What exactly is bankruptcy?

 

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts, or to repay them under the protection of the bankruptcy court. Bankruptcy’s roots can be traced to the bible. (Deuteronomy 15:1-2 “1: At the end of every seven years you must cancel debts. 2: This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD’s time for canceling debts has been proclaimed.”)

 

Are there different kinds of bankruptcy?

 

Yes. Bankruptcies can generally be described as “liquidation” or “reorganization.”  Liquidation bankruptcy is called Chapter 7. Under Chapter 7 bankruptcy, a consumer or business asks the bankruptcy court to eliminate (discharge) the debts owed. Certain debts cannot be discharged. (These are discussed below.) In exchange for the discharge of debts, the business’s or the consumer’s non-exempt property is sold (or “liquidated”), and the proceeds are used to pay off creditors. The property a consumer might lose is discussed below.

 

There are several types of reorganization bankruptcy.  Consumers, and individuals who operate as a sole-proprietorship, who have debts below a certain dollar amount, can file a Chapter 13. Family farmers can file a Chapter 12.  Businesses, and consumers with debts in excess of the Chapter 13 debt limits can file a Chapter 11.  This is a complex, time-consuming and expensive process. In any reorganization bankruptcy, a “plan” is filed with the bankruptcy court proposing how creditors will be repaid.  Some debts must be repaid in full; others can be paid only a percentage; some debts are not paid at all.  Some debts may have to be repaid with interest.

 

Will filing for bankruptcy stop harassing phone calls from bill collectors?

 

Generally, when you file a bankruptcy, an “automatic stay” goes into effect.  The automatic stay prohibits virtually all creditors from taking any action to collect the debts you owe them, unless the bankruptcy court lifts the stay and lets the creditor proceed with collection action.  An exception to this automatic stay protection exists if you have had a previously filed bankruptcy dismissed in the twelve (12) months before you file the present bankruptcy.

 

What debts are non-dischargeable in bankruptcy?

 

The following debts are non-dischargeable in both Chapter 7 and Chapter 13.  If you file for Chapter 7, these will remain when your case is over.  If you file for Chapter 13, these debts will generally have to be paid in full during your plan.  If they are not, the balance will remain to be paid at the end of your case:

 

· Recent income tax debts;

· Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution;

· Student loans and educational benefits, unless it would be an undue hardship for you to repay;

· Child Support, and spousal support or alimony;

· Debts for personal injury or death caused by driving under the influence.

 

In addition, the following debts may be declared to be non-dischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your discharge of these debts, by filing a lawsuit against you in bankruptcy court known as an “adversary proceeding.”

 

· Debts you incurred on the basis of fraud, such as lying on a credit application;

· Credit purchases of $600.00 or more for luxury goods or services made within 90 days of filing;

· Loans or cash advances of $875.00 or more taken within 70 days of filing;

· Debts arising out of willful or malicious injury to another person or another person’s property;

· Debts from embezzlement, larceny or breach of trust.

 

The following debts are non-dischargeable in Chapter 7, but may be discharged in Chapter 13. You can include them in your plan, and at the end of your case, the balance still owed will be discharged, or eliminated:

 

Obligations arising out of provisions of a divorce or separation decree;

Debts for willful and malicious injury by the debtor to another, or to another’s property.

 

What property might I lose if I file for bankruptcy?

 

You generally lose no property in a Chapter 13.  In Chapter 7, you select property you are eligible to keep from either a list of state exemptions, or from the exemptions provided in the federal Bankruptcy Code.

 

Examples of these exemptions are as follows:

 

· Equity in your home, called a homestead exemption. Under the Bankruptcy Code, you can exempt up to $21,625.00 per debtor (in a joint petition, $43,250.00) The State of Washington allows a $125,000.00 homestead exemption.

· Insurance. You usually get to keep the cash value of approximately $10,000.00 of your whole life policies.

· IRS-qualified Retirement Funds and Other Retirement Plans. Pensions which qualify under the Employee Retirement Income Security Act (ERISA) are fully protected in bankruptcy. So are many other retirement benefits.

· Personal Property. You will be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments with a value of approximately $11,525.00 (in a joint petition, approximately $23,050.00). You may be limited to approximately $1,450.00 in jewelry you can keep. Most states allow you to keep a vehicle with no more than $3,450.00 in equity [(2) vehicles in a joint petition]. You may also have a “wild card” exemption of up to $11,975.00 per debtor that you can apply toward any property.

· Public Benefits. All public benefits, such as welfare, Social Security and unemployment insurance, are fully protected.

· Tools used in your job. You will probably be able to keep up to a few thousand dollars worth of tools used in your trade or profession.

· Note that these exemption amounts are periodically changed.  For current exemption amounts, consult your attorney.

 

 

Will I lose my home if I file for bankruptcy?

 

One of the most significant concerns of individuals regarding bankruptcy is whether they risk losing their home if they file for bankruptcy. Though there are a few situations that could cause you to lose your home, this is a very rare occurrence in a bankruptcy proceeding.

 

In Chapter 7 bankruptcy, whether or not your home is at risk depends on the amount of equity you have in the property, and the amount of any homestead exemption to which you are entitled. If your equity is more than the amount than you can exempt, the bankruptcy trustee may sell your home, pay you the amount of your exemption, and then use the remaining funds to pay your creditors. If you are behind on your mortgage payments, you may also lose your home if you file a Chapter 7 bankruptcy. Your mortgage lender can request the bankruptcy court to lift the automatic stay so that the lender can begin, or continue with, foreclosure proceedings.

In a Chapter 13 bankruptcy, you will not lose your home even if you are behind in your mortgage payments if you immediately resume making the regular payments called for under your agreement, and you propose a payment plan to bring current your missed mortgage payments through your plan over a 3-5 year payment period.

