| UNDERSTANDING BANKRUPTCY
Despite the commercials promising magical cures to debt relief, the only real legal option to a fresh start is Bankruptcy. For consumers, Bankruptcy generally comes in two varieties--Chapter 7, and Chapter 13.
Bankruptcy in a Chapter 7 is the legal discharge (wiping out or eliminating) of your debts, or in a Chapter 13, the re-organization of your debts. In your bankruptcy, a Bankruptcy Trustee will look at your financial picture, and the items that you may own, and assess whether there is anything of value to distribute to creditors. Once this is accomplished, and there is nothing more to disburse, the remainder of your debts will be discharged.
The Bankruptcy trustee will not take all of your assets or your property, only that property which lies outside of certain exemptions. In other words, the law allows you to keep property up to a certain dollar figure. Any property below (less than) that dollar figure is exempt, and moneys that are above that dollar figure are not exempt and may be taken by the trustee. If all of your property added together falls under the exemption, then you will lose nothing, and your debts will be discharged.
Obviously, this is a simple explanation. So let’s back up a minute…
WHAT GETS DISCHARGED IN BANKRUPCY?
Generally, any debts other than student loans, criminal restitution payments, domestic support, and certain taxes, will be discharged. This means that things like credit card debts, foreclosure deficiency judgments, court judgments of almost any kind, medical debts, personal guaranties, and almost every kind of loan where you may owe money, will be discharged.
Even potential or pending debts get discharged--for example, even though you may not have been foreclosed on, a bankruptcy will prevent a money judgment against you later if you are foreclosed on in the future. Or, if you are currently being sued by a creditor, but no judgment has been entered yet. Or, if you are behind in your rent, but your Landlord has not sued you yet.
You can opt to keep, or reaffirm certain debts. For example, many people opt to reaffirm their car loan, as they wish to keep their car and may be current on payments and able to make payments. Many people reaffirm their home loan, as they wish to keep their house. Many will reaffirm their residential lease, if they don’t want to be forced to move.
WILL THE COURT TAKE ALL MY PROPERTY?
No. The Court will only take property you own with a fair market value of over the exemption limit.
For example, let’s assume that the exemption limit is $1,000. If you own $900 worth of items, nothing that you own will be taken or lost.
(1) It is the value of your property that counts after liens, so if, for example, your car is worth $4,000 but you still owe the bank $4,001 on it, the car has $0 value, and does not count against the $1,000.
(2) The value of your property is generally what you could get for your items if sold on the open market today. So if you paid $10,000 for your living room furniture, but it would only sell for $500 on Craigs List or Ebay today, it’s only worth $500. For most people, their personal items are worth much less on the open market than they paid for those items originally.
The Court can take property that is yours but you don’t have yet, such as anticipated inheritances, tax refunds, security deposits you may expect to receive in the near future, or upcoming personal injury settlements. It is important to see an attorney to discuss timing your bankruptcy properly to make sure you get the maximum use of any pending or upcoming assets.
WILL THE COURT TAKE MY INCOME?
No, although any money you may have sitting in the bank does count against your exemption.
But the Bankruptcy Court does not take your regular income nor garnish your wages. Although your income must be below a certain level for you to discharge your debts, your regular recurring income is safe from the Bankruptcy court, before and after the Bankruptcy. At worse, a high income may prevent you from filing a Chapter 7 Bankruptcy, but your regular income will never be taken or garnished by the Bankruptcy court.
WHAT HAPPENS AFTER THE BANKRUPTCY?
After the Bankruptcy in a Chapter 7 case, you are finished. No creditors who were included in the Bankruptcy can bother you, harass you, or make any attempt to collect from you again. Any debt that you previously owed, or may have potentially owed is completely wiped out. You are free to earn whatever income that you can.
WILL BANKRUPTCY RUIN MY CREDIT?
There’s a few things to consider about Bankruptcy and credit:
1) Although Bankruptcy is a negative mark on your credit, many people find that because their debts have been wiped out, they are in a better credit position than they were before the bankruptcy. Since you can only declare Bankruptcy every 7 years, many creditors may feel safer extending you credit after the Bankruptcy. You may find credit extended to you at higher interest rates, as opposed to being completely denied credit before the Bankruptcy.
2) It would take you 20 years to pay off your debts (assuming you can even pay them off), That’s 20 years of bad credit, compared with 6-7 with the Bankruptcy.
The bottom line is that the Bankruptcy is the first step to starting fresh and renewing your credit.
WILL BANKRUPTCY SAVE MY HOME?
Generally, no, bankruptcy will not save your home. It will, however, provide you some additional time in your home, to assist you in modifying your loan, or just in the event you need extra time in your home. Please review our foreclosure defense services, to get a full idea as to how we can assist you if you are facing foreclosure or seeking to modify your loan.
CHAPTER 13 BANKRUPTCY
Chapter 13 bankruptcy does not eliminate your debts, but rather, entails working out a plan for you to repay your debts, usually in 3 years, minus some interest and penalties that may have accrued on your debts. The benefits of a Chapter 13 are that:
1. There is no danger of losing personal property by the trustee
2. In certain cases, second mortgages can be wiped away in a Chapter 13 Bankruptcy
3. If your income is too high to allow you to qualify for a Chapter 7, Chapter 13 is the next best alternative for you.