Orange — California State Bar (What Can I Do If I Can’t Pay My Debts?)

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T H E S TAT E BA R O F CA L I F O R N I A WHAT CAN I DO IF I CAN’T PAY MY DEBTS?

THE L GET A G E S L T C A E F IF L F O

What can I do if I can’t pay mydebts?

1 Can my property be taken to pay a debt?

2 Can my creditors harass me?

3 Can I be forced to pay someone else’s debts?

4 What should I do if I’m billed for something I didn’t buy? 5 Can other people find out about my debts?

6 What happens if I am sued?

7 What happens if I lose the lawsuit?

8 Can I protect my property if I am sued?

9 What if I just need more time to pay my debts?

10 When should I consider filing for bankruptcy?

11 Are there different types of bankruptcy?

12 When should I file for Chapter 7?

13 Will Chapter 7 wipe out all of my debts?

14 If I file for Chapter 7, can I keep any property?

15 When should I use a Chapter 13 plan instead?

16 How can I find a lawyer to represent me? © 1990, 1999, 2003, 2006, 2008 The State Bar of California.No part of this work may be reproduced, stored in a retrieval system, or transmitted in any medium, withoutprior written permission. This pamphlet was made possible, in part, through the volunteer efforts of the Insolvency Law Committee of the Business Law Sectionof The State Bar of California.

1 Can my property be taken to pay a debt? Yes, under certain circumstances. A creditor—the person or company that says you owe adebt—usually must go to court and win a lawsuitagainst you before taking your property. Let’ssay, however, you make a written promise toeither pay your debt or give the creditor some-thing you own. The item you promise to give iscalled the security, and the money you owe iscalled a secured debt. If you fail to pay a secureddebt, the creditor usually can take the security. Let’s say you borrow money to buy a car andthe car is the security. If you fall behind in your pay-ments, the lender can repossess (take back) the carwithout going to court. The car must, however, beon public property when it is repossessed. And evenif the car is repossessed, you could still wind upowing the lender money. Suppose, for example, youowe $8,000 on the car when it is repossessed and thelender sells the car at an auction for $7,000. Youcould be sued for the $1,000 that the lender is out—plus any money spent to repossess the car and sell it. Companies that repair or store items also cantake property from you without going to court. Forexample, if a shop cleans your rug and you do notpick it up and pay for the cleaning, the shop cankeep the rug and sell it after a certain period of time.

2 Can my creditors harass me? Creditors or collection agencies—companies thattry to collect payment for past due bills—cannot,by law, repeatedly call you on the telephone. It isalso against the law for them to threaten you withharm or contact you at work if you have told themnot to. And if you ask them, in writing, to stopcontacting you, they must leave you alone. At thatpoint, they can only contact you to inform you thatthey are filing a lawsuit. Be sure to keep copies ofall correspondence. Creditors and collection agencies are not sup-posed to contact your employer either, except tomake sure that you are employed. And they cannotsend you anything that is meant to look like a legaldocument if it is not.

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If you are bothered in any of these ways, con-tact a consumer protection or law enforcementagency. Or you could seek a lawyer’s help.

3 Can I be forced to pay someone else’s debts? Yes, in some instances. For example, if yourspouse obtains a necessity of life—such as food,clothing or medical care—and cannot pay for it,you can be forced to pay. This may be true for aformer spouse, too, if you were not separatedwhen your spouse got into debt. In most cases, people under age 18 can get outof an agreement to buy something. If, however,you are an adult and you co-sign a contract or loanagreement for someone under 18 (or for anyoneelse, for that matter), you would be responsible forthe debt. This means you have promised to makethe payments if the other person fails to live up tothe agreement. What if you co-sign an agreement for someonewho ends up filing for bankruptcy? The other per-son may not have to pay the debt, but you will. In addition, you legally may have to pay certaindebts, such as medical bills, for your minor child.

