People in California facing significant, unrepayable debt may turn to personal bankruptcy to find relief. There are two types of personal bankruptcy available: Chapter 7 and Chapter 13. If a person files for Chapter 7 bankruptcy, a trustee liquidates his or her assets, uses the proceeds to pay off some amount of the outstanding debt and discharges the remainder. However, Chapter 7 isn't the best option for everyone seeking debt relief, especially if they have certain key assets to maintain or they have a relatively high income.
A federal means test determines whether a person could pay their debts over time in order to keep their home or other valuables from being liquidated. Under Chapter 13 bankruptcy, the person works with an attorney to develop a five-year plan to repay outstanding debts. During that period, the debts are repaid as supervised and approved, and a remaining balance would be discharged after five years. Under this structured plan, the person could seek debt relief while maintaining the home or other items. During that five-year period, all of a person's disposable income is to be directed toward debt. The bankruptcy court will allow for some personal expenses, but his or her overall finances are subject to court approval on an ongoing basis.
In addition, a Chapter 13 plan may need to be renegotiated if a person faces a worsened financial situation. During the repayment period, debts are given priorities; the highest priority belongs to child support, back taxes or spousal support. Other forms of secured and then unsecured debt have lower priority.
People who are looking for relief from mounting debts may find recourse in the law. A bankruptcy attorney may provide guidance and representation in filing for Chapter 13 and developing a repayment plan to help people emerge with a new financial future.