Renata Klein will not not be rich, she declares in the second episode of the second season of HBO's hit show, "Big Little Lies." Played by actress Laura Dern, Renata's financial meltdowns have become some of the summer's most meme-able pop culture moments. But the show also highlights what's at stake in personal bankruptcy proceedings.
After her husband, Gordon, is arrested for securities fraud, the Kleins have to come to terms with losing their seemingly perfect lives. Thanks to Gordon's actions, the family's $20-million Monterey mansion, their Tesla, even Renata's wedding ring are fair game in the bankruptcy proceedings, John C. Colwell, a San Diego-based bankruptcy attorney and president of the National Association of Consumer Bankruptcy Attorneys, tells CNBC Make It.
There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Colwell says Chapter 7 is almost always the preferable option of the two and is more popular across the country. Not only is it quicker — usually done and over within about four months, he says — but it's less expensive, too. At the end, the filer will no longer have to repay certain debts they've accrued.
In Chapter 7, the debtor must list all of their assets and debts for the trustee to review. Colwell says the asset forms are comprehensive: The debtor has to include their house and car, of course, but also clothing, jewelry, furniture and even pets. "When in doubt, disclose," says Colwell.
That's where Renata ran into trouble with the trustee: On their assets form, she didn't list the family's Tesla or her wedding ring, which are likely worth more than what California law allows bankruptcy filers to exempt from being sold. For example, California allows debtors to exempt up to $100,000 in home value. Anything above that amount can be sold and used to pay off debts, and the Kleins' $20-million home is well above that threshold.
A debtor's assets are used to pay off some of the estate's debts, of which there are three main types: secured (house, car), unsecured (credit card debt, medical debt, payday loans, student loans) and priority (alimony). Unsecured debt, aside from student loan debt, is typically discharged in Chapter 7 proceedings, which is why filers get the chance to "start over." The debtor still has to repay any priority debts, and any secured debts that are not paid off with the estate's assets.
Chapter 13 is more complicated and less common: It involves creating a repayment plan for the filer's debts, says Colwell.
Though Renata's financial plight isn't necessarily sympathetic — securities fraud isn't the same as not being able to repay crushing medical debt — Colwell says the stigma of bankruptcy has lessened in his decades in the field, and he encourages anyone who needs help financially to at least seek out a free consultation with a local bankruptcy attorney, which can be found by searching on NACBA's website.
"I know it's the last place they want to be," says Colwell. "If folks can come in and get info and not be scared about it, that's really important in my view."
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