4 What should I do if I’m billed for something I didn’t buy? Try to settle the problem as soon as possible. Ifyou get a bill for something that you didn’t agreeto buy, write to the creditor. Do the same thing ifyou don’t believe you received everything forwhich you have been billed. Keep copies of allyour letters. If you can’t work the situation out on your own,seek out a consumer protection agency. Look in thewhite pages of your telephone directory under“Consumer Complaint and ProtectionCoordinators.” Or, call the state Department ofConsumer Affairs toll-free at 1-800-952-5210 or con-tact them by e-mail at dca@dca.ca.gov to find outwho might be able to assist you with your particularproblem. Or go to www.dca.ca.gov. Or you may want to consult a lawyer (see #16),because most debts are based on a contract—a 2

legally binding agreement that can be written orspoken. In any case, take action immediately. It couldturn out that you owe a debt and, if you do notrespond, you could end up with serious moneyand legal problems.

5 Can other people find out about my debts? Yes. If you don’t pay your bills, you can endup with a bad credit rating, which is a report onyour financial situation. Credit ratings are issuedby credit-reporting agencies. These companies getinformation about your debts from your creditors,and they make their reports available to othercreditors, employers and landlords. A credit report includes such information aswhether you pay your bills on time, have had aforeclosure, owe money as the result of a lawsuitor were convicted of a crime. Each piece of infor-mation stays in the report for a certain number ofyears. For example, a bankruptcy usually will belisted for 10 years. What if a store refuses to give you a chargeaccount because you have a bad credit rating? Thestore must give you the name and address of thecredit-reporting agency that made the report, andthe agency must let you see the report. If you tell the agency that some of the informa-tion in the report is wrong, it must look into thematter. If the agency decides that its report is cor-rect, you can explain your side of the story in writ-ing. Then, anyone who checks your credit ratingwill see your explanation. If you ask, the agencyalso must send your explanation to anyone whoreceived your credit rating for employment pur-poses in the last two years and to anyone else whoreceived your rating within the last six months. It is a good idea to check your credit reportperiodically for errors, signs of identity theft oranything else that might affect your credit rating.By law, you are entitled to receive one free creditreport from each of the three major credit bureauseach year. To order your free annual reports, call1-877-322-8228 or visit the program’s Web site atwww.annualcreditreport.com.

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6 What happens if I am sued? If you have a secured debt (see #1), the credi-tor can sue you either to recover the security or forthe amount of money you owe or both. If you donot have a secured debt, you will be sued for themoney you owe. If the debt is $5,000 or less (up to $7,500 if thecreditor is an individual), the creditor mightdecide to take you to small claims court. You can-not be represented by a lawyer in this court, butyou can talk to one beforehand. For more informa-tion, see the State Bar pamphlet How Do I Use theSmall Claims Court? Lawsuits for larger amounts are filed in ahigher court, where it is best to have a lawyer rep-resent you. In any event, if you receive a court summonsbecause you are being sued, do not ignore it. Ifyou do not respond within a certain time, you willlose the case automatically—and your property orbank accounts can be taken without notice. As soon as you receive a summons, you should: • Consult a lawyer (see #16). • Get in touch with the lawyer hired by theperson suing you and try to negotiate, or workout, a way to settle the dispute. You can try to negotiate a settlement even afterthe suit has been filed, but you should do so only ifyou have responded first in writing to the summons.

7 What happens if I lose the lawsuit? It depends on the terms of the lawsuit. If thelawsuit demanded the return of a secured item, thecreditor could get an order from the judge allowinga sheriff or marshal to take the item from you. Oncethis happens, your debt may be canceled. If the suit demanded money and you do notpay the amount that the judge ordered you to pay,something you own could be attached (legallyclaimed as payment). The property—such as a caror bank account—would be about the same valueas the amount of your debt. A car, for example,could be sold in order to pay the creditor. You may,

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however, be able to keep certain items (see #8). A judge also can order your employer to with-hold up to 25 percent of your take-home earningsto pay a debt. This is called a garnishment of wages.

