Keeping All that You Own in Bankruptcy

Posted by Kevin on June 20, 2017 under Bankruptcy Blog | Be the First to Comment

Can you really keep everything you own if you file bankruptcy?  The Answer: Usually Yes.

Some basics. 

There are two basic types of consumer bankruptcies.  Chapter 7  is an asset based approach.  The Chapter 7 trustee sells your “non-exempt” property and pays your creditors.  Chapter 13 is an income based approach where you generally keep your assets but have to make payments to your creditors over a 36-60 month period.

There are two types of creditors:  secured creditors (they took collateral as a condition of granting you credit, and can look to the collateral to be paid even after the bankruptcy), and unsecured creditors (basically no collateral).

The purpose of bankruptcy is to give an honest debtor a fresh start.  That means that most, if not all,  of your debts are discharged, and you can keep all or most of your property.

Now how is that accomplished.

In a Chapter 13, as stated above, you keep the property you want to keep in exchange for making payments over the term of 36-60 months.

In a Chapter 7 “straight bankruptcy,” your debts are discharged—legally written off forever—in return for you giving your unprotected assets to your creditors (as represented by the bankruptcy trustee). But here is the good part: for most people, all or most of their assets ARE protected, or “exempt.” from the trustee and your creditors.  Why?  The fresh start.

Property Exemptions- The Basics

• The Bankruptcy Code has a set of federal exemptions, and each state also has its own exemptions. In some states you have a choice between using the federal exemptions or the state exemptions, while in other states you are only permitted to use the state exemptions.  In New Jersey, we can use either.   In many states, choosing which of the two exemption schemes is better for you is often not clear.  However,  in New Jersey, debtors generally use the federal exemptions.  Why?  Because many of the New Jersey exemptions were created by statute about 100 year ago or more, and were not adjusted for inflation.  Moreover, New Jersey has no homestead exemption.
• If you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s exemption types and amounts can differ widely, thousands of dollars can be at stake depending on when your bankruptcy case is filed.
• In some circumstances, it is not clear how the federal exemptions will be applied.  What if you own a car and you owe $10,000 on your car loan.   Clearly, the bank (secured lender) has an interest as do you.  But, the trustee also may be able to make a claim to part of the value to the car, and sell it.

Navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by your bankruptcy attorney.  It can maximize the amount of property you keep after receiving your bankruptcy discharge.

Your Income Tax Debt Paid through an “Asset Chapter 7 Case”

Posted by Kevin on October 17, 2016 under Bankruptcy Blog | Comments are off for this article

Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.

Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.

But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.

If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.

What are the type of non-exempt assets that would fit into this scenario?  It’s not going to be your home.  (That is why we have Chapter 13)  But, say you recently closed down a business.  You may still own some of the business assets, but you have no use for them.  Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep.  And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.

Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule.   Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.

But, what types of debts have priority over taxes?  The most important are the trustee commission and his/her professional fees.  This could amount to a few dollars.   Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.

So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.

Again, it’s not common that the “stars will line up”.   But when it does, it can be a big plus.  Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.