What may be surprising is the extent to which bankruptcy in California, a proceeding controlled by federal law, is different here.
Bankruptcy in California gets its distinct color from three things:
- State law on foreclosure including anti deficiency statutes
- Exemption law
- Community property
California is a non judicial foreclosure state.
That means that there is no court proceeding before a foreclosure sale can be held. The widely touted “show me the note” foreclosure defense is not available here. In a non judicial foreclosure, there is no court involved, and therefore, no one to show the note to.
State law provides that loans used to purchase a home are “non recourse”. Non-recourse means that a lender making a loan to fund a home purchase cannot get a money judgment against the borrower, even in a judicial foreclosure. The lender gets only the collateral, nothing more.
Further, when a lender uses the power of sale in a deed of trust to conduct a non judicial foreclosure, it gives up the right to collect anything further on its debt. It doesn’t matter if the loan was purchase money or a refinance.
So once a standard foreclosure is complete, the borrower has no further liability to the creditor who foreclosed. Any junior lien holders may have rights against the borrower, depending on whether the loan was recourse or non recourse.
California gives debtors a choice between the state law exemptions found in Code of Civil Procedure §704 and a set of bankruptcy-only exemptions in CCP §703.140 that mirror the bankruptcy code exemptions in the federal law when the California law was adopted.
Usually, homeowners chose the 704 state law exemptions with a generous homestead exemption when they have equity in a primary residence.
Renters or those with no equity in their homes chose the CCP 703 exemptions, with its “wild-card” or “grub stake” exemption for equity in any kind of property. The dollar amounts for California exemptions increased January 1, 2013.
California is a community property state where property acquired by a married couple during marriage belongs equally to both spouses, unless they agree otherwise.
The community property (though not necessarily the other spouse personally) is liable for the debts incurred by either spouse during the marriage and before the marriage.
Even if only one spouse files bankruptcy, all of the community property becomes property of the estate. Property of the estate, if not exempt, is available to pay the community debts of both spouses through the bankruptcy. Can I file bankruptcy by myself?
There is a trade off for debtors in community property states like California for the inclusion of both halves of the community property in the bankruptcy estate when only one spouse files bankruptcy.
When the filing spouse gets a discharge, all community property of the marriage acquired after the bankruptcy is protected by the discharge, even if only one spouse filed.
The property exempted or abandoned to the debtor at the closing of the case is also immune to the claims discharged in the case.
That means that the community property a couple acquires after the bankruptcy filing is not liable for the debts of the non filing spouse that existed when the bankruptcy was filed. 11 U.S.C. 524(a)(3).
The non filing spouse’s separate property (if any) may be liable for his or her debts, however.
This provides lots of opportunities for planning in cases where there are reasons why both spouses can’t file or where debt and/or property holdings are lop sided.
Get good legal advice to explore how these principles play out.
If you live outside of the San Francisco Bay Area where the Moran Law Group practices, the California State Bar certifies bankruptcy specialists who can be located by county on the bar’s site.
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