|
What
Is Bankruptcy?
Bankruptcy is a right guaranteed by the United
States Constitution as well as Federal and State statutes.
Bankruptcy is designed to allow people to gain
a fresh financial start by eliminating or reorganizing
debt. Your creditors MUST stop all collection activities
immediately after bankruptcy is filed.
There are two types of bankruptcy that apply to
most situations. The most common type of bankruptcy
is Chapter 7 Bankruptcy. Under Chapter 7 a
person is allowed to keep certain exempt assets, the
non-exempt assets may then be sold to pay creditors.
The result of a successful bankruptcy proceeding is a
"discharge," which releases the debtor from payment
of affected debts.
The second most common type of bankruptcy is
Chapter 13. Chapter 13 is for individuals with regular income.
Under Chapter 13 the debtor creates a repayment plan
and then pays the specified amount of money each month for a period
of 3 to 5 years. Chapter 13 is often the most effective in dealing
with secured creditors, such as mortgage companies
and financing companies, who might otherwise repossess a home or
car. Chapter 13 is powerful because it can extend
the time to repay debts and reduce the amount of
debt to be paid (sometimes even eliminating 2nd and
3rd mortgages). Chapter 13 can also suspend collections
against friends or family who cosigned on loans.
Should I File Bankruptcy?
Some people are considered "judgment proof" and do not need the protection of bankruptcy.
These are people who can not have anything taken from them even if their creditors sue them and win. These
are individuls who do not have non-exempt assets and are immune to garnishment because they do not make much more than
minimum wage or receive their income from protected sources like social security or disability - and their situation is not
likely to change. The rest of us need to be concerned about our credit and avoiding judgments and collections - this is the group that can benefit from bankruptcy.
If you only have a few debts you should first try
to contact your creditors to see if they are willing to work out a payment
plan. Often, with the threat of bankruptcy, they will be willing to
negotiate to reduce the debt, reduce the interest rate,
or reduce your monthly payments. The problem is that they can not be forced to
work with you and some creditors will not negotiate.
Please be cautious when working with "not for
profit" credit counselors. Remember, you have to
pay for their salaries and advertising expenses. Before
you give them any money learn exactly what
they will do for you and when. Many of my clients
have spent hundreds or even thousands of dollars with
these companies and have still ultimately had to file
for bankruptcy. Often the companies only paid
"administrative fees" and never got around to even
notifying the creditors!
If you do not receive the protection of bankruptcy
there is little to stop your creditors from their tried
and true collection techniques, including: foreclosure,
lawsuits, garnishing your wages and
maybe even ordering a sheriff to enter your home
and sell your non-exempt personal belongings.
Your creditors have powerful laws in place to help
them collect, bankruptcy is a powerful law in your
corner to protect you and level the playing field.
Who Can File For Bankruptcy?
In general, any person or business can file for bankruptcy under Chapter 7. There is no minimum amount of debt required;
however, a person who files usually owes considerably more than he or she can repay. Although
it often makes sense for a husband and wife to file jointly, one may file without the other.
Only individuals can file under Chapter 13. Businesses must file under Chapter 11 to obtain a reorganization, which is a much more expensive and complicated process. Individuals may not qualify for Chapter 13 if they have more than $1,010,650 in secured or $336,900 in unsecured debts.
Can I File Bankruptcy Again?
If you previously filed a Chapter 7 (and received a discharge) you must wait 8
years before you may file another Chapter 7 and 4 years to receive a discharge under Chapter 13.
If you previously filed a Chapter 13 (and received a discharge) you must wait 6 years before filing a Chapter 7, but only 2 years before receiving protection under Chapter 13.
What Can I Keep If I File Bankruptcy?
The first question to ask
is, which state′s exemptions apply? If a person
has moved within the past two years then the exemptions
of another state may apply. (That can be both good and
bad depending on the other state). If you have moved
from out of state make sure that your bankruptcy attorney
checks to see whether those exemptions apply. If your
attorney doesn′t you may end up wasting time, taking
unnecessary steps or even losing thousands in assets!
