Bankruptcy Basics Newsletter

November 6, 2023
Today’s Topic: What’s the difference between chapter 7 and chapter 13

This is the first in a weekly series of emails about the ins and outs of bankruptcy. I hope we’ll get to know each other over the coming weeks. My name is Martha Warriner Jarrett and I’ve been practicing bankruptcy law in California for over 45 years. I’ve represented hundreds of individuals, lots of businesses (big and small), and even a creditor or two, so I’ve seen all kinds of problems relating to money and personal finance and I’ve counseled lots of people who can’t pay their bills and see no other way out. I’m a strong advocate for the bankruptcy system and I’d like to help you navigate the process so you can get a fresh start.

I live in Santa Barbara, CA, and I have a rescue pup named Woody. He’s a Jack Russell/Dachsund mix, and I may bore you with pictures of him from time to time. I’d love to know who you are so please send me an email and introduce yourself.

Also, please let me know why you’re considering bankruptcy.

For most individuals, there are two kinds of bankruptcy: chapter 7 and chapter 13. The first decision you will need to make is which one is right for you. That’s where we’ll start our journey. Chapter 7 is a liquidation proceeding. If you qualify, chapter 7 liquidates your non-exempt assets (most chapter 7 debtors do not have any so you can keep everything you own) and uses them to pay creditors on a pro rata basis. There are income and expense limitations you must meet to be eligible for a chapter 7 (the subject of the next newsletter). If you are eligible for a chapter 7, that’s usually what I recommend. Not only does it wipe out your unsecured debt (other than taxes, student loans and a few others), but it’s quick and easy (and less expensive).

Chapter 13 is a reorganization plan for individual debtors that are not eligible for chapter 7. A chapter 13 plan provides for partial repayment of debts over a 3-to-5-year period. If you are behind on your house or car payments, it allows you to bring those payments up to date over the course of the plan. It has very strict rules (and a tight budget) that must be followed to receive a chapter 13 discharge. It’s difficult to navigate by yourself so I recommend hiring an attorney if you’re going to file a chapter 13.

Tip for the week: Before you file for bankruptcy, you must take a credit counseling course. This requirement can be a nuisance, but at least it’s easy (you can take it online) and doesn’t cost much. I recommend that you wait until just before you are ready to file before you take the course because it’s only good for six months. You can find a list of providers on your local Bankruptcy Court website (www.uscourts.gov).

Next week we’re going to tackle the “means test.” You must pass this test to file a chapter 7 (don’t worry, it’s nothing you need to study for). I’ll help you gather the information you need for the test.

November 13, 2023
Today’s Topic: The Means Test

Martha Warriner Jarrett

If you want to file a chapter 7, you must either: have a monthly income (for the last year) that is less than your state’s median income for your family size, or
pass a means test based on a combination of your monthly expenses, and the average monthly expenses in your area (there is a table that provides this information); or
be a disabled veteran, a reservist, or a member of the National Guard (if you are in this category, you automatically qualify and you don’t need to read any further).

The first thing to do is check the median income for your state with this link: Median Income. At the bottom of Section I (Median Income), click on the download link, then find your state of residence and go to the column for the number of people in your household. Multiply your monthly gross income (for both spouses if you both work) by 12. If the total is less than the median income that applies to you, you are eligible to file a chapter 7.

By way of example, the median income for a family of four in California is $123,451. If your household income is less than that amount, you qualify for chapter 7 and you don’t need to go to the next step (and you don’t need to read any further).

If your household income is more than that amount, you must take (and pass) the means test. You can find the information for this part of the test below, but if you must take this test, you should seriously consider seeking an attorney’s help. The test is technical, complex, and a mistake can make the difference between filing a chapter 7 and having to file a chapter 13.

If you want to try and do it yourself, go to the Bankruptcy Court website for your locale, find the Forms section, and print out a copy of Form 122A-2. Read it carefully and fill it out. Go to the page (on the website) where you found the median income. In Section II, you’ll find the national average information for Food, Clothing and Other Items (#2), Health Care (#3), Housing and Utilities (#4a), Transportation (#4b). Follow the instructions in Part 4 of the form carefully to determine if there is a presumption of abuse in your case.