If you are current on your mortgage payments, you will not lose your home if you file for Chapter 13 bankruptcy, so long as you continue to make your mortgage payments.

 

Will I be evicted from my apartment if I file for bankruptcy?

 

If you are current on your rent payments, and you file for bankruptcy, it is unlikely your landlord would evict you.  If you are behind on your rent, there is a good chance that your landlord will begin eviction proceedings after your bankruptcy is completed. Filing for bankruptcy will still, however, result in an automatic stay which will generally stop any eviction until after your bankruptcy is complete.

 

When is a Chapter 13 Bankruptcy better than a Chapter 7 Bankruptcy?

 

Although most people who file for bankruptcy choose Chapter 7, there are situations where Chapter 13 is the preferred bankruptcy remedy:

 

· You cannot file for Chapter 7 bankruptcy: If you received a Chapter 7 discharge within the previous eight (8) years, or you received a discharge in a Chapter 13 filed within the last six (6) years, you are not eligible to file a Chapter 7.

 

· Mortgage or car loan delinquencies: If you are behind on your mortgage or car loan, in Chapter 7 you may have to give up the property, pay for it in full, or bring the account completely current during your bankruptcy. In Chapter 13, you can repay the arrearage through your plan, and keep the property by making the payments required under the contract.

 

· Non-Exempt Assets:  When you file for Chapter 7 bankruptcy, you can only keep, or “exempt,” certain property. If you have significant non-exempt property (which you would have to give it up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option. In Chapter 13, you do not loose any non-exempt property, so long as your creditors receive the value of this non-exempt property through the monthly payment which you make on your wage earner plan, over its plan length.

 

· Non-Dischargeable Debts: If you have significant debts that cannot be discharged in Chapter 7, you may wish to create a payment plan to repay just those non-dischargeable debts in a Chapter 13.

 

· Co-Debtor Situation: In Chapter 7, the creditors can still pursue your co-debtors for payment. In Chapter 13, creditors are prohibited from seeking payment from your co-debtors during the duration of your case.

 

· Tax Debts: If a significant portion of your debts consists of federal or state taxes, whether or not these tax debts are dischargeable may determine which type of bankruptcy is best for you.

 

· Desire to Repay Debts:  You may feel a moral obligation to repay your debts, or you may want to learn money management skills that come from participating in a Chapter 13.

 

 

When can taxes be discharged with a Bankruptcy?

 

You can discharge (eliminate) debts for federal income taxes in Chapter 7 bankruptcy only if all of these five (5) conditions are present:

            

The taxes are income taxes. Taxes other than on income, such as payroll, withholding, and other “trust-type” taxes can never be eliminated in bankruptcy.

 

You did not commit fraud or willful evasion. You did not file a fraudulent tax return or otherwise willfully attempt to evade paying taxes.

 

You pass the three-year rule. To be dischargeable, the tax must be for a tax year for which the tax return was originally due at least three (3) years before you file for bankruptcy.

 

You pass the two-year rule. You filed the tax return for the dischargeable tax period at least two (2) years before filing the bankruptcy – having the IRS file a substitute return for you doesn’t count unless you agreed to the return, and signed the substitute return.

 

You pass the 240-day rule. The income tax debt must have been “assessed” by the IRS at least 240 days before you file your bankruptcy petition.

 

If you cannot discharge your tax debts in a Chapter 7 bankruptcy, Chapter 13 may be a better alternative. There, you pay your tax debts over time, less all assessed penalties which are dischargeable, and without having to pay any additional interest or penalties on the tax due, after your bankruptcy is filed.

 

What is my first step in filing Bankruptcy?

 

             Schedule an appointment with our office.  We offer a free, no-obligation initial consultation.  During your first appointment at our office, you should bring with you the following:

                          Creditor List:  Please make a list of all creditors whether you intend to keep paying the debt or not.  Please do not bring a credit report in lieu                           of this list, but rather create your own list from all available sources.  Identify creditors by name, and state the approximate amount owed to                           each creditor.

 

Income Verification:  Please bring verification (ie. Paystubs, or if you are operating a business, Income and Expense Statements) of all income received by you during the last six (6) full months (Example:  if your appointment is in July, the six (6) month period in question would be January through June of that year).

 

             Other Circumstances: If any of the following apply, please locate and bring to your appointment all documents which pertain to this issue:

                          1.  Have you or your spouse been divorced in the last ten (10) years?      

                          2.  Have you been the plaintiff or the defendant in any lawsuit in the last six (6)  years?

                          3.  Have you received a Notice of Default or Notice of Foreclosure concerning any of your property?

                          4.  Do you have any tax debt with any taxing authority (IRS, Dept of Revenue, L&I, Employment Security Dept)?

 

You should also bring with you copies of all legal documents (i.e., leases, contracts, purchase and sale agreements, financing documents, etc.) about which you may have questions.

 

             If you are married, both spouses should be present for your first consultation in our office.  This is to assure that you are both equally informed about the issues which will be discussed during your initial consultation.  Ask all the questions you wish.

 

 

Frequently asked questions

Law Office of George Peter Rose

Over 25 Years Bankruptcy Experience

417 South “G” Street

Tacoma, WA 98405

Phone: (253) 572-1657

Fax: (253) 272-1472

While the information presented in this web site is accurate as of the date of publication, it should not be cited or relied upon as legal authority.  It should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy, both of which may be reviewed at local law libraries, or to local rules of practice adopted by each bankruptcy court.  Finally, this web site should not substitute for the advice of competent legal counsel.  If you have further questions, please contact the Law Office of George Peter Rose at (253) 572-1657 or email us at prose@roselaw.comcastbiz.net.

We are a debt relief agency.  We help people file for bankruptcy relief under the Bankruptcy Code.