Bankruptcy: An Option for More than You Think
Although often times portrayed in a negative light or frowned upon when discussed in social circles, bankruptcy offers those in financial strife an opportunity to rebuild. Further, bankruptcy is not just for low income individuals that found themselves in over their heads. Bankruptcy also offers options for high-income earners who may have fallen prey to a bad business deal or experienced a significant drop in income. Through a chapter 7 or chapter 13 bankruptcy, individuals are provided the opportunity to receive a fresh start to their financial lives.
Chapter 7 bankruptcy is commonly known as a “liquidation” bankruptcy. A chapter 7 bankruptcy offers debtors the opportunity to discharge (or eliminate) all or most of their unsecured debt. Not all individuals will qualify for chapter 7 bankruptcy. Whether one qualifies for Chapter 7 is determined by the means test. High-earning individuals may not qualify for chapter 7 and may need to turn to chapter 13.
In a chapter 7 bankruptcy debtors are not required to pay any portion of their debts back through a payment plan. Rather, a trustee is assigned to determine if there are significant non-exempt assets available to liquidate for the benefit of creditors. However, with proper planning most, if not all, property in a chapter 7 bankruptcy can be exempted from the trustee’s reach.
For those individuals with substantial non-exempt property or those individuals that cannot pass the means test, a chapter 13 bankruptcy offers an alternative route. Unlike chapter 7, chapter 13 allows debtors the ability to retain their non-exempt property without the requirement of liquidation.
Chapter 13 bankruptcy is commonly known as a “re-payment plan” bankruptcy because it allows debtors to re-pay their creditors through a 3 to 5 year payment plan. However, debtors are not required to re-pay the full amount of their debts. Rather, the re-payment plan is determined based on the value of the debtor’s non-exempt assets and the debtor’s monthly disposable income. This may result in a debtor re-paying anywhere between 0% – 100% of unsecured debts.
Chapter 13 also offers benefits that cannot be obtained in chapter 7. Through the re-payment plan debtors can: 1) catch up on missed payments on a house or car while avoiding foreclosure or repossession; 2) discharge debts that are not otherwise eligible for discharge in chapter 7; and/or 3) cram down, strip, or avoid liens on secured property.
Properly planning and preparing for a bankruptcy filing can be just as important, if not more important, than the filing itself. Two important aspects of proper bankruptcy planning focuses on converting non-exempt assets to exempt assets and limiting priority payments.
Likely the most important part of planning for a bankruptcy case involves exemption planning. This is because any property that is not protected by an exemption may be sold by the Trustee to satisfy the claims of creditors. The phrase exemption planning refers to arranging one’s assets within the state’s exemptions to ensure maximum protection. The court has consistently upheld a debtor’s use of exemption planning (see In re Stern, (9th Cir. 2003) 345 F.3d 1036). The difference between exemption planning and fraudulent conveyances is working within the laws to protect the asset rather than trying to hide or distribute the asset.
A second aspect of bankruptcy preparation is avoiding priority payments. Priority payments are payments to family members or general creditors whereby your payment prioritizes the creditor above other creditors. The court views this as impermissible since every creditor should be treated the same. As such, any payments within one year of the filing of a bankruptcy made to family members to repay a debt can be effectively reversed by the trustee in order to distribute the funds to all creditors equally. For payments to non-insiders, payments within three months of the bankruptcy filing may be reversed. If a priority payment has already been made or needs to be made then proper bankruptcy planning involves waiting the applicable time to file the bankruptcy case after the priority period has passed.
These are just a few of the considerations that should be made when preparing for a bankruptcy filing. Most importantly, it is critical to have a knowledgeable attorney who can guide you through the complicated bankruptcy process.
– Keith R. Wood is an Associate at Calone & Harrel Law Group, LLP who concentrates his practice in Bankruptcy, Tax collection, and Corporate, Partnership and Limited Liability Company law matters. Mr. Wood may be reached at 209-952-4545 or firstname.lastname@example.org