy.  This is often a tragic mistake, as they may be literally too broke to file
bankruptcy.  In these troubling
times, it is best to obtain professional advice sooner rather than later to get
the best result.

            One
should not consider bankruptcy lightly; it is a life altering event.  However, we live in troubling times and for
those people who find themselves financially upside down, bankruptcy can be a
powerful tool to get a fresh start. 
Unemployment in California is over 12%, and real property prices
continue to fall.  Ordinary people who
never contemplated the possibility of bankruptcy find themselves having to
consider it.  In order to survive in
these financially challenging times, it is important to understand the basics
of bankruptcy and to be prepared to act proactively if one’s situation demands
it.   By researching options, you may be able to
save more property and have a smoother glide path towards economic recovery or
retirement.

            In
order to understand bankruptcy, think of it as a living probate.  In a probate, someone dies and their property
creates an estate.  Their property is
then administered and distributed through the laws of probate.  From the decedent’s estate property will
first be distributed to pay debts and administrative claims, then to the
beneficiaries or heirs as determined either by a will, trust or priorities created
under the law. 

            Bankruptcy,
like probate, deals with the distribution of a person’s property when he is insolvent.  “Insolvent” is defined as ‘[t]he condition of
a person who is unable to pay his debts”. 
Black’s Law Dictionary,
Revised Fourth Edition.  However unlike
probate, bankruptcy does not involve a physical death, but merely a financial one,
and unlike a deceased  person, a
successful bankruptcy allows a person a fresh start, either not encumbered by
[most of] the pre-bankruptcy debts or alternatively to pay them off through a
plan of reorganization, usually at a discount. 
Upon the filing of a bankruptcy petition, a bankruptcy estate is created
which consists of all of the debtor’s assets at the time of the filing of the
bankruptcy petition.  From the bankruptcy
estate, the Debtor is allowed to exempt certain items of property so that he or
she is not left without the basic necessities of life.  Understanding the allowable exemptions is the
key to obtaining the most benefit of a Bankruptcy and by failing to seek advice of competent bankruptcy attorney too late, one
might lose the ability to maximize those exemptions or to lose them entirely.

            In
California, there are two different exemptions schedules, one being the state
exemptions and one that is based on the Federal exemptions (CCP§ 703.140(b)).  You can only use one of these two schedules and
each has a different emphasis.  Under the
California exemptions, anyone can exempt up to $75,000.00 or more of equity in
their residence and for people over 65 or with physical or mental disabilities,
you can exempt up to $175,000.00 of equity. 
This means that if you could afford to keep your mortgage current, and
had less equity than the homestead and the costs of sale, you might easily keep
your residence if you file bankruptcy, as long as you continued to make the
mortgage payments and taxes.  Therefore,
anyone who is saddled with crippling credit card debt, but has some equity in
the house, should consider filing bankruptcy or at least get bankruptcy
counseling, to determine if they might keep their house while eliminating their
unsecured debt.  It is better to make
that decision sooner rather than later, before equity is eaten up or property
foreclosed because one could not afford to pay their mortgage payments and
credit card debt.

            The
Federal type exemptions are more flexible as to the type of property you can
keep, but has a very small real estate exemption ($22,075.00) § 703.140(b)(1) compared
to the California exemptions.  However,
for those people who don’t own real property or have no equity the federal
exemptions can protect any other property. 
Under California Code of Civil Procedure § 703.140(b) (5), you can
exempt out $1175.00, plus any amount of the homestead exemption § 703.140(b)(1)
not used, for a total of $23,250.00. 
Therefore, a renter with a savings account of $21,000.00 you could
theoretically file bankruptcy, discharge all of their credit card and other
dischargeable unsecured debt and still keep their savings account.  This is a tremendous opportunity to get a
fresh start that would be lost if one waited too long to consult a bankruptcy
attorney.

            This
is a simplification of the bankruptcy system, as requirements for filing and
actual filing are complex, and some people simply make too much money to filing
bankruptcy.  However, the determination of
income is called the “means test.”  It is
usually based on your last six months of income, and if you are retired or out
of work, you may easily qualify.  The
important message is that to file bankruptcy intelligently, one must plan and
one is best served by having a qualified and experienced attorney guide you
through the system.  It is better to see
that attorney too soon, rather than too late, as filing bankruptcy is never
easy or pleasant, as sometimes it is the most intelligent thing to do in difficult
times.  If you wait too long you may make
mistakes or miss opportunities to get your best fresh start.   (Note: This writer is a licensed attorney
who like many qualified bankruptcy counsel provides an initial free bankruptcy
consultation of up to 45 minutes, if you are having difficult financial times,
please do not hesitate to seek such counsel.)

This article is not intended to
constitute legal advice or substitute for the advice of an attorney and the
author recommends that you see a qualified attorney for your legal issues.  ©Ronald E. Ostrin