- What Is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay their bills can get a fresh start and eliminate most of their past-due debts. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, including phone calls, foreclosures, repossessions, letters, and any other way to contact you.
- What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts, which is called a “discharge”. It is designed to give you a fresh start.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment, but motions may be filed with the court to possibly accomplish that)
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt. • Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud, sold defective merchandise or otherwise trying to collect more than what is actually due.
What Bankruptcy Cannot Do
Bankruptcy cannot, however, cure every financial problem. In bankruptcy, it is usually not possible to:
- Eliminate certain rights of “secured” creditors. A “secured” creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the Chapter 13 bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money (deficiency balance) if your property is repossessed. In most cases, you cannot keep the collateral unless you continue to pay the debt.
- Discharge certain debts, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and certain taxes.
- Protect cosigners. When a relative or friend has co-signed a loan, and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
- Discharge debts that arise after bankruptcy has been filed.
- What Different Types of Bankruptcy Should I Consider?
Chapter 7 “Straight Bankruptcy”
Chapter 7 bankruptcy is often referred to as a “complete liquidation,” so, not surprisingly, many people erroneously believe that when they file for relief under Chapter 7 of the bankruptcy code they will lose all of their possessions. When you file bankruptcy, something called the bankruptcy “estate” is created. This estate encompasses all rights, title and property you are entitled to as of the petition date. In simpler terms, this means that whatever property you own on the date you file bankruptcy now belongs to the Chapter 7 Trustee. The trustee is the government appointed individual tasked with administering your case. Administering your case refers to liquidating, or selling, your non-exempt assets to distribute to your unsecured creditors. The trustee takes a percentage of the sales proceeds as payment, so the trustee has an incentive to sell whatever property is available. But remember that only non-exempt assets are capable of being sold by the trustee. The term “non-exempt” refers to the set of Georgia laws that protect certain property from being seized by the trustee in a bankruptcy. For instance, under Georgia law, debtors can now exempt up to $21,500 in their residence ($43,000 if married) from the trustee. This means that if you and your significant other owe $200,000 on a house that the trustee can sell for $250,000, $43,000 of those sales proceeds will be distributed to you, $200,000 will be turned over to the mortgage holder, and the trustee takes the remainder to distribute to your unsecured creditors.
Perhaps you don’t want the $43,000, and you would rather the trustee just leave it alone and let you stay in your home. In the example given above, real estate broker’s and attorneys’ fees would all but eliminate the $7,000 of perceived equity available to the trustee. In such a case, the trustee would most likely “abandon” the property back to the debtor, meaning that the trustee has no interest in selling it. Debtors can also exempt $5,000 in household goods and $3,500 in a car. You may think that you have more than $5,000 in household goods because you paid so much more for all your furniture and electronics, but used furniture and electronics have negligible value, so there is really nothing to worry about for the average debtor. The trustee is typically only interested in real property with equity, cars, cash, stocks, and other fairly liquid assets. Most people filing for Chapter 7 relief have a house and car that are both underwater and no valuable possessions, a case referred to as a “no-asset” case by the trustee that will be pushed through without issue.
Chapter 13 “Payment Plan”
Chapter 13 is often referred to as the “wage-earners” repayment plan. Chapter 13 enables you to repay your debts (although not necessarily in full) over a 3 to 5 year period, depending on the amount of money you make. A Chapter 13 bankruptcy is most beneficial in the following situations:
- You want to keep your house and car and have the ability to catch up your delinquent payments through the Chapter 13 plan.
- You want to retain assets that would normally be taken by the Chapter 7 Trustee in a Chapter 7 case.
- You want to repay certain debts that cannot be discharged in a Chapter 7 bankruptcy case, such as recent tax debts. Importantly, Chapter 13, unlike Chapter 7, allows debtors to discharge property settlements owed to ex-spouses.
Chapter 11 is a totally different animal than consumer bankruptcy cases. Chapter 11 is typically used to reorganize a business, which may be, among other things, a corporation, sole proprietorship, limited liability company, or partnership. Chapter 11 can also be used to reorganize the debts of wealthy or high-income individuals. This is something that most bankruptcy practitioners are not familiar with, and it definitely takes someone with prior experience in this area to confirm a plan of reorganization on behalf of an individual. While a Chapter 11 is more expensive, it is also more flexible in that the debtor is not subject to the oversight of a Chapter 13 trustee. For more information on individual Chapter 11 cases, please see my blog post at https://wiggamgeer.com/chapter-11-bankruptcy/.
- What Property Can I Keep?
In a Chapter 7 case, you keep everything that the law says is “exempt” from the claims of creditors which includes:
If you are filing jointly with your spouse, all the below exemptions are doubled.
$21,500 of value in real or personal property, including a co-op, that you or your dependent uses as a residence, including a co-op. Up to $43,000 of value if married and the property is owned by only one spouse. Up to $5,000 of unused homestead exemption may be used to protect any other property. 44-13-100(a)(1) & (a)(6), 44-13-1
$5,000 of value in motor vehicles – 44-13-100(a)(3).
Other Personal Property
$500 of value in jewelry – 44-13-100(a)(5)
$5,000 of value in animals, crops, clothing, appliances, books, furnishings, household goods, and musical instruments (up to $300 per individual item) – 44-33-100(a)(4)
Burial plot (if you don’t use the homestead exemption) – 44-13-100(a)(1)
$7,500 of compensation for future earnings needed for support – 44-13-100(a)(11)(E)
$10,000 of personal injury recoveries – 44-13-100(a)(11)(D)
Tools of the Trade
$1,500 of implements, books, & tools of trade – 44-13-100(a)(7)
$600 of any property – 44-13-100(a)(6)
Up to $10,000 of unused portion of homestead exemption – 44-13-100(a)(6), 44-13-1.
