Bankruptcy Filing
Secured Debt, Unsecured Debt,
Chapter 7, Chapter 13 Defined
Prior to filing for bankruptcy you should consult with a lawyer regarding changing laws. The newest bankruptcy laws went into effect during 2005 and have made the filing process more difficult and expensive. A new provision to the bankruptcy law stipulates that a person must meet with a credit counselor and attend money management courses before their debt is discharged.
If you are contemplating filing for bankruptcy you should be aware there are two types of bankruptcy, Chapter 7 and Chapter 13, and each has its advantages and disadvantages. You should also familiarize yourself with the difference between secured and unsecured debt, as this will help you to protect your most valuable assets during bankruptcy.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is intended to give people a fresh start. Assets are liquidated and used to pay creditors, although if you do not have assets of real value there is a chance to have your debt removed without giving much to the credit card companies. The new law makes filing for Chapter 7 more difficult because if your income is above your state's median, and a judge determines you are financially able to pay at least twenty-five percent of the unsecured debt you will not be allowed to file.
What is Chapter 13 Bankruptcy?
You can make an appeal to the court that you have special circumstances, such as a natural disaster or severe illness, which further prevents you repaying the debt but most lawyers at this point will advise you to consider Chapter 13 bankruptcy. Chapter 13 bankruptcy puts you on a repayment plan with the creditors for a period of at least five years. The interest rates are often much lower than the original debt, and you are not responsible for debt unless it is specifically stated in your repayment plan. Under the new law courts will apply pre-set standards determined by the IRS to compute how much money you should allocate towards housing and food, and how much money you should have left to pay off your debt.
What is Secured Debt?
Once you and your lawyer have determined how you will file for bankruptcy, you should begin itemizing your assets and labeling your debt as secured and unsecured. Secured debt is credit given to you based on the value of the property you bought, such as a car loan. Should you fail to make payments the creditor with a secured interest in the property may have the item seized, and if the item is now worth less than your debt the creditor may sue you to make up the difference.
What is Unsecured Debt?
Unsecured debt is credit given to you solely on your promise to repay at a later date. An excellent example of unsecured debt is a credit card. Failure to pay unsecured debt may cause the creditor to obtain a judgment against you, and once this happens there is no hope of protecting your assets until your debt has been settled.
A creditor may obtain a judgment against you if your debt has remained unpaid for a long period of time, the balance of the debt is very high, or a combination of both. Once a judgment is obtained you are forced, by law, to pay back the debt you owe. To achieve this goal the creditor may request TO garnish your wages or even put a lien on your house to satisfy the debt.
How to Itemize Your Assets to Pay Down Debt
When itemizing your assets you should consider the value of your property in terms of what you could sell it for. Some debts such as your mortgage and taxes will not be absolved after you file bankruptcy, and you may consider selling some of your assets to pay down on these debts. Once you have taken stock of your assets, you can determine which of these assets are considered exempt property and untouchable by creditors.
Some states have very liberal homestead exemptions which allow you to keep a certain amount of your equity which will allow you to rebuild after declaring bankruptcy. States such as Florida and Texas allow you to keep all the equity in your home, whereas states like Alabama only allow you to retain the first $5,000. In states with more liberal homestead exemptions it may be to your benefit to use liquid assets to pay down on your equity. You can also refinance the equity from your homestead exemption and use the money to pay down on your unsecured debt.
Other Legal Options to Protect Your Assets During Bankruptcy
Other legal options for protecting your assets during bankruptcy are making annual contributions to your IRA or other pension plan. It is important to consult with an attorney to make sure your pension plan complies with federal standards for bankruptcy exemption before you move any funds from existing accounts. You may also tie up money by purchasing additional life insurance, obtaining an offshore annuity, or by gifting certain assets.
If you choose to transfer ownership of your assets, make sure this transfer is permanent since you are taking an oath when you file bankruptcy that you have accurately presented all of your assets for consideration in repaying debt. Your actions within the last ninety days before you file for bankruptcy will be highly scrutinized in court, and any suspicious activity may result in a denial of your case.
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Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection, award-winning trust and estate planning expert.
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