8 Can I protect my property if I am sued? If you lose a lawsuit, you also may lose someof your property. The law, however, lets you claimthat some property is exempt, which means that itcannot be taken from you. When you receive a notice that your propertyis being attached, you have 10 days to deliver aClaim of Exemption form to the sheriff or marshal.This form describes the property and explains whyit legally cannot be attached. Most sheriff, marshaland court clerk offices have these forms. The creditor can either accept your claim orchallenge it at a court hearing. At the hearing,you must prove that the property is exempt. Ifyou do not go to the hearing, you automaticallylose the exemption. You cannot file a Claim of Exemption if yourdebt is for unpaid federal income taxes or for anecessity of life such as food, shelter or medicaltreatment. These debts must be paid. However, among other things, you and yourspouse together can claim exemptions for: • Up to $75,000 in equity in your home if youare part of a family unit (up to $50,000 if you aresingle), and up to $150,000 if you are 65 years oldor older, disabled, or on a low income. • A $2,550 equity in one or more cars. • Up to $6,750 in tools and other items thatyou need for your work (or up to $13,475 for itemsused by both spouses who do the same work). • 75 percent of your salary for the last 30 daysor wages that have not yet been paid. • Up to $6,750 worth of jewelry, heirloomsand works of art.

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• Life insurance policies with a cash value ofup to $10,775 each. Married couples may combinethis exemption; it doesn’t matter whether the poli-cies belong to you, your spouse or both of you. • Up to $1,350 in an inmate’s trust account. • Up to $2,700 each in a bank account inwhich your Social Security payments have beendirectly deposited ($4,050 if the one payment isdirectly deposited for the benefit of both spouses). In addition, you and your spouse each canclaim exemptions for: • Household furnishings and clothing thatyour family needs. • A cemetery plot. • All or part of retirement, disability andhealth insurance, workers’ compensation, welfare,unemployment, union and other benefits that areneeded to support your family.

9 What if I just need more time to pay my debts? You could contact your creditors and ask formore time to make payments. You might ask, forexample, if you can make a series of small pay-ments over a period of time. If any creditor agreesto such an arrangement, write a letter confirmingthe agreement and keep a copy of the letter. It might help to contact a credit and debt coun-seling agency as well. Such services can sometimeshelp people work out plans with their creditors.However, shop carefully for one that you believegives good advice. And keep in mind that if youwind up filing for bankruptcy, you will be requiredto complete such counseling from an agencyapproved by the U.S. Trustee Program. (See #10.) Be careful about getting a debt consolidationloan to pay off your debts. If the interest (themoney that lenders charge for loans) is too high,you may end up with a bigger problem. If youdo get a loan, however, make sure all of the

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financial statements that you give the lender are true and complete.

10 When should I consider filing for bankruptcy? It depends on your particular set of circum- stances. You should seek an attorney’s advice beforemaking such a decision. Filing for bankruptcy willimpact your credit and may not wipe out all of your debts. If your creditors, however, will not give youmore time to pay off your debts and you have no other good options, it may be the best way to beginturning your situation around. Before filing for bankruptcy, you will have to complete credit counseling with a U.S. TrusteeProgram-approved agency. To locate such an agency, visit the program’s Web site at www.usdoj.gov/ust(go to Credit Counseling and Debtor Education). Keep in mind that credit counseling is required even if there is no possibility of setting up a repayment plan. If you fail to obtain the credit counseling and file the certificate with the court, your bankruptcy case will be dismissed without wiping out your debts. In addition, you will be required—once youhave filed for bankruptcy—to complete a personal financial management course before any of yourdebts can be wiped out.

11 Are there different types of bankruptcy? Yes. There are two types of personalbankruptcy: Chapter 13 and Chapter 7. Chapter 13allows you to stop most debt collection in exchange for your promise to pay your available funds to creditors according to a repayment plan (see #15).You can file a Chapter 13 bankruptcy in the nearestUnited States Bankruptcy Court. The repaymentplan allows you to pay your debts over five years. It also allows you to keep your property as long asyou continue to make payments. And at the end of the repayment period, most of your debts can becanceled—even if you have not paid them in full— as long as you make all the payments or fully per-form your plan.

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In filing for Chapter 7 bankruptcy, however,you are not seeking a repayment plan (see #12). Instead, you are asking the bankruptcy court to cancel most of your debts because you don’t haveenough money or property to pay them off. Certain assets (assets that are not exempt) would be sold to pay off your creditors. To file Chapter 13 or Chapter 7, you must pay a filing fee in bankruptcy court, either alone or with your spouse. If you meet certain criteria, you may be able to file without paying the fee. Contact a lawyer to determine whether you meet the criteria. A trustee is appointed when you file your case. Once you have filed for Chapter 13 or Chapter 7, the creditors you had before you filed (except those seeking child or spousal support payments) cannot attach your salary or other possessions as payment without bankruptcy court permission. Those seeking payment of child or spousal support debts, however, can attach your salary and your possessions—even your exempt property—if they obtained a court order from the family court before you filed for bankruptcy.

