5 Things You Ought to Know About Bankruptcy
With CSAFirm attorneys Brian Schuette and Mike Carey
- What is bankruptcy?
Bankruptcy is a process by which you put the bankruptcy court in between you and your creditors. In order to prevent creditors from seizing your assets and garnishing your wages, the bankruptcy court steps in by stopping all collection activities and providing an orderly process to deal with creditors.
Wage garnishment can generally take up to ¼ of income. Most people struggle to make ends meet as it is, or they live right up to the edge of their means with little margin. A wage garnishment can push you over the edge where you can’t pay rent, buy groceries, or buy gas to get back and forth to work.
Analogy – (Rocky 3 movie) Rocky and Mr. T are in the ring fighting it out and Mr. T is getting the best of Rocky. You are “Rocky” and your creditors are “Mr. T.” Your creditors are getting the best of you. Then the bell rings and the referee steps in sending you both to your corners. Filing for bankruptcy relief is essentially like the bankruptcy court ringing the bell and sending everyone to their corners. Everything stops temporarily. It gives you some breathing room to figure it all out.
- What is an automatic stay?
An automatic stay is the “time-out” the bankruptcy court imposes. It puts everything on hold temporarily until it is all sorted out. It goes into effect automatically when you file the case. You don’t have to request it. In most cases, the stay remains in effect until the court orders otherwise or the case is closed.
During this time, your creditors can’t contact you, can’t seize assets, and can’t even send you bills while the bankruptcy is pending. There are serious penalties for violating the Automatic Stay.
- How does bankruptcy affect your assets?
Clients often want to pick and choose what debts are listed in the bankruptcy petition. You cannot do that. You can’t choose what assets you want to disclose. You have to list all assets and all debts. This includes houses, property, cars, clothes, money other people owe you, life insurance policies, 401Ks, any asset that you have an interest in.
Most bankruptcies run very smoothly, but failing to disclose assets is a huge deal and can result in very serious consequences, even potential criminal ramifications. If you are seeking the [bankruptcy] remedy, you must be willing to follow the rules associated with it.
Sometimes clients end up not filing bankruptcy when they discover all the rules because they do not want to disclose all of their assets.
Once assets are listed, exemptions are applied. This is sort of a blanket that is put over the assets. A certain dollar amount of exemption is allowed in a variety of different areas including equity in your home, equity in your car, value of your personal property, etc. There is even a “Wildcard Exemption” to cover things that don’t fit into any specific category.
In order to keep stuff, it has to be exempt. Anything left unexempt after the exemptions are applied may be seized and sold to cover debts. Kentucky State exemptions are very limited when compared to Federal exemptions, which are much more generous. So Federal exemptions are almost always selected in Kentucky. Federal exemptions provide sufficient coverage for most debtors in bankruptcy; however, if you own a home or vehicle that is worth a lot of money and you have more equity than the allowed exemption, it is possible that you may have to sell it to pay back the debts, or otherwise pay the bankruptcy Trustee the value of the unexempt equity in order to retain those assets.
- How does bankruptcy affect your debts?
There are different types of debts, and each is affected differently.
- Some debts are not dischargeable in bankruptcy. Criminal restitution, debts incurred as a result of fraud, student loans, child support or other domestic obligations like maintenance/alimony payments, personal injury claims resulting from DUI accidents and other debts that may constitute a “willful or malicious injury” are typically not dischargeable. Collection of these debts is still on hold during the bankruptcy case, but collection may resume immediately after the bankruptcy case concludes.
- Unsecured debts such as medical bills, credit card balances, personal loans, etc. can be discharged in bankruptcy. The bankruptcy discharge is a permanent injunction preventing creditors from ever collecting that debt from you again.
- Secured debts, such as car loans or home loans, are a little different. As a general rule, if you want to keep property subject to a lien or mortgage after your bankruptcy case, you will still have to pay for it. Creditors usually retain their rights to repossess vehicles or foreclose on real estate when the bankruptcy concludes. There are options in deal with secured creditors.
- Reaffirmation Agreements – If you decide that you want to keep your house or your car, you can reaffirm the amount you owe the creditor, which is essentially a written agreement to continue to pay that debt. In most cases you still have to pay the debt according to the original contract terms, but with the benefit of the discharge removing the burden of unsecured debt, making those payments is usually much easier. Under most reaffirmation agreements, you just continue to make the payments like you were making before the bankruptcy happened.
- Redemption – When you are upside down on your loan and owe a lot more than the property is actually worth, you can ask the court to affix a specified market value to the property, and then you have up to 10 days to pay that amount in full, after which the creditor must release any liens on the property. It is often much easier to get a loan to finance a redemption because the amount borrowed is equal to the value of the property.
- How does filing bankruptcy affect your life?
In most cases, filing bankruptcy can have a fast, dramatic, and positive impact on your life.
Completing the analogy – After Rocky had a chance to regroup and get a little breather from the beating he was taking, he went back in and won the fight! When you are under financial crisis, you may feel hopeless, lose sleep, or fear you will never be able to get out from under this debt. The stress can be so great that you can hardly function. Relief from debt allows you to go back into your daily life without that burden so that you can function again and resume your life with a fresh start.
This is not a pleasant process. No one does the “happy dance” on the way to bankruptcy court. You may be embarrassed and not want to tell your friends about it, but you need to realize it is not something immoral. It is a lawful process that is part of the American system of laws. Most people do not get into this situation by foolish choices or bad decisions. It is often the result of unexpected circumstances, like medical bills, car repairs, home repairs, etc., that came out of nowhere. Most of us live right up to the edge of our means with little extra for emergencies. Unexpected bills can easily push us over the edge in a way that is impossible to recover from. Most people want to pay their bills, but the system sometimes makes it difficult to do that. Bankruptcy is a means to deal with this in a lawful and responsible way.
For more information, contact Mike Carey at firstname.lastname@example.org.