Certain property is exempt in Bankruptcy proceedings and can′t be taken.
Utah offers an unlimited exemption for all clothing (excluding furs and jewelry), one refrigerator, freezer, washer,
dryer, microwave, and a sewing machine. Cars are protected up to $2,500 in equity (2 cars or equity up to $5,000 if married filing jointly), $20,000 in home equity for a primary residence ($40,000 if co-owned), and $3,500 in business assets. Other exempt assets include couches and related furnishings in the amount of $500, a dining room table
and chairs worth up to $500, and a $500 exemption for heirlooms or items of sentimental value (all of which may be doubled if married filing jointly). Also exempt are disability (both public and private), public benefits, child support, and most retirement accounts (except contributions made during the previous year). A person is also usually able to keep property or income earned after filing bankruptcy, with some exceptions.
You can keep your home or car even if they are worth more than the exemption amounts - as long as there is not more equity than permitted, and you are willing to continue to make the monthly payments (although it is sometimes possible to lower the amount that must be repaid to keep the property through redemption or cram-down).
Exemption planning is an important part of an
effective bankruptcy. Although emergency bankruptcy filings are sometimes necessary, it is often to
your advantage to plan several weeks in advance to get
the most out of bankruptcy. Effective planning can save you thousands!
Which Debts Will Not Be Discharged After Filing Bankruptcy?
Although most debts from credit cards, medical
bills, and bills for other services will be discharged in bankruptcy,
some debts will not. Debts that are secured by items
of value will only be discharged if the debtor returns
the property (though they may be redeemed or crammed-down). A debtor will also have to repay most
taxes, student loans, alimony and child support, government fines, and certain other debts. A discharge
may also be denied if an individual acts fraudulently in a bankruptcy case, such as by concealing assets.
What
Will Happen To My Home If I File Bankruptcy?
Will I lose my home if I file for bankruptcy?
You will probably not lose your home because
of bankruptcy. The most common way that a person loses
their home after bankruptcy is because they cannot afford
to make the monthly mortgage payments even after eliminating
their other debts. The other way that a person could
possibly lose their home is by filing a Chapter 7 bankruptcy
while having too much home equity. In Utah a person
is entitled to keep $20,000 in equity ($40,000 if owned
in joint tenancy). This can be avoided by proper exemption
planning or by filing under Chapter 13. Losing your
home should never be a surprise, talk with a knowledgeable
bankruptcy attorney if you think either of these
situations may apply to you.
How
can bankruptcy help me keep my home?
First, filing bankruptcy imposes an "automatic stay,"
which causes all collection activities, including foreclosures,
to stop immediately. Second, bankruptcy gives you some
time to get funds to catch up your payments. Third,
bankruptcy gives you the ability to force your mortgage
company to receive the past due payments slowly over
a period of up to 5 years (by filing under Chapter 13).
I
have talked with many people who have been strung along
for months by lenders promising to adjust their mortgage,
only to have the adjustment denied after months of promises.
Even worse, I have seen where the mortgage company actually
completed foreclosure of a home while someone from the
same company continued to tell the owner that the adjustment
was almost complete. Chapter 13 is an excellent tool
to prevent foreclosure and get your mortgage back on
track.
Can
bankruptcy lower my monthly mortgage payments?
Under the current bankruptcy laws you can only force
your bank to lower your monthly mortgage payments under
limited circumstances. These situations call for Mortgage
Stripping (also called Lien Stripping).
If
you have two mortgages on your home and the home is
worth less than the first mortgage then the second mortgages
can be stripped off by filing a Chapter 13 Bankruptcy.
For example, lets say that our home is worth $200,000
and has a first mortgage for $210,000 and a second mortgage
of $70,000. Because the home is worth less than the
first mortgage ($200,000 < $210,000) we can strip
off the second mortgage. That means that you only have
to pay the first mortgage to keep the home. The same
principles apply when there are more than two mortgages
or liens on a home. This housing market provides many
opportunities to strip loans from depreciated homes.
What if
I have a lot of equity in my home?
$20,000
in home equity ($40,000 if owned jointly) is exempt
and protected. If you only have the exempt amount of
home equity then you will not lose your home as long
as you keep your mortgage current. Under Chapter 13
you can keep your home even if you do have more than
the exempt amount of equity in your home. However, under
Chapter 7 it is possible that the trustee will request
to sell your home if they determine that there is more
than the exempt amount of equity. He/she would be required
to give you a check for $20,000 to $40,000 and would
then give the rest to your creditors. If you have a
substantial amount of equity in your home then you should
discuss asset protection techniques with your attorney
and should also consider a Chapter 13.
What Will Happen To My Car?
Will I lose my car if I file for bankruptcy?
Your car will not be taken by the bankruptcy trustee
unless you have more than the exempt amount of equity
in your car. Many people owe more than what the car
is worth and in those situations they can almost always
keep their cars. Under Chapter 13 you can keep your
can even if you do have more than the exempt amount
of equity. If a husband and wife file jointly then they
each may exempt $2,500 in a vehicle or they may combine
their exemptions to $5,000 in one car. Sometimes the
best option is to return your vehicle, which can be
done without penalty. Contact a knowledgeable bankruptcy
attorney for more information and other options to help
you keep your car or to help you carefully plan out
how to purchase a replacement before filing for bankruptcy.
How
can bankruptcy help me keep my cars?
First,
the bankruptcy automatic stay prevents your car from
being repossessed. Second, bankruptcy gives you some
time to catch up your payments if you are behind. Third,
in a Chapter 13 you can make up the past due payments
over a period of up to 5 years. Fourth, you may be able
to pay back only what the vehicle is worth rather than
what is owed, unless the loan is less than 2 ½
years old and was used to help you purchase the car.
What Will Happen To My TV, ATV And Other Toys?
Televisions, stereo equipment, ATVs, sporting equipment,
etc. are typically not exempt assets and are not protected
in bankruptcy. That means that in a Chapter 7 bankruptcy
the trustee has the ability to collect these assets
and sell them in order to repay your creditors. However,
many people who file for bankruptcy do not lose their
televisions and other property, even if it is not "exempt."
Often
TVs and ATVs are secured with loans or credit cards
and do not have equity. You can usually keep these items
in a Chapter 7 if you continue to make the payments to the person owed.
Sometimes you can even reduce your payments to the actual
value of the goods, which is usually less than what
is owed. Even if your TV and other nonexempt assets
are fully paid for, the trustee will not take them if
he/she determines that the costs of examining, collecting,
selling, and distributing the proceeds exceeds the equity
in the items. But a fully paid ATV or 60" LCD TV
is probably too tempting for a trustee to pass up.
DO
NOT transfer these assets because you think that you
may lose them in bankruptcy!
It
is very important to talk to a knowledgeable bankruptcy
attorney about exemption planning to make sure you
maximize your assets and avoid Fraudulent Transfers
and Preferences. If the situation is handled correctly
you may save yourself thousands.
What
Will Happen To Cosigners If I File Bankruptcy?
What
happens if I cosigned on a loan for someone else?
Your bankruptcy filing will
not have any effect on the other person. They can still
keep their car or home even if you signed as a cosigner
- as long as they make the required payments.
What
happens to the cosigner of one of my debts?
Unfortunately, bankruptcy does not relieve a cosigner
of their duty to repay the debt, but there are still
a few ways to protect your cosigner. In a Chapter 7
bankruptcy the only way to protect the cosigner is to
repay the debt after the bankruptcy. In Chapter 13 bankruptcy the cosigner will not have to make payments or be negatively effected during your bankruptcy if you reaffirm the debt, timely make the required plan payments, and repay the debt in the bankruptcy plan.
How Will Bankruptcy Effect My Credit?
Bankruptcy may appear on a person's credit report for up to ten years. It may hamper access to
credit for a while, but often a person contemplating bankruptcy may already have a poor
credit rating or difficulty obtaining credit. In many cases, bankruptcy may actually improve the ability to obtain credit, since most debts will be discharged and creditors are aware that a person who recently filed bankruptcy can't seek bankruptcy protection again for several years.
|
