California Bankruptcy Law: Core Concepts, Traps, and a Worked Rule
The statutory foundation
California clients usually file under the federal Bankruptcy Code, but California supplies the exemptions that decide what a debtor keeps. Know three layers: federal substantive law (eligibility, automatic stay, discharge, Chapter 7 means test, Chapter 13 plan rules), California exemption statutes, and California nonbankruptcy law that defines property and lien rights.
Eligibility and the means test
Chapter 7 requires passing the means test unless the case is a non-consumer case or the debtor's income is below the state median. Above-median debtors must complete the full disposable-income calculation. Chapter 13 requires regular income, debt limits, and a plan that commits projected disposable income for the applicable commitment period. Trap: assuming a debtor can choose between chapters freely; eligibility depends on income, debt type, and prior filings.
The automatic stay
Filing imposes a stay under section 362 that halts collection, foreclosure, garnishment, and most litigation. Traps: the stay does not protect co-debtors; it terminates 30 days after a second filing within one year absent relief; and relief from stay may be granted for cause. Violations can trigger damages and attorney fees.
Exemptions under California law
The debtor chooses between two California exemption systems, not the federal set. System 1 uses a homestead exemption plus statutory personal-property exemptions; System 2 uses a larger homestead amount and different personal-property caps. Homestead protection depends on recorded timing and occupancy. Traps: using federal exemptions, double-claiming, or forgetting that exemptions apply to equity, not market value.
Discharge and nondischargeability
Discharge releases most debts but not taxes, student loans absent undue hardship, domestic support, or debts obtained by fraud. Section 523 litigation requires a timely adversary proceeding. Rule of thumb: compare the debtor's equity in an asset to the applicable exemption; if equity is below the exemption amount, the trustee cannot liquidate it. Example: $500,000 home, $400,000 mortgage, $150,000 System 2 homestead exemption yields $100,000 equity, fully exempt, so no sale.