Bankruptcy guide

What is bankruptcy?

Bankruptcy is a legal process to help people who can't pay their debts get a fresh start. When you file for bankruptcy, a federal court steps in and either:

• wipes out your debts, or 
• sets up a plan so you can repay them over time, often for less than you actually owe.

Bankruptcy is a federal law, which means the rules are the same across the country. But you file in your local area, in a special federal court called a U.S. Bankruptcy Court.

• After a bankruptcy, the debtor is no longer legally required to pay any debts that are eliminated, or discharged, in bankruptcy court.
• Debt collectors cannot collect on the debts that have been discharged.
  • This means that creditors have to stop all legal action, telephone calls, letters, and other types of contact about debts that have been discharged by the bankruptcy court.

Bankruptcy cases happen in federal court

Bankruptcy cases are handled in federal court — not state court. California has four federal bankruptcy court districts:

• Northern District — with locations in San Francisco, San Jose, Oakland, Santa Rosa
  • Map to see which counties are in the Northern District
• Eastern District — with locations in Sacramento and Fresno
  • Map to see which counties are in the Eastern District 
• Central District —with locations in Los Angeles, Riverside, Santa Ana, Santa Barbara, and the San Fernando Valley
  • See which counties are in the Central District
• Southern District — with one location in San Diego
  • Map to see which counties are in the Southern District

⚠️ File for bankruptcy in the district where you live or where your business is located.

Decide if bankruptcy is an option for you

Bankruptcy isn't the right move for everyone.

It can be a good option if:

• Your debt is so large you could never realistically pay it off
• Most of your debt is the kind that can actually be wiped out (more on that below)
• Creditors are suing you, garnishing your wages, or threatening to take your home
• You've already tried other options and they haven't worked

It may not be a good option if:

• Most of your debt is the kind that can't be wiped out (like student loans or child support)
• You have assets you don't want to risk losing
• Your financial problems are temporary — for example, you just lost a job but expect income soon
• You recently received a large amount of credit or made large purchases

Filing for bankruptcy also affects your credit. It stays on your credit report for 7 to 10 years, which can make it harder to get loans, rent an apartment, or sometimes even get a job.

Alternatives to bankruptcy

• Try to figure out if you can avoid bankruptcy on your own

  Determine if you can reduce your expenses, increase your income, negotiate lower interest rates, or sell some property. You may be able to make adjustments to your situation to start paying off your debts on your own.

• Negotiate directly with your creditors
  Many creditors would rather work out a payment plan than deal with bankruptcy court. You can call and ask for lower interest rates, reduced balances, or a payment arrangement.

• Consolidate your debt, if possible
  You combine multiple debts into one loan — ideally with a lower interest rate. This doesn't reduce what you owe, but it can make payments more manageable.

• Get credit counseling and a debt management plan
  Nonprofit credit counseling agencies can help you set up a plan to repay your debts, often with reduced interest. Look for agencies approved by the U.S. Department of Justice.

• Settle your debt
  You (or a company on your behalf) negotiate to pay less than the full amount owed.

  • ⚠️ Be careful — debt settlement companies often charge high fees (often upfront, whether or not they settle your debt), and settled debt can count as taxable income.

• Simply wait it out
  If you have very little income and almost no assets, creditors may not be able to collect from you anyway. This is sometimes called being "judgment proof." This isn't a permanent solution, but it may buy time.

• Learn about other options from a bankruptcy lawyer ↗️ (opens in a new tab)

  A lawyer with expertise in bankruptcy may be able to give you additional ideas for alternatives.

Types of debt that is not eliminated by bankruptcy

This is one of the most important things to understand before filing. Bankruptcy does not eliminate all debts.

Some of the most common debts that you generally cannot get rid of in bankruptcy are:

• Child support or spousal support debt — These survive bankruptcy. You will still owe them.
• Most student loans — Very difficult to discharge. You'd have to prove extreme hardship, which is a high legal bar.
• Most tax debts — Recent income tax debts generally cannot be wiped out. Some older tax debts may qualify, but the rules are complicated.
• Criminal fines and restitution — Money owed because of a criminal case does not go away.
• Wages you owe people who worked for you — Generally, wages, salaries, and commissions you owe to employees are given priority status in bankruptcy, which means they get paid before most other creditors. They're not dischargeable, though there are dollar limits and time limits on how much per employee is protected.
• Debts from DUI accidents — If you caused injury or death while driving under the influence, that debt typically survives.
• Debts from fraud — If a creditor can prove you lied or committed fraud to get credit, that debt likely won't be wiped out.
• Debts to government agencies — Fines or penalties owed to a government agency (like regulatory penalties, court fines, or penalties imposed as punishment) are typically not dischargeable in bankruptcy.
• Recent luxury purchases or cash advances — Debts incurred shortly before filing (especially large ones) may not be dischargeable.

If you have any of these types of debt, you may want to consult a bankruptcy attorney ↗️ to learn more.

Types of bankruptcy

There are four common kinds of bankruptcy cases, named by the chapter of the federal Bankruptcy Code that describes them.

• Chapter 7  — The fresh start
  • It is the most common type for individuals.
  • It wipes out most unsecured debts — like credit cards and medical bills — fairly quickly, usually within 3 to 6 months.
  • The a trustee appointed by the court sells all your non-exempt assets for cash and then pays your creditors.
  • California has exemptions that protect certain property, like a portion of your home equity, a car up to a certain value, and basic household goods.
  • You must make less than a certain amount of money to qualify
  • You must have received credit counseling from an approved credit counseling agency in the last 6 months.
• Chapter 13 — The repayment plan
  • Instead of wiping out the debt right away, you get to keep you property and pay your debts off over 3 to 5 years through a court-approved payment plan.
  • It is a repayment plan for individuals with regular income who have property, like a home they want to save from foreclosure, or who don't quality for Chapter 7.
  • It is also useful if you have debts that can't be discharged in Chapter 7 but can be managed over time.
• Chapter 11 — The business reorganization
  • This type is usually for businesses (although individuals with debts too large for Chapter 13 may use this too).
  • The debtor usually keeps their assets and continues to operate the business while working on a plan to pay off the creditors. 
• Chapter 12 — For Family Farmers and Fishermen
  • This type is a specialized type of bankruptcy specifically for family farmers and family fishermen with regular income.
  • The debtor keeps their property and works out a repayment plan with the creditors.
  • It works similar to Chapter 13, but with rules tailored to the seasonal and unpredictable income from farming and fishing. 

💬 Get help with bankruptcy

Deciding to file for bankruptcy is a big decision. It can affect you for a long time and it does not remove all types of debt. Any mistake in your case may mean the court can dismiss your case.

Since bankruptcy is a specialized area of law that is very complex, it is a good idea to get advice from a bankruptcy lawyer.

And, all the California bankruptcy district courts have helpful information on their websites. Look at the bankruptcy resources below for more. (↗️ Both links below open in a new tab).

 Find a lawyer ↗️

Find bankruptcy resources ↗️