Bankruptcy is a legal process that allows individuals to protect family assets from being seized by creditors, and to reorganize or eliminate qualified debts. Not all debts can be discharged or reduced via a bankruptcy proceeding. For example, most taxes and student loan debt cannot be discharged or reduced though bankruptcy.
Individuals have the right to file for bankruptcy to obtain financial relief from creditors. Bankruptcies are governed by the U.S. Bankruptcy Code. See 11 USC §101 et seq. The Bankruptcy Code is, in turn, rooted in the US Constitution with Article I granting to Congress the exclusive enumerated power to enact laws with respect to bankruptcy. See US Const., Art. I, Sec. 8. In practical terms, this means that bankruptcies are handled by federal courts.
Bankruptcy is something you should not fear. Bankruptcy can alleviate the constant stress and worry that comes from being unable to make debt payments. Often, there is a great feeling of relief after a bankruptcy is completed. The bankruptcy process is intended to give a person a "second chance" at success. It is a new beginning, not an end or a disgrace.
A bankruptcy is started by filing of a petition with a federal bankruptcy court. In general, a petition must include information on the debtor's assets, financial accounts and debts. If the debtor is seeking a reorganization of debts, then a payment plan must also be submitted to the court. The bankruptcy proceeding is ultimately governed by an assigned bankruptcy judge, but the court appoints a court officer, called a "Trustee," to handle the specifics of the case.
There are three types of bankruptcies for individuals. They are known by their Chapters in the Bankruptcy Code:
Bankruptcies can be complicated. To determine which type, if any, will get your finances back on track, you will need to know a little more about them.
Chapter 7 is designed to eliminate and discharge all qualified debt. However, for individual debtors, Chapter 7 is available only for those with certain incomes. The income criterion is based on the debtor's gross monthly income compared to the median gross monthly income for the area where the debtor lives and for the debtor's household size. For example, as of 2020, in the Denver metropolitan area, the median gross monthly income for a single-person household is approximately $6,100. Therefore, generally speaking, any single-person debtor in the Denver area with less monthly income than $6,100 will be eligible to file under Chapter 7.
Even if a debtor fails the income test, some debtors may still be eligible to file for Chapter 7 discharge. To determine this, the courts use a second test called the "means test." The means test evaluates the debtor's monthly income, living expenses, and debt payments. The means test is complex, but in simple terms, if there is sufficient income above and beyond monthly living expenses to continue making debt payments, then Chapter 7 is not available. The debtor must instead file under Chapter 13.
Chapter 13 is designed to reorganize an individual's debt with the expectation that the debtor will pay back some percentage of the debt. Under Chapter 13, the individual debtor is considered to have sufficient income to make payments. When filing a Chapter 13, the debtor is expected to submit a payment plan detailing how much can be repaid and over what time period. The repayment plan must be approved by the creditors and the bankruptcy court.
That being said, not every individual debtor is eligible to use Chapter 13 because debt limits are imposed. The limits are changed every three years, but currently, an individual can file under Chapter 13 if the individual has no more than $419,275 in unsecured debts and $1,257,850 in secured debts. A secured debt is one that is collateralized, or secured, by an asset. For example, a home loan is typically secured by the mortgage on the house. If a person has debts that exceed these limits, then Chapter 11 must be used.
Chapter 11 and Chapter 13 personal bankruptcies are similar. In both, the debt is reorganized, some assets might be liquidated or turned over to the creditor and a repayment plan must be submitted and approved.
When a bankruptcy petition is filed, there are two immediate legal effects:
That is why a bankruptcy trustee is assigned. The trustee has control over the assets in the bankruptcy estate and holds them in trust for the creditors. Generally, possession of assets remains with the debtor, but the trustee has ultimate control and can command that assets be physically delivered to the trustee. With respect to personal bankruptcies, assets might include the debtor's personal residence, other real property, vehicles, furnishings, the content of bank accounts, stock holdings, etc.
As the bankruptcy proceeds, the trustee has the power to liquidate -- sell -- any and all assets in order to generate monies for the benefit of creditors.
However, whether an asset is sold depends on many factors. One important factor is whether selling the asset will generate money for the general benefit of creditors. For example, imagine the debtor owns a vehicle with a market value of $10,000 and lender financing against the vehicle of $20,000. If the vehicle were sold, all the money obtained would be paid to the financing company holding the vehicle as collateral. The trustee would most likely not choose to sell the vehicle since no money would be generated that could be paid for the general benefit of the creditors. The vehicle could be turned over to the lender, or kept by you if you can continue to make payments and you satisfy other factors, like showing you need the care to continue to work.
Another important factor in deciding whether assets are sold is the debtor's use of personal exemptions. The Bankruptcy Code and state law provide exemptions when a bankruptcy is filed by an individual. There are no exemptions for a formally incorporated business.
Personal exemptions allow a debtor to exempt from the bankruptcy estate statutorily-defined monetary values with respect to certain assets or certain assets entirely. The exemption amounts and types of assets are listed in the relevant statutes and the exemptions themselves vary from state to state. Under some statutes, certain assets are exempt regardless of value (such as health and medical aids). Other assets are exempt up to set monetary limits. For example, in Colorado, $75,000 of the value of an individual's personal residence is exempt. This means that if, for example, the house had a market value of $300,000 with a note and mortgage of $225,000, then the debtor’s equity in the home ($75,000) would be exempt from the bankruptcy estate and could not be liquidated by the trustee. By contrast, in Virginia, the homeowner's exemption is $5,000 plus additional amounts per dependents living at the residence and/or for personal property.
As you can see, personal are complicated. Whitcomb Selinsky, PC has experienced and tested bankruptcy attorneys who can help you obtain the debt relief you need, and help protect your personal and family assets. We can ensure that you are filing under the chapter that will best suit your personal. We can also review any personal guarantees. Our attorneys also help with all of the following:
If you need assistance with a personal bankruptcy, our aggressive and experienced attorneys can help. Whitcomb Selinsky, PC has years of experience representing a wide variety of clients in a wide variety of legal matters. Contact Whitcomb Selinsky, PC today. We can be reached online or by phone at 866-476-4558.