12 When should I file for Chapter 7? If you can’t work out any other reasonable way to pay your debts, you might consider filing for Chapter 7. It allows an honest debtor to make a fresh start by having a court discharge (in other words, cancel) most debts. Chapter 7 is a way to get out of debt when you owe more money than you can be expected to pay in a reasonable amount of time. To qualify for a Chapter 7 bankruptcy, however, your income cannot exceed certain limits. If your income is greater than the median income in California, for example, you may not be eligible for this type of bankruptcy. You would be required to pass a “means” test to determine your eligibility. The purpose of such a test is to find out if you have enough income to participate in some sort of Chapter 13 repayment plan instead. If, after subtract- ing certain expenses and debt payments, you havemore than $166.66 left over each month, you would not qualify for Chapter 7. For more detailed infor- mation, visit www.usdoj.gov/ust (go to Means Testing Information). If you do file for Chapter 7, your appointed 8

trustee will sell any of your property that is notexempt (see #14) and distribute the funds amongyour creditors. The law says that an employer can’t fire you or refuse to hire or promote you because you filed forChapter 7. Chapter 7 bankruptcy, however, can havea bad effect on your credit rating for a long time. Also, Chapter 7 may solve the problems you havenow, but it won’t protect you if you can’t pay new bills. And keep in mind that your debts can be dis-charged through Chapter 7 only once in an eight-year period. In filing for Chapter 7, you or your lawyer willhave to file a number of forms and papers with thebankruptcy court. These include a list of your debtsand property, plus information on your income andhow you spend it. The court decides if you are bet- ter suited for Chapter 13 than Chapter 7 if requested to do so. In addition, your case can be dismissed. Also, a judge can refuse to discharge all orsome of your debts through Chapter 7. For exam- ple, if you run up a lot of bills on purpose orborrow money with a dishonest motive just before filing for bankruptcy, you may not be allowed tohave your debts canceled.

13 Will Chapter 7 wipe out all of my debts? No. Chapter 7 does not cancel: • Any lien on personal or real property (thedebt will be canceled, but you don’t get to keepthe security if you don’t pay for it). • Most income taxes incurred in the last three years. • All student loans, unless you qualify for ahardship discharge. • Child support and spousal support orproperty settlements. • Any money that you owe as a result of injur-ing or killing someone while you were operating amotor vehicle, vessel or aircraft under the influ-ence of alcohol, drugs, or another substance. 9

Your debts also will not be canceled if a creditorproves that you lied about how much money youhave, tried to hide property or committed fraud. You may choose to reaffirm a secured debt. Thismeans that you decide to pay the debt and keepthe secured item, even though Chapter 7 wouldotherwise cancel the debt. If you do not reaffirm thedebt and the contract allows repossession of the itembecause bankruptcy was filed, the item can be repos-sessed even if you are current on the payments.

14 If I file for Chapter 7, can I keep any property? Yes, probably. If the property is exempt (see #8and below), it cannot be used to pay off yourdebts—unless you owed spousal or child supportwhen you filed for bankruptcy. Even exempt proper- ty can be used to pay spousal or child support claims. When you file for Chapter 7, you can choosebetween two sets of exemptions. To claim theseexemptions, you must have lived in California for at least two years before filing for bankruptcy.(Otherwise, you would have to use the exemptions available in the state where you used to live.) One set of exemptions is the same as the oneyou can use to protect your property from creditors in a lawsuit (see #8). Homeowners generally prefer this set because it allows a much larger home equi- ty exemption than the other set. For some examples of what you and your spouse can keep if youchoose the second set of exemptions, see below (the dollar amounts will change in April of 2010): • A $20,725 interest in a home and/or burial plot. If you do not own either one, you can apply this amount elsewhere to keep non-exempt proper- ty, such as an income tax refund. In addition, youhave a $1,100 floating exemption that can beapplied to any non-exempt property. • A $3,300 interest in a car or other motor vehicle. • All items (not to exceed $525 in value in anyone particular item) that are household furnishingsand goods, clothing, appliances, books, crops andmusical instruments. 10

• $1,350 in jewelry. • $2,075 worth of books or tools that you need to earn a living. • A life insurance policy that has notmatured and cash value in a life insurance policyup to $11,075. • Social Security and veterans’ benefits,unemployment insurance money, and pensionand profit-sharing plans.

