What can really be discharged in bankruptcy? Will I lose all of my assets?
In our experience, there are two big misconceptions that people have about bankruptcy before they meet with an attorney to get accurate information. Firstly, people believe that all debt is eliminated in bankruptcy. Secondly, they believe that this comes at the price of losing all of their assets. Neither of these are entirely true. How your debts will be discharged primarily depends on which chapter of bankruptcy you file under – and as for losing your assets, well, that depends on state and federal exemption rules, and your intentions towards your property.
Confused? Let’s break this down. If you file for a Chapter 7 bankruptcy, most of your unsecured debt will be dischargeable (read our post on the differences between Chapter 7 and Chapter 13 bankruptcies HERE). This means that upon receiving your discharge in bankruptcy, your obligation to pay on any of that unsecured debt has been eliminated. Note that taxes, student loans and domestic support obligations are generally not dischargeable in a Chapter 7 bankruptcy. Once you have received a discharge in bankruptcy, neither creditors, nor debt collectors, can collect on that debt – the debtor is protected by the bankruptcy code, and is no longer legally obligated to pay on what they owed prior to filing. Examples of unsecured debt that is typically dischargeable in bankruptcy include credit cards, civil court judgments, medical bills, vehicle repossession deficiencies and others. Essentially, debt that falls into this category is any debt that is not attached to collateral or property of any kind. A vehicle loan or a mortgage are examples of secured debt. If you want to keep the property that your secured debt is attached to, then you can do so by continuing to make timely payments on that debt. If you choose to surrender the items (i.e. vehicle or home) then those secured debts can also be discharged in bankruptcy. It is best to consult with an attorney if you want to know more about what types of unsecured debt can and cannot be discharged in a Chapter 7 bankruptcy.
Similar to a Chapter 7, a Chapter 13 bankruptcy will discharge most of the debtor’s unsecured debts that do not get paid through the course of the plan. However, given that a Chapter 13 works on the premise of repayment over an extended period of time, a portion of, or sometimes all of, the unsecured debts will be repaid over the course of plan. The payment plan in a Chapter 13 bankruptcy is usually based on your disposable income, but may be adjusted depending on any non-exempt assets that you own. In a Chapter 13 bankruptcy you are generally required to pay all secured debt and any unsecured priority debt through the course of your plan, which can be anywhere from 3 years to 5 years. You can also discharge certain debt in a Chapter 13 bankruptcy that you would not be able to discharge in a Chapter 7 bankruptcy. You should speak to an experienced attorney in more detail about what debts can be discharged in a Chapter 13 bankruptcy versus a Chapter 7 bankruptcy.
As to debtors losing their assets in bankruptcy, well, that is not always the case and in fact, very rare. When you file a bankruptcy petition, all of your real and personal property becomes property of the bankruptcy estate and you cannot pick and choose what is ‘included’ in the bankruptcy. However, state and federal exemptions allow for exemptions up to a certain amount on property, meaning if your property value falls under the exemption amount, you should be able to keep that property in bankruptcy. Exemptions vary state to state, as well as on where you have recently resided, so it is important to speak with an experienced bankruptcy attorney to help you determine what exemptions you will use.
For example, Michael has a vehicle loan balance of $8,000 and the vehicle is valued around $12,000, so he has about $4,000 in equity in his vehicle. His state’s exemption limit for equity in a vehicle is $6,000. Since the equity in his vehicle is less than the exemption limit, he will be able to keep his vehicle in a bankruptcy. Now, if Michael’s vehicle was valued at $19,000 and he only had a loan balance of $8,000, that would leave $11,000 in equity, which would be $5,000 over the exemption limit. In this situation, the Trustee could require that he turnover his vehicle to be auctioned for the benefit of his creditors.
In a Chapter 13 bankruptcy, it is important to consider the best interest of creditors. In Michael’s situation, he might be better off in a Chapter 13 bankruptcy because he could keep his vehicle, as long as he repays his unsecured creditors the amount that is equal to or greater than the non-exempt portion of his vehicle.
If this is all going over your head, don’t worry, you’re not alone! Bankruptcy is hugely complicated and difficult to navigate. It is full of complicated regulations, exemptions and qualifications. If it feels overwhelming and you’d like to get your options straight, call our office on 602-265-3000 to schedule an appointment with an attorney. We’ll talk you through the process and answer any questions you have.