Bankruptcy

What is it’s Effect?

Bankruptcy

A legal process that relieves debtors of the responsibility of paying their debts or protects them while they try to repay.

Article One, section Eight of the U.S. Constitution authorizes Congress to enact bankruptcy laws.

Purpose

To protect debtors by giving them a fresh start, free from creditors’ claims.

To give fair treatment to creditors competing for debtors’ assets.

Two general classes of debt

Secured loans – loans backed by specific assets that the debtor pledged as collateral to assure repayment.

Unsecured debt – a loan that is not backed by pledged assets.

Involuntary bankruptcy

When creditors file a petition with the court, asking the court to declare you, the debtor, bankrupt. (If the court agrees, it takes your property to pay the debts.)

Voluntary bankruptcy

A person files a petition with a federal court asking to be declared bankrupt. Notice is given to creditors. The court takes your assets to pay the debts.

About bankruptcy

Bankruptcy is a court proceeding Bankruptcy remains on your credit report for

10 years Each debt that was discharged under the

bankruptcy petition (such as credit card accounts) may remain on your report for seven years.

You should hire an attorney to file bankruptcy.

Discharged debts

Debts erased by the court during bankruptcy proceedings.

Creditors can no longer try to collect. Liquidation – Court collects your assets and

sells them to pay some of the debts. Reorganization – you keep your assets by

submitting a plan to the court to repay the debts.

Chapter 11

Reorganization form of bankruptcy for businesses that allow them to continue operating under court supervision as they repay their restructured debts.

Chapter 7

Straight bankruptcy Liquidation form that wipes out most debts

nor secured by collateral. Collateral is property that guarantees a loan Mortgage loans are guaranteed by real estate

and car loans by the cars. You are allowed to keep exempt assets. This

is the property you are allowed to keep when you file bankruptcy

Means Test

All bankruptcy filers are subject to a “means test” to determine if they are eligible for Chapter 7 or if they must file a Chapter 13 Your income is compared to the median

income in the state you live in, in addition to your financial ability to repay your debts.

Debtors who can pay at least $6,000 within a five year period ($100 per month) will be required to file a chapter 13.

“Means Test for Utah”

Median State Income for Utah 1 earner (dollars) 40922 2-person families 47570 3-person families 53229 4-person families 57999 5-person families 62966 6-person families 64193 7-or-more-person families 66917

*Add $6,300 for each individual in excess of 4.

Credit Counseling

Pre-bankruptcy credit counseling and pre-discharge debtor education are bankruptcy requirements People applying for bankruptcy must complete

a federally approved credit counseling course within six months prior to filing.

A debtor education course must be completed after filing to have debts discharged.

Fees are normally charged for counseling and debtor education. If you cannot afford to pay, there is no charge.

To file bankruptcy you must also provide: A copy of your latest tax return for a Chapter

7. Past 4-years tax returns for a Chapter 13 A certificate of credit counseling Evidence of earning in the past 60 days Monthly net income and any anticipated

increase in income A photo ID

The court appoints a trustee

The trustee arranges for he sale of your non-exempt property and is responsible for paying as many of your debts as possible with the proceeds

Not all debts can be erased by bankruptcy

Chapter 13

Reorganization form that allows debtors to keep their property and use their income to pay a portion of their debts over 3-5 years.

There is a court enforced repayment plan. You are allowed to keep all your property as

long as you continue to make your chapter 13 payments on time.

Alimony and child support payments and long-term secured obligations such as your home mortgage cannot be discharged.

Key Points

You can only file bankruptcy under one category at a time.

Chapter 7 offers a financial fresh start and is a quicker process compared to a Chapter 13.

A means test will determine if you are eligible to file Chapter 7 or repay part of your debt under Chapter 13.

Chapter 7 can be filed only once every eight years. You cannot file Chapter 13 If you obtained a

bankruptcy discharge in the past 2-4 years.

Repercussions of Bankruptcy

When you file bankruptcy all your property except exempt assets will be sold to pay your creditors. Exempt assets are property you are allowed to

keep during bankruptcy If you file a Chapter 13 repayment plan, it will

take three to five years to repay your debts and receive your discharge from the court.

Bankruptcy will not remove:

Child support and alimony Debts for personal injury or death that you caused

while under the influence of alcohol or illegal drugs. Student loans Fines and penalties for law violations, such as traffic

tickets, court-ordered payments or recent property tax assessments.

Income taxes from the past three years and other tax debts.

Credit purchases of $1,150 for luxury items within 60 days of filing.

Bankruptcy will not remove:

Loans or cash advances of $1,150 or more taken within 60 days of filing.

Debts owed to a single creditor of more than $600 for luxury goods purchased within 90 days of filing.

Cash advances of $750 made within 70 days of filing. Debts or judgments based on fraud or other illegal

activities. Criminal restitution resulting from illegal activities Debts you owe from a divorce decree or settlement. Any debts you forgot to list in you bankruptcy filing.

Reaffirmation

Creditors ask debtors to agree to pay their debts even after bankruptcy has been charged.

You may decide to pay instead of giving up your property.

Causes of bankruptcy

Job loss Emotional spending Failure to budget and plan Catastrophic injury or illness

Advantages of Bankruptcy

Debts are erased Exempted assets are retained Certain incomes are unaffected The cost is small

Disadvantages of Bankruptcy

Credit is damaged On record for 10 years Any credit given will be high interest

Property is lost Some obligations remain

Child support, alimony, student loans, taxes Co-signers must pay