For many years, I have been assisting clients
in restructuring their debt, or discharging it,
through the filing of bankruptcy.
I 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.
If you need further information, please call 812.988.8788 or
E-mail Szakaly Law Office.
Q. What types of bankruptcies are there
and which one is right for me?
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 debtorgoals.
In both bankruptcy types, the debtor files
a bankruptcypetition 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 realproperty 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 ofitemized regular monthly living expenses.
About 30 to 45 days after the petition is filed in bankruptcycourt, the debtor meets with a trustee, who is an individualappointed by the federal government to oversee the debtor'sbankruptcy on behalf of creditors. He or she will review yourpetition with you and verify that all of the informationcontained therein is accurate. What happens beyond that pointdepends upon whether you filed for a Chapter 7 or a Chapter 13.
In a Chapter 7, the debtor is seeking to convince the trusteethat he or she does not have any disposable income to pay debts,nor does he or she possess assets of a significant value thatcould be sold to raise money to pay debts. Therefore, said debts,as of the date of the bankruptcy petition's filing, should bedischarged. If the trustee agrees with this position, the matteris marked as a "no asset" bankruptcy and, barring anyobjections to discharge of debt by a creditor, an order fordischarge is issued.
The other type of bankruptcy available to individuals, Chapter13, is usually filed for one of the following four reasons:
- The debtor is trying to save a home from foreclosure and needs time to pay back a mortgage arrearage;
- 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;
- 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 <
- 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 documentsthat set forth the debtor's strategy for payment to creditors. Aplan can be as long as 36 months (3 years) at the debtor'sdiscretion, 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 isenough regular income available to the debtor over and aboveregular monthly expenses to cover the payments proposed) and isproposed in good faith. In other words, a debtor cannot proposeto pay $200.00 of his or her $1,000.00 disposable monthly income,over 36 months. Both the trustee and the creditors would demandthe contribution of much more disposable income and, ifnecessary, over a longer period of time, to pay back debt.
If the plan as proposed isfeasible and made in good faith, the creditors have no choice butto accept it.
Finally, to qualify for a Chapter 13, the debtor must meet thefollowing criteria:
- Be an individual (as opposed to a partnership or corporation);
- Have a regular source of income; and
- 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, thedebtor 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 areavailable to be sold to pay creditors depends upon the value ofthe property, and whether or not the property is protected byexemptions. Since each state has its own set ofexemptions, in addition to the federal exemptions (and a debtormust choose whether to use the federal exemptions or thoseoffered by his or her state), only the federal exemptions will bediscussed here. However, they have the same basic purpose.
Under the federal exemptions, the following property can beexempted up to the value indicated (married couples filingjointly can each use the exemptions to their fullest, thusdoubling them where appropriate): the value above liens of realor 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; cashsurrender values on whole life or universal life insurancepolicies up to an aggregate value of $8,000.00. If the debtordoes not own the real or personal property used as his or herprimary residence (or does own it, but has no or very littleequity) up to one half of the unused exemption, or $7,500.00maximum, can be used to exempt other property at the debtor'sdiscretion.
Most people that go into a Chapter 7 bankruptcy are concernedwith 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 atrisk. From the appraised value of the home, you deduct the payoffamount for all mortgage liens and the cost of selling it (whichis presumed to be 10% of the home's value). If both spouses arefiling bankruptcy, the home equity exemption described abovewould then be deducted for each spouse (i.e. up to $30,000). Ifonly one spouse is filing, the rule of thumb would be to take theremaining balance of equity (if there is any), and divide it bytwo. The debtor spouse's exemption would then be deducted. If youcome up with zero or a negative number, it is highly unlikelythat the trustee would seek to sell your home in a chapter 7bankruptcy.
One should always enter into bankruptcy only after carefulthought and consideration.
It is a very big step that can effectyour credit for up to ten years. For more information on what you can dooutside of bankruptcy, contact the
National Foundation for Consumer Credit.
The information set forth above constitutes general information
pertaining to bankruptcy law and is not intended to replace the advice
of an attorney after a careful review of the individual facts of your case.