Chapter 7 of the Bankruptcy Code is often a last resort for individuals or companies with financial problems that they cannot solve. Under Chapter 7, a Trustee is appointed to administer the assets of the debtor. The Trustee sells the assets in order to pay creditors. For individuals, some assets are exempt, and those are retained by the debtor.
Many people have taken advantage of a long-existing rule that a vehicle purchased outside of California and kept outside the state for more than 90 days after purchase is not subject to California use tax when brought into California. That rule has now been changed.
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Often times when a tenant files for bankruptcy, the trustee not only rejects the lease but also abandons any personal property left over by the tenant pursuant to 11 U.S.C. 554(a). The California landlord who expects to use the value of the abandoned property to offset amounts owed by the bankrupt tenant will be sorely mistaken.
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Generally, if you renegotiate a loan and reduce the amount owed, the reduction is subject to income tax as “cancellation of indebtedness income.” However, both California and federal income tax laws have special, temporary provisions under which reduction of mortgage debt on a taxpayer’s principal residence is not subject to tax. Unfortunately, these two provisions are confusingly different.
Chapter 11 allows companies to reorganize their financial affairs and emerge from bankruptcy with an improved balance sheet. Most large bankruptcies that make the news are Chapter 11 filings. For example, EZ Lube, which filed bankruptcy in December, is in Chapter 11, as is Circuit City, which filed in November. Most Chapter 11s are filed by companies, but individuals can also file Chapter 11. However, individual Chapter 11s are rare because there are other bankruptcy Chapters which are usually more appropriate for individuals.
