WHAT ARE SOME COMMONLY ASKED QUESTIONS ABOUT BANKRUPTCY?
By Mark E. Henze
1. Types of Bankruptcy:
Chapter 7. A Chapter 7 case is often referred to as a "liquidation" or "straight" bankruptcy. Although it is the most common form of consumer bankruptcy, it is limited to persons who have disposable income (the difference between regular income and acceptable monthly expenses) below a certain level. In a chapter 7, the person (“debtor”) is forgiven from paying certain debts in an attempt to provide a "fresh start" on life. The debtor is permitted to keep a certain amount of belongings (“exempt property”) while a Trustee collects all of the non-exempt assets and sells them in order to pay as much to the creditor as possible. Creditors get paid in order of their priority, with debts such as child support, taxes, and trustee expenses being paid first. If the debtor is behind in making car or house payments, a secured creditor is normally permitted to foreclose or repossess that collateral. In most cases, debtor does not own sufficient non-exempt assets of value to make it worth the Trustee’s efforts to collect and sell them. In this case, the proceedings are closed as a "no asset" case. Even should there be non-exempt assets worth collecting by the Trustee, the debtor is often given the opportunity to keep these assets by making a payment equaling the value of those assets to the trustee over several months.
Chapter 13. A Chapter 13 case is often referred to as a "debt adjustment" plan. Here, an individual with regular income is permitted to make a Chapter 13 plan whereby he/she will pay only that amount that is left over after making his/her regular monthly expenses to the court. Whatever funds are paid into the 3 or 5 year plan are the paid to the creditors based upon their priority (with child support, taxes, attorney fees for the case, and trustee expenses being paid). Whatever is left over can be used to catch up on mortgage arrears (allowing the debtor to keep a residence provided the regular monthly payments can be recommenced), and then finally to be shared by the unsecured creditors. The payments are paid monthly to a Chapter 13 Trustee, who disburses the funds to creditors. The debtor's budget is reviewed to ensure that debtor's income is sufficient to pay necessary living expenses and the plan payment. Chapter 13 plans can be very beneficial in cases that are not helped by Chapter 7, including: a) those who owe taxes or child support; b) those who are behind on auto or house payments, but wish to catch up; c) people who are ineligible to file Chapter 7; and d) those who have property that would be taken by the Trustee in a Chapter 7 case.
Chapter 11. Chapter 11 cases are “reorganization” bankruptcies (conceptually similar to Chapter 13) that are normally reserved for large businesses. However, this chapter is also available to individuals with large amounts of debt who are ineligible to file a Chapter 13 or who’s personal and business debts are intertwined and difficult to separate. Chapter 11 is a more expensive and highly complicated form of bankruptcy that has its role in certain specialized circumstances, but is seldom used by individuals.
2. Types of Debts that Cannot Be Discharged in a Bankruptcy:
There are some types of debts that bankruptcy does not discharge. This differs slightly between Chapter 7 and Chapter 13 cases. For example, a Chapter 13 case will discharge only those debts that are included within the terms of the plan. Also, remember that getting debts discharged is not the only reason why bankruptcy cases are filed. In many cases, the plan in a Chapter 13 or Chapter 11 case will simply buy time while the debt (especially back payments in child support, taxes, mortgage or auto arrears) are paid in full.
- Debts or creditors not listed on the filed Schedules.
- Student loans, unless special circumstances have made payment of the debt an “undue hardship” – meaning that it has become “impossible” to pay the debt off due to medical or other catastrophic circumstances;
- Recent federal, state, and local taxes;
- Child support and spousal maintenance (alimony);
- Government or criminally imposed restitution, fines, or penalties;
- Court fees;
- Debts resulting from driving while intoxicated; and
- Debts previously determined to be non-dischargeable in a previous bankruptcy case.
- Debts that can be “ruled by the court” to be non-dischargeable if the creditor files a special bankruptcy case and proves that the debt falls into one of these categories:
- Debts incurred through the intentional fraud or misrepresentation of the debtor;
- Purchases of luxury goods, services or cash advances made within sixty days prior to the date of filing;
- Debts from willful and malicious acts by the debtor that cause harm to another;
- Debts from embezzlement, larceny, or breach of fiduciary duty; and
- Debts from a divorce settlement agreement or court decree, if the debtor is held to have the ability to pay and the detriment to the recipient from not receiving these funds would be greater than the benefit gained by the debtor in discharging the debt.
3. Can I Keep My House and Car?
A typical concern in a consumer bankruptcy case is the possibility of losing the family home and the automobile used for getting to and from work. In both cases, there are two different concepts that must be considered.
