The laws of bankruptcy in California are generally the same as they are in all states. The Constitution gave Congress the power to establish “uniform” laws of bankruptcy so that the same standards apply to debtors in all states. Those uniform laws, called the US Bankruptcy Code, is in effect in California. A debtor who files for bankruptcy will do so in a specialized Federal court, not a California court.
For individuals, the Bankruptcy Code provides two methods to finding relief from creditors. Named after the parts of the code where they are described, there are referred to as Chapter 7 and Chapter 13. The first is for people who will go through complete liquidation of all their assests and debts. The second is for people to work out a repayment plan to eventually satisfy their debts. Chapter 7 is available for people who are below a certain income threshold and recent reforms of the Chapter 7 process have been driven by the belief that high income people were abusing the Chapter 7 process to walk away from debts.
There are certain categories of debt that are “non-dischargeable” under the code. Many purchases made within the 90 days prior to filing to ensure that a debtor was not trying to hide assets in a way to be able to keep them throughout the bankruptcy process. Likewise major gifts to relatives will be invalidated as a potential fraud on the creditors.
Under Chapter 7, if the court agrees that the debtor cannot be expected to pay the debts, the court will discharge all the debts but will also take most of the debtor’s property (again, with some exceptions) to try to satisfy the debts as best as it can. Thus the “liquidation”.
Chapter 13 will generally allow a debtor to keep property and will simply arrange a long term repayment plan which can be as long as a 5 year. Although this means that the process will stretch out longer than Chapter 7, it also means that the debtor retains a chance of working out of debt without losing major property in the process.
In California, the courts must follow the decisions of the Ninth Circuit Court of Appeal. Although the Supreme Court tries to resolve differences in the way that courts in various regions in the country interpret the laws, some minor disparities are inevitable. A California bankruptcy attorney will be able to give you the lastest news on how the Ninth Circuit has reacted to the reform of the bankruptcy code in the last several years.