Pensions and Retirement Accounts
Individual Retirement Accounts – Up to $1 Million
401k and other ERISA Accounts – Unlimited
In determining value, it’s not what you paid for your property but what a trustee could sell it for.
- What Will Happen to My Home and Car if I File Bankruptcy?
Fortunately, most people never lose their home or cars during bankruptcy because they have no equity to make it worth a trustee’s time to sell. You see, the trustee can only sell your property if it has value above any exemption you take (as seen above) and any liens a creditor has on it.
If you still owe your car creditor money, they will most likely require you to “reaffirm” the debt to them to allow you to keep the vehicle. This means you must keep making your payments if you want to keep the car, but it also means you are agreeing to exclude this debt from your bankruptcy discharge. This is a major decision because if you default on your car note after you receive your discharge, the car creditor can still sue you for the deficiency.
I advise most of my clients NOT to reaffirm their mortgage debts because I have never seen a mortgage holder foreclose on someone’s home if they keep making the payments. If you don’t sign a reaffirmation agreement related to your home mortgage, you could potentially walk away from it at any time after you file bankruptcy, and the creditor could not sue you for any potential deficiency.
- What if I Get an Inheritance or Win the Lottery After Filing?
If you receive an inheritance, a property settlement, life insurance benefits or other monies within 180 days after filing bankruptcy, that money or property may have to be paid to your creditors unless it is exempt.
- Will Bankruptcy Wipe Out All My Debts?
With a few exceptions, yes, bankruptcy will wipe out all your personal liability. Here are a few of the exceptions:
- Certain tax debts, such as newer income taxes and “trust” taxes.
- Student loans are not impossible to discharge, but they may as well be under the current state of the law. Federal loans are almost never dischargeable, but you may have an easier time showing undue hardship with private loans since private lenders do not have as many programs to help debtors through rough patches.
- Debts incurred through fraud.
- Debts not listed on your bankruptcy petition (though if you unknowingly leave off a creditor in a no-asset Chapter 7, the debt will still be wiped out).
- Debts for willful and malicious injury to person or property.
- Child support and certain other domestic support obligations, depending on the chapter you file.
- Will I Have to Go to Court?
In either a Chapter 7 or 13, most people will only have to go to court once to their “341” meeting, sometimes referred to as the “meeting of creditors,” even though creditors rarely show up. All debtors must be questioned under oath pursuant to section 341 of the bankruptcy code – hence the name. This is really just a chance for the trustee to ask you questions about your bankruptcy paperwork and to question you about any assets you may have that he could sell. Even in Chapter 13’s, most people don’t have to attend their confirmation hearing of their plan because the debtor’s attorney and the Chapter 13 trustee work out all the details without the need for the debtor to appear.
- How Will Bankruptcy Affect My Credit?
Probably the most asked question I get is how bankruptcy will affect credit scores. Don’t let anyone fool you – bankruptcy will knock a high credit rating down a couple hundred points, but if you are in my office to file bankruptcy, your credit is either already rock-bottom or is about to be because a judgment or foreclosure against you is imminent. Filing bankruptcy can actually help boost you credit rating because it stops the downward trend from missed and late payments. You are essentially taking 2 steps backward to go 5 steps forward. I’ve had clients’ credit scores back into the 700’s within 2 years of filing. Contrary to popular belief, bankruptcy does not ruin your credit for 10 years. It’s listed on your credit report for that long, but it only affects your credit score for a few years. You can actually qualify for a mortgage within 2 years of receiving your discharge.
- What Must I Do Before Bankruptcy and How Much Will It Cost?
Everyone who files for bankruptcy protection must take a “Pre-filing Credit Counseling Course” within 180 days of filing. Your attorney will fill you in, but it usually takes anywhere from 1 to 2 hours to complete and costs $10-$50, depending on what service provider you use. Most providers allow you to take the course completely online.
Chapter 7 bankruptcy can cost anywhere from $1,000 to $5,000, depending on the complexity of your case. If you make less than the average income, have only one source of income, and no creditors threatening you with fraud, it could be on the lower end of the pricing spectrum. However, if you make good money, have tax debts, and need your attorney to spend many hours researching complex issues, it will be on the higher end.
Chapter 13 usually costs between $3,000 and $4,500, though a big portion of your fees are paid through your payment plan. In most cases, your attorney’s fees won’t even affect how much you pay back, so any money that would have gone to your unsecured creditors would go to your attorney instead for representing you for 3 to 5 years.
Chapter 11 is much more expensive. A typical retainer is $15,000, plus the $1,717 filing fee. Some simpler cases can be done for a lower retainer, but you should know that all Chapter 11 attorneys bill against that retainer at their hourly rate because it is required of them by the code.
Do I Qualify for a Chapter 7?
Because it’s the fastest and best way to get rid of your unsecured debts and receive a fresh start, most people want to know if they qualify to file a Chapter 7. In 2005, Congress created something called the “means test” providing that debtors who make more than the median household income for a family of their size are presumed to be abusing the bankruptcy code and should instead file a Chapter 13. Now before you think you make too much to file a Chapter 7, there are many deductions you can take to overcome this presumption, and I’ve gotten debtors making more than $100,000 a year through a Chapter 7.