California Bankruptcy law is a lot like a unicorn….appealing but imaginary.
Instead, we have bankruptcy in California, where the landscape is shaped by community property; state exemptions, large mortgages, and the 9th circuit court of appeals.
Like the Merced River cutting through the granite of Yosemite, those factors alter the bankruptcy landscape here.
California community property law defines what assets of a married couple come within the control of the bankruptcy court. While there are other community property states, it is the law of each state that defines how community property is created. State law also defines the rights of creditors in that community property.
Whether one spouses files, or both join in a bankruptcy case, all of the community is available to the creditors of the marriage.
In return, after the bankruptcy all community property is forever protected by the discharge. Post bankruptcy wages and purchases are beyond the reach of creditors.
Even when only one spouse files, all the community gets protection from creditors who had claims when the case was filed.
Much different from the treatment of marital property other places.
Two California exemption laws
While bankruptcy is federal law, California state law defines exemptions. Exemptions specify assets a debtor can protect from creditors in bankruptcy.
Exemptions are the only place in bankruptcy that the law is explicitly different from state to state.
Congress, in a legislative compromise in 1978 on the adoption of the Bankruptcy Code (back when Congress knew how to compromise), states were given the option to opt out of the federal bankruptcy exemptions in favor of the state’s exemptions.
In response, California’s legislature gave debtors a choice: the existing state law exemptions found in Code of Civil Procedure 704, or a special set of California bankruptcy exemptions starting at CCP 703.140.
Mortgage debt dominates
California boasts (or suffers) home loan balances that make eyes bug in other states. The cost of housing here skews family budgets, leaving less for other living expenses.
For many years, credit cards were used to fill the gap between the available income and the expectations of comfortable living.
For homeowners, the deduction for mortgage payments on the means test assures most homeowners that they pass the means test.
The increasing cost of renting has sharpened the drive to save a house from foreclosure, at whatever cost.
Bankruptcy can often make that possible in Chapter 13.
9th Circuit shapes us
California bankruptcy judges are bound by the decisions of the 9th Circuit Court of Appeals. The circuit courts can only be overruled by the Supreme Court.
So, the decisions made by the 9th Circuit on bankruptcy issues drive outcomes that may be different from outcomes in other circuits.
Recently the 9th Circuit made some very satisfying decisions for bankruptcy debtors, including allowing lien stripping in Chapter 20; granting attorneys fees to debtors who win bankruptcy disputes with their creditors; and slapping down bankruptcy trustees who sought to disqualify Chapter 13 debtors who had secured debts for non essentials.
And, the 9th Circuit rejected its earlier, horrible decision about making debtors whole when creditors violate the automatic stay.
Bankruptcy the product of our environment
So, sorry to disappoint, there is no “California bankruptcy law.”
There’s just the granite of the Bankruptcy Code, fractured, shaped, and worn by the economic and legal realities of California.
And the resulting landscape is generally awesome.