If you are feeling overwhelmed by your inability to pay your debts or catch up on bills, a possible solution is to file for bankruptcy. In a Chapter 7 bankruptcy, also called liquidation or straight bankruptcy, the main goal is to give the debtor a fresh start. This is achieved by filing a petition to get rid of the debtor’s debt. The debt is wiped out by a court order called a Discharge. The Discharge gets rid of most if not all of your debt, by preventing the creditor from collecting against you.
How does Chapter 7 Bankruptcy work? Imagine a file with an account of everything you own: all your assets/property (including personal property) and all your debt/liabilities. This is called your estate. Once a bankruptcy petition is filed a trustee, is assigned to your case. The trustee has the job of paying the creditors whatever they can from your assets, and informing them when there is no money to pay the debt owed.
What can you keep from your estate? Currently, the court allows you to keep your homestead property, and the equivalent of $2,000.00 worth of personal property (the equivalent of $1,000.00 value to put towards your car and $1,000.00 value to put towards your other personal property). If you are giving up your homestead property (giving it back to the bank), then you are allowed an additional $4,000.00 value to put towards your personal property in the file/estate. So if you are not keeping your house, you have $6,000.00 in total to put towards your personal property.
Example: Let us say that you have a car that is worth $10,000.00 and you still owe $8,000.00 on your car loan, the value/equity of the car in the estate is $2,000.00. You can put the court’s car allowance, $1,000.00, towards the car and take another $1000.00 from the homestead allowance of $4,000.00 (that you get for the home that you are not keeping). That leaves $4,000.00 to put towards the remaining personal property that is still in the estate (the court allowance of $1,000.00 for personal property and the remaining $3,000.00 from your homestead allowance.)
What happens if your remaining property is worth more than $4,000.00? If your remaining property is worth more than $4,000.00 you may have to buy back the remaining equity or worth of that property which is over the remaining 4,000.00 allowance from the estate ($3,000.00 remaining from the surrender of homestead and $1,000.00 that you are allowed for personal property).
Let us say you have no car. That $1,000.00 allowance can be put towards your personal property (jewelry, furniture, etc.)
Let us say you have a second car that has a value of $5,000.00. You can put whatever remains after you have “bought back” the value of your other personal possessions (furniture, clothing, jewelry, etc.). Whatever is over the court allowance can be bought from the estate by you or it will be sold to pay your creditors for part or all of your debts.
For this reason it is always advised that you discuss your situation with counsel so that you can begin pre-bankruptcy planning or active planning to reduce the amount of equity that you may have to buy-back.
What is an example of pre-bankruptcy planning? If your child’s car is titled in your name because he/she could not get a loan at the time of purchase (because of age, no credit, etc.), that car is listed as your personal property and could affect your bankruptcy status. If that child is now working or has credit, you would be advised to put that car in your child’s name and keep all the evidence to show that your child is and has always been the true owner of the car, the one who was paying the car loan, driving the car, etc
While filing for bankruptcy is not always the best solution for an inability to pay debt or catch up on outstanding debt, it is important to know if it is the right solution for you. At the very least, a consultation should inform you of what you can and cannot do to better your outcome if the need to file a Chapter 7 bankruptcy should arise.
Next week we will share some examples of debts that can be discharged, and those that cannot be discharged.
• Call us at (407) 647-7887 to schedule a free consultation to find out if this is the right solution for you.
• Be prepared to discuss your situation. Compile a list of all your debt (credit cards, medical bills etc.) and all of your assets and bring that list to the consultation.
• At the end of the consultation, among other things, you should have a clear picture of whether bankruptcy is the best solution for you, which pre-petition debts can be discharged, and how filing would affect you in the future. If you do decide that it is the right option for you, you will understand how to manage your assets and debts in preparation for filing.