For many years, We have been assisting clients in restructuring their debt, or discharging it, through the filing of bankruptcy. We have found that many people have basic questions about how the bankruptcy process works and how they can benefit from it. The answers to those questions are listed below.
Q. What types of bankruptcies are there and which one is right for me?
A. There are two types of bankruptcies, commonly referred to as Chapter 7 and Chapter 13, that are filed by individuals. They are very similar in the amount of information you must disclose in your bankruptcy petition, although there are some differences, since each type reflects different debtor goals.
In both bankruptcy types, the debtor files a bankruptcy petition with the Federal Bankruptcy Court located in the district where the debtor has lived for at least six months or where a significant amount of his or her assets is located. The petition sets forth all of the debtor’s assets (both real property and personal property and its value), a list of all creditors and the amounts owed indicating whether that creditor is secured (a mortgage company or a bank that financed your car purchase) unsecured or has some priority status (taxes owed to governmental agencies, claims by spouses in divorce actions, or claims by employees for wages, commissions, or benefits), a complete statement of your income (along with total gross income for the previous two years), and a statement of itemized regular monthly living expenses.
About 30 to 45 days after the petition is filed in bankruptcy court, the debtor meets with a trustee, who is an individual appointed by the federal government to oversee the debtor’s bankruptcy on behalf of creditors. He or she will review your petition with you and verify that all of the information contained therein is accurate. What happens beyond that point depends upon whether you filed for a Chapter 7 or a Chapter 13.
In a Chapter 7, the debtor is seeking to convince the trustee that he or she does not have any disposable income to pay debts, nor does he or she possess assets of a significant value that could be sold to raise money to pay debts. Therefore, said debts, as of the date of the bankruptcy petition’s filing, should be discharged. If the trustee agrees with this position, the matters marked as a “no asset” bankruptcy and, barring any objections to discharge of debt by a creditor, an order for discharge is issued.
The other type of bankruptcy available to individuals, Chapter13, is usually filed for one of the following four reasons:
1. The debtor is trying to save a home from foreclosure and needs time to pay back a mortgage arrearage;
2. The debtor is at risk of losing property to liquidation in a chapter 7 and needs to pay the equivalent value of property to creditors over time;
3. The debtor has a significant amount of disposable income after regular monthly expenses are paid, which would be looked upon by the bankruptcy court as income that could be used to pay back creditors either partially or fully; or <
4. There are certain debts that would not be discharged in a chapter 7 bankruptcy (e.g. taxes less than 3 years old or arrearages on alimony and child support) that a debtor needs time to pay back.
In a chapter 13 bankruptcy, in addition to filing a petition, the debtor files a plan and summary of plan. These are documents that set forth the debtor’s strategy for payment to creditors. A plan can be as long as 36 months (3 years) at the debtor’s discretion, and up to 60 months (5 years) with court approval. The debtor’s goal when meeting with the trustee in a chapter 13situation is to prove that the plan is feasible (i.e. there is enough regular income available to the debtor over and above regular monthly expenses to cover the payments proposed) and is proposed in good faith. In other words, a debtor cannot propose to pay $200.00 of his or her $1,000.00 disposable monthly income, over 36 months. Both the trustee and the creditors would demand the contribution of much more disposable income and, if necessary, over a longer period of time, to pay back debt. If the plan as proposed is feasible and made in good faith, the creditors have no choice but to accept it.
Finally, to qualify for a Chapter 13, the debtor must meet the following criteria:
1. Be an individual (as opposed to a partnership or corporation);
2. Have a regular source of income; and
3. His or her secured debt cannot exceed $750,000.00, and his or her unsecured debt cannot exceed $250,000.00.
If the first or third criteria are not met, however, the debtor always has the option of filing a chapter 11 bankruptcy, which is beyond the scope of this article.
Q. If I file bankruptcy, will I lose my house?
A. The determination of whether or not assets are available to be sold to pay creditors depends upon the value of the property, and whether or not the property is protected by exemptions. Since each state has its own set of exemptions, in addition to the federal exemptions (and a debtor must choose whether to use the federal exemptions or those offered by his or her state), only the federal exemptions will be discussed here. However, they have the same basic purpose.
Under the federal exemptions, the following property can be exempted up to the value indicated (married couples filing jointly can each use the exemptions to their fullest, thus doubling them where appropriate): the value above liens of real or personal property used as the primary residence of the debtor,$15,000.00; the value above liens of a motor vehicle, $2,400.00; household goods and furnishings to an aggregate value of$8,000.00; jewelry to an aggregate value of $1,000.00; cash surrender values on whole life or universal life insurance policies up to an aggregate value of $8,000.00. If the debtor does not own the real or personal property used as his or her primary residence (or does own it, but has no or very little equity) up to one half of the unused exemption, or $7,500.00maximum, can be used to exempt other property at the debtor’s discretion.
Most people that go into a Chapter 7 bankruptcy are concerned with the possibility they will lose their homes as a result. A very simple procedure, called a liquidation analysis, can be done to determine whether or not the home would be at risk. From the appraised value of the home, you deduct the payoff amount for all mortgage liens and the cost of selling it (which is presumed to be 10% of the home’s value). If both spouses are filing bankruptcy, the home equity exemption described above would then be deducted for each spouse (i.e. up to $30,000). If only one spouse is filing, the rule of thumb would be to take the remaining balance of equity (if there is any), and divide it by two. The debtor spouse’s exemption would then be deducted. If you come up with zero or a negative number, it is highly unlikely that the trustee would seek to sell your home in a chapter 7 bankruptcy.
For further questions please list your information below and a representative from our office will confidentially contact you and discuss your current situation.