If there isn’t, you’re good to go.
If there is a presumption of abuse, and you still want to file a chapter 7 instead of a chapter 13, you should consult an attorney. There may be adjustments that can be made, including exceptions for certain expenses, or you may not have filled it out correctly (the likely case).

And if you’re hopelessly confused, either consult a local attorney, or go to my website (bankruptcysage.com) and contact me for a free consultation.

Tip of the Week: if you are concerned about keeping your car, go to one of the online sites like Car Max and determine the value (use average condition). If you owe more than it’s worth, you can keep it and continue making payments, or surrender it and discharge whatever is left owing. If it’s worth more than you owe, your equity may be exempt under your state law (next week’s subject). In either case, keep making payments. Don’t reaffirm the loan if you can avoid it. If you do reaffirm the loan, it’s like starting over and you will owe the full amount no matter what happens to the car.
Next week we’ll go over exemptions, what they are and where to find the ones that apply in your state.

November 20, 2023
Today’s Topic Exemptions

Martha Warriner Jarrett

One of the most important things to consider when you are filing for bankruptcy is the exemptions that are available. Think of them as an “allowance” that is available to protect your assets. If the value of your possessions (based on used or thrift shop values) is less than the exemption, you can keep those assets. Exemptions allow most individual debtors to keep everything they own while discharging their debts.

Here are some of the common exemptions categories:
* Home equity
* One or more automobiles
* Clothing and jewelry
*Furniture and household goods
* Tools of the trade
* Spousal or child support income
* Most insurance benefits
* Most public benefits, including Social Security
*Retirement accounts
* Most personal injury awards

No matter how simple I try to make it, the topic of exemptions is a complex one that depends, in large part, on where you live and if you have any valuable assets, such as a home.

There are two kinds of exemptions available to most debtors: the Federal set and a separate set for the state where you live.

I’ll talk about the Federal ones first because, unless you own a home, those are probably the ones that you’ll want to use. You can find out if your state allows you to use the Federal exemptions at The Bankruptcy Site.

Under the Federal exemptions, you can exempt (a) your home equity – $27,900 ($55,800 for joint spouses who co-own property), (b) car(s) – $4,550, (c) up to $14,875 ($700 per item) for household goods, furniture, etc., (d) over $1.5 million for retirement accounts, (e) some miscellaneous exemptions like tools of the trade, (f) and a “wildcard” exemption (can be applied to anything, including the non-exempt value of assets like automobiles) of $1,475, plus the unused portion of the homestead exemption up to $13,950. You can see why most individual debtors are able to protect all their assets using these exemptions.

If your state doesn’t allow the Federal exemptions, you’ll have to use your state exemptions. And if you own a home, your state homestead exemption is probably bigger than the federal one.

In California, you can’t use the Federal exemptions, but you have your choice of two sets of exemptions. One is like the Federal exemptions. The other is unique to California and is where you’ll find California’s generous homestead exemption (for 2023, the minimum homestead exemption is $339,189.00 and the maximum is $678,378.01, depending on the county you live in).

Some states have no homestead exemption. Others are unlimited in amount. You can find a list of each state’s homestead exemption on Ascend’s website.

Each state has different requirements for using its homestead exemption and the Bankruptcy Code has a residency requirement (3.3 years) before some homestead exemptions can be used. In all cases, you must reside in the home on the petition date. If you have a lot of equity to protect, consult a local attorney. Don’t try to figure it out yourself.

As I said at the beginning, exemptions are complicated. If you have assets you want to protect, you shouldn’t take chances by trying to figure it out yourself. Consult an attorney. It’s a wise investment.

Tip for the Week: Most bankruptcy attorneys offer free consultations. Take advantage of this freebie by consulting a local attorney who can answer your questions and give you advice tailored to your individual situation. There’s also a lot of information online on sites such as the Bankruptcy Court, Upsolve, and my website, BankruptcySage, but be careful about taking the advice of people on sites like Facebook. People are well-intentioned but often don’t know what they’re talking about.