Bankruptcy is not a magic wand, but it can be a useful tool for most people who find themselves with more debt than they can afford.
The key is to understand how to wield that tool in each person’s individual situation to leverage the benefits of the bankruptcy code.
There is a saying that “an honest debtor deserves a fresh start.”
It means that honest people who find themselves with too much debt are entitled eliminate their liability on all or most of that debt. But, you cannot expect bankruptcy relief to be the answer for debt that was incurred by fraud or dishonesty, or if you try to hide assets.
Many people worry about losing their home or other assets. The good news is that most bankruptcy debtors do not lose any of their assets in a bankruptcy. That is because the state or federal exemptions available to the debtor protect equity (net value) in your home, cars, household goods, jewelry, clothing, retirement accounts, and other assets.
Most exemptions have dollar limits, such as $75,000 on your homestead currently in Colorado if you are under 60 years old and $105,000 if you are 60 or older or disabled. Up to two vehicles with combined equity of $7,500 if you are under 60 years old or $12,500 for 60 and over or disabled, can be protected in Colorado. Each state has a different set of exemptions, which might be higher or lower than Colorado. It is critically important to be truthful with your attorney about what assets you own and how much they are worth to evaluate exemptions.
The first step for any bankruptcy is to meet with an experienced bankruptcy attorney and hire someone you trust.
Your attorney will need your help providing the information for your bankruptcy petition. This includes listing your assets, your debts, your income, your expenses, and some financial history, including prior annual incomes, business connections, and previous financial transactions.
You must list all assets and all debts on your bankruptcy petition.
“Garbage in, garbage out” applies to bankruptcy petitions. If the information that you provide to your attorney is incomplete or you choose to not be totally honest, troubles could arise later that were preventable. Your attorney relies on having the truth, the whole truth, and nothing but the truth to achieve the result you expect and desire. Your petition must be as accurate and complete as possible.
I allow three hours to review the initial draft of a client’s petition, going line by line through each page. I do this myself with the client instead of passing it off to someone less experienced. I apply my 20 years of bankruptcy experience to identify any potential issues that need to be resolved before the petition is filed and make sure that the available exemptions protect as much of your assets as legally possible.
You don’t want your attorney to be one of your creditors.
Before your bankruptcy is filed your attorney must be paid in full.You also must complete a 1.5 hour credit counseling. Most clients do this online, which is the least expensive method. Credit counseling is also available by phone. Your attorney will recommend one or more companies that provide the course.
When your case is filed the bankruptcy court clerk assigns a case number, a judge and a bankruptcy trustee to your case. In most cases, you will never see the judge unless there is a problem with your case, but you will see the judge’s initials on the case number and signature on your Discharge.
The trustee will preside at a hearing about 5 weeks after your case is filed. Your creditors are notified of the hearing and can ask you questions if they appear at the hearing. Most creditors do not show up because it is not worth their time to be there. Be prepared for creditors who might appear, such as former significant others or irate creditors. Because the creditors are invited to this hearing it is often called a Creditors’ Meeting.
You must appear at this hearing and answer a series of questions from the trustee and creditors under oath. Each case takes about 7-10 minutes, but it can take longer if the trustee has lots of questions about your case or a creditor is there and asks questions. I spend time in the three hour meeting with my clients reviewing questions that could be asked during the hearing. Because of COVID-19 restrictions those hearings are being held by telephone for now instead of in a courtroom.
If you file under Chapter 7 of the Bankruptcy Code the Chapter 7 Trustee liquidates your non-exempt assets, if any, and the money collected becomes the bankruptcy estate. Chapter 13 and 11 cases will be discussed in separate articles. The trustee is paid out of the bankruptcy estate and the creditors who file a proof of claim receive a pro-rata share of the remaining balance. You need to know that most Chapter 7 cases are what we call “No-Asset” cases because the liquidation value of the non-exempt assets is too small to justify the trustee’s time to administer the assets and the debtor gets to keep all their stuff.
As an example, one of my clients had some assets that could not be protected under any of the exemptions. The assets could have been sold before filing bankruptcy and the proceeds used to pay living expenses, surrender the assets to the trustee and let the trustee sell them, or buy them back from the trustee. Each of those options have been chosen by different clients during my 20 years of bankruptcies.
Because of the substantial appreciation of real estate here in Colorado, I sometimes require an appraisal or market analysis or the client’s real estate before the bankruptcy is filed if there is a question about how much the house is worth and is there any non-exempt equity. It is best not to leave asset valuation to chance or let the trustee determine the value. Having a recent professional valuation usually resolves the valuation issue. Also, some personal property might need valuation prior to filing. I have found Ebay and local Craigslist or Facebook Marketplace useful for establishing a rough estimate of what an item, like a canoe or piece of jewelry, might sell for.
Sometimes the non-exempt assets are more than you can easily buy back from the trustee and you don’t want to sell them or give them to the trustee. That might be a house that is not your homestead, for instance, a rental or vacation home. Resist the temptation to give away or transfer title to assets like these. That creates a fraudulent transfer. Fraud and bankruptcy do not play well together. This is another reason why it so important to have a candid discussion with an experienced bankruptcy attorney before deciding how to proceed.
One of my clients chose to file a Chapter 13 Bankruptcy and make payments over 60 months to buy back the non-exempt assets. The debt being discharged was three times more than the client paid to buy back the non-exempt equity. For this client that made sense and the chapter 13 will save them a lot of money.
Some potential clients decide that the consequences of bankruptcy are not justified because of the value of the non-exempt assets to the potential client or they cannot afford to buy them from the trustee. They might decide to go a different route, like negotiating a settlement with creditors instead of bankruptcy.
The opposite situation might also recommend not filing bankruptcy if the person is judgment proof. I often come across potential clients who have minimal assets and no non-exempt income. An example is someone renting their residence with minimal assets and their income is totally exempt like social security or retirement. They are unlikely to be sued, and even if a judgement is entered against them there is nothing non-exempt for the creditor to collect. But an individual who is judgment proof might still want to file bankruptcy to avoid harassment from aggressive creditors or collection agencies.
Your creditors have 60 days after the Creditors’ Meeting to file an objection to your discharge.
There is a list in the bankruptcy code of reasons for your debts not to be discharged. A reason might be that fraud was involved in creating the debt. The vast majority of bankruptcy cases do not have dischargability problems. Be aware that your bankruptcy discharge does not eliminate child support, spousal maintenance, or criminal restitution. Taxes are more complicated, because most taxes are not discharged in bankruptcy. But if your circumstances are just right at least part of the tax debt will be discharged. If eliminating tax debt is important, discuss the need to discharge taxes with your attorney.
A second 1.5 hour course on financial management is required before your discharge will be granted.
Many of my clients just need to eliminate credit card payments or stop a garnishment. Bankruptcy can fix that problem. Bankruptcy can be a useful tool for building a fresh start, even if it isn’t a magic wand.