15 When should I use a Chapter 13 plan instead? You should consider a Chapter 13 plan if youcan work out a way to pay off your debts (or at least part of them) over a period of time and still afford the reasonable costs of living. Also, this type of bankruptcy may be your only option if you arenot eligible to file for Chapter 7 (see #12). The law says you can use a Chapter 13 plan ifyou have a steady income. This means you work forwages, own a small business or receive pension, Social Security or other benefits. You also must owe less than $1,010,650 in secured debts, such as a mort- gage, and less than $336,900 in other debts. (These dollar amounts will change in mid-2010.) If you qualify for Chapter 13, you and yourlawyer will have to work out a plan for the court to approve. The plan must show how you intend to pay all or part of your debts. Certain debts mustbe paid in full. (These include secured debts, federal or state income taxes incurred in the past three years, and the court, trustee and attorney fees involved in setting up and carrying out the plan.) The appointed trustee collects your pay-ments and pays your creditors. And if yourcircumstances change—you lose your job, forexample, or become ill—while you are paying offyour debts through a Chapter 13 plan, you can ask the court to switch you to Chapter 7.

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16 How can I find a lawyer to represent me? If you do not know a lawyer, ask a friend, co- worker, employer or business associate to recom-mend one. Or, call a local State Bar-certified lawyer referral service. For an online list of certi- fied lawyer referral services, visit the State Bar’sWeb site at www.calbar.ca.gov/lrs. To hear a recorded message that will provide you with the phone numbers of certified services in your county, call 1-866-44-CA-LAW (442-2529). If you are out of state, call 415-538-2250. Or check the Yellow Pages of your telephone directory or contact your local bar association. State Bar-certified lawyer referral services, which must meet minimum standards established by the California Supreme Court, can assist you in finding the right lawyer for your particular problem. Most of these services offer half-hour consultations for a modest fee. Attorneys who are members of State Bar-certi- fied lawyer referral services must carry insurance, agree to fee arbitration for fee disputes, meet certain standards of experience and be State Bar members in good standing. Lawyer referral service fees do vary. Don’t forget to ask whether there is a fee for the referral or initial consultation. And if you decide to hire a lawyer, make sure you understand what you will be paying for, how much it will cost and when you will be expected to pay your bill. The State Bar also certifies “specialists” in bankruptcy law and 10 other legal areas. Tobecome a State Bar-certified specialist, a lawyermust show that he or she has extensive experienceand tested ability in that field of law. In addition, the bar accredits certification programs of private certifying organizations in a variety of legal areas, including consumer bankruptcy law and creditors’ rights law. Keep in mind, however, that there are lawyers with extensive experience in their legal fields who simply do not seek certification. For an online list of State Bar-certified specialists, visit www.californiaspecialist.org (go to Specialist Search). Or call the State Bar’s Legal Specialization Program at 415-538-2120.

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What if you do not have enough money to payfor legal advice? You may belong to a “legal insur-ance” plan that covers the kind of services you need.Or, if you have very little income, you might qualifyfor free or low-cost legal help. Check the white pagesof your telephone directory for a legal services pro-gram in your county. (California’s legal services Website—www.LawHelpCalifornia.org—can help youlocate a local program and provide you with addi-tional resources as well.) You also could ask yourlocal bar association if its State Bar-certified lawyerreferral service offers free legal advice to those withlittle income. For more information, see the State Barpamphlet How Can I Find and Hire the RightLawyer? To order a free copy or to requestinformation on ordering other consumereducation pamphlets from the State Bar, send ane-mail to pamphlets@calbar.ca.gov. Or visit thebar’s Web site—www.calbar.ca.gov—whereyou’ll find online versions of these consumereducation pamphlets, as well as information onordering them. For information on ordering thepamphlets by mail, call 1-888-875-LAWS (5297).

The purpose of this pamphlet is to provide general information on the law, which is subject to change. It is not legal advice. Consult a lawyer if you have a specific legal problem.

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