The first is whether the car or house is secured by a loan. If you are up-to-date on your loan payments, this is no problem. Simply continue making your payments. If you are behind, a Chapter 7 case will not be of much help. You will need to catch up on your payments in a manner acceptable to your lender or they will be able to commence or continue repossession or foreclosureefforts. However, they will be temporarily halted (“stayed”) from continuing until they either get permission from the Court to continue (“relief from stay”) or until your case is completed. This may give you some breathing room to catch up. Be aware that failing to keep the car or house insured is automatically grounds for the court to allow the creditor to continue … and may be against the law in the case of a motor vehicle.
A Chapter 13 case, however, may at times be helpful. Even if you are behind on your payments, your payment plan may provide that you will recommence making the regular payment on the loan and that the arrears will be paid from a distribution of accumulated plan payments. This essentially provides you with a period of time to make partial payments of the amount you are behind. Provided that you actually make all of the promised payments, the lender will not be able to continue their foreclosure or repossession efforts. Note that the back payments may include interest and other agreed upon costs that were assessed by the creditor before your case was filed.
The second concept to be considered is the equity that you have in your car or residence. If (after accounting for the remaining balance on the loan) your car or house is worth more that the exemption amount you are entitled to, the Trustee may still take the property, sell it, pay you the exemption amount in cash, and then use the remaining sales proceeds to pay off your creditors. The current exemption in Colorado for a vehicle is $5,000 ($10,000 if you are disabled or over age 60) and the homestead exemption for your residence is $60,000 ($90,000 if you are disabled or over age 60).
If you are renting, be careful. If you are behind in your rent payments, you must catch up immediately or your landlord will automatically be granted relief from stay to commence or continue eviction procedures. You will then need to negotiate a settlement with your landlord, if possible, without any help from your bankruptcy case.
4. What Property Will I Have to Give Up and What Can I Keep?
The property you are permitted to keep is called “exempt property” while property that the Trustee may be permitted to take from you is called “non-exempt property.” Colorado provides a list of monetary values of property within certain categories may be “exempt.” The value is based upon the likely fair market value you could get from that asset if you sold it. Thus, while your 2005 Honda Accord might be valued at $13,000, that glass pitcher you received at your wedding might be priceless to you but would only bring $5.00 at a flea market. Since the exemption amount for a car is $5,000, you would likely be forced to give up the Honda. But, remember that the valuation applies only to what the property is currently worth after you pay off any liens or loans secured by that property. Therefore, the $13,000 Honda is worth only $3,000 to you if you still owe $10,000 on your car loan. Under these circumstances, provided that you continued to make your payments on the car loan, you would be permitted to keep the Honda. Exemption amounts change from time to time, so you should consult an attorney experienced in Bankruptcy law to ensure that you are claiming the proper exemptions. Exemption planning is a big part of planning your bankruptcy case.
Generally, you can expect that the following are NOT exempt and will be taken: expensive hobby tools or musical instruments; valuable collections; expensive artwork; cash (whether found in bank accounts, stocks, bonds, or other investments; money owed to you but not yet collected; recreational vehicles; vacation or investment property; inheritances already determined or determined within a year of filing; and other luxury property not necessary for providing for you and your family. Some major types of assets that ARE exempt include: pensions, certain insurance funds, and awards for personal injury.
5. How Will Bankruptcy Affect My Credit?
A consumer credit report may include Chapter 7 and Chapter 13 bankruptcy information for ten years from the time the case is filed although several agencies indicate that they remove this information sooner to prevent mistakes. Yet, non-bankruptcy credit information can be included for only seven years. However, what many do not know is that this date is calculated as seven years from the last activity on that account. Thus, each time you make a payment, the seven year period resets itself. Therefore, in many cases negative information will be removed quicker in the case of a bankruptcy filing.
Yes, a bankruptcy filing will affect your credit rating, but most people will already have a terrible credit report if they are contemplating a bankruptcy filing. Still, most people will find that their ability to secure post-bankruptcy credit will depend upon the normal factors … their income, their other debt load, and their post-bankruptcy record in paying their debts. It is generally recommended that you take your time and build your credit back slowly. New auto loans and house loans are generally available within a year or two after discharge, but the interest rate may be slightly higher than that offered to prime borrowers. You will soon realize that there is a financial market that specializes in offering credit to bankrupt debtors, however many of these involve high interest rates and unreasonable terms. Stay away from most of these lenders. Learn to carefully examine the terms of credit offerings and avoid credit when it is not helpful or warranted.