Timing is Everything, Even for Bankruptcy

As a result of the coronavirus pandemic, millions of people have lost their jobs and are facing extreme financial difficulties.  To pay for all of their living expenses, many individuals and families have resorted to depleting their hard-earned savings and accumulating additional debt to pay for expenses, such as credit card balances, medical bills, and past-due rent.

Sadly, for some, the amounting debt will become too overwhelming to feasibly pay back.  Fortunately, the United States bankruptcy laws were created specifically to help people who can no longer pay their creditors.  A fundamental goal of the federal bankruptcy laws enacted by Congress is to provide debtors a financial “fresh start” from burdensome debts.  The United States Supreme Court made this point in a 1934 decision:  “[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”  Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). 

So, how does one obtain this fresh start?  In short, once an individual files for “Chapter 7” bankruptcy, a trustee will pay your creditors what you can afford with your assets and then discharge your remaining debt.  A creditor cannot collect debt discharged through bankruptcy.  For most, the bankruptcy discharge will allow a fresh start to build a life without the anchors of debt.

A fresh start, however, does not mean that you start over with nothing.  The bankruptcy laws allow you to keep some assets, called “exempt assets,” which are not within the reach of your creditors.  Debtors can elect either the homestead exemption (for homeowners) or the “wildcard” exemption (codified in California Civil Code section 703).  

For debtors that do not elect to use the homestead exemption, the wildcard exemption currently allows them to keep up to $30,825 that they have in a bank or brokerage account.  In addition, a debtor can keep his equity in his or her car up to $5,860, tools of his or her trade, household items of less than $600 current value per item, and jewelry up to $6,750 as exempt assets in bankruptcy that are beyond the reach of creditors. 

Another benefit of the wildcard exemption is its flexibility.  Specifically, the wildcard exemption can be divided up and used to protect numerous assets; thus, if any other exemption does not fully cover the value of the asset, the debtor can use the wildcard exemption to cover the rest.  For example, if a debtor owns a car worth $8,000 (and owes no money on it), he or she can still keep the car by using the $5,860 exemption for cars and the wildcard exemption for the remaining $2,140 value of the car.  The only caveat is that the total amount a debtor can use for the wildcard exemption cannot exceed $30,825—if  a debtor is using $2,140 of the wildcard exemption for his or her car, then he or she will have $28,685 ($30,825 minus $2,140) left in the wildcard exemption to use for a bank account (or another asset). 

Unfortunately, most debtors do not know that Chapter 7 bankruptcy allows them to keep their exempt assets, which could add up to a substantial amount.  Instead, many will dip into their savings to pay their bills, most of which will be discharged in bankruptcy.  If bankruptcy is unavoidable, an individual would be better served by filing bankruptcy early.  Then, these individuals could use keep all of their exempt assets, including potentially up to the $30,825 in savings through the wildcard exemption, to assist them obtain the fresh start that is provided and intended by the bankruptcy laws.

If you are struggling with debt and would like to speak to a bankruptcy lawyer to discuss your options, please contact Park Lawless & Tremonti LLP for a free consultation.  We represent clients throughout Southern California and offer compassionate legal advice in the face of life’s challenges.

© 2020 Park Lawless & Tremonti LLP. All rights are reserved.  Attorney Advertising.  This blog post is intended to be a general summary of the law and does not constitute legal advice.  You should consult with counsel to determine applicable legal requirements in a specific fact situation.