Bankruptcy
Bankruptcy is a legal
proceeding in federal court in which a person with debts (called the debtor)
can be freed or “discharged” from most of them.
In a “Chapter 7” bankruptcy,
property of the debtor that is not exempt (protected by law) may be sold. The money from the sale of this property is
divided among the people or companies to whom the debtor owes money (called the
creditors). In a “Chapter 13”
bankruptcy, the debtor is given 3 to 5 years to pay off debts, sometimes at
less than the previously agreed amounts, and the debtor’s property remains in
the debtor’s possession.
Should I Consider Bankruptcy?
The purpose of
bankruptcy is to give someone a fresh
financial start. Bankruptcy will
work best for people who will have an income that is adequate to support them
and to pay their bills after bankruptcy. It is usually advisable to wait until
you have reached the point where your financial problems cannot be solved by
personal efforts before filing for bankruptcy.
In other words, don't file if in six months your money problems are
going to reappear. In most instances
debts you get into after you file bankruptcy cannot be added to the
bankruptcy. Before deciding to file,
figure out what your expenses will be after you file and be sure to allow for
some unexpected expenses. If you will
not have enough money to cover your expenses after bankruptcy, you may want to
consider an alternative to bankruptcy.
Automatic “Stay”
As soon as a petition
in bankruptcy is filed, all other legal actions against the creditor are
temporarily stopped, which is called a “stay
of execution.” This includes evictions and foreclosures, debt collection
actions, garnishments and repossessions as well as administrative actions
and arbitration proceedings. However, a creditor can ask the Bankruptcy
Court to lift the stay. And if too many bankruptcies are filed but not
finished, a creditor may ask that the debtor be barred from filing for a time.
Can I Get Rid of All My Debts?
Not always. A bankruptcy generally will not rid you of debts for child support, taxes, alimony, fines, and
many student loans, as well as debts incurred by fraud or malicious
injury. Under some circumstances a
debtor can be denied discharge of all his debts as opposed to certain specific
debts. If this happens the primary
reason for filing bankruptcy is defeated.
Are There Credit Service Organizations That Will Help Me
Avoid Bankruptcy?
Yes.
Does Bankruptcy Hurt My Credit Rating?
Bankruptcy does not
always make it impossible to get credit, but it usually makes it much
harder. The fact that you have filed
bankruptcy may stay on your credit rating for several years. On the other hand, foreclosures and garnishments
hurt credit as well. If you think you
need credit after bankruptcy to buy a home, car or other large items, you may
have to rebuild your credit history from the beginning. Sometimes credit is actually easier to obtain
after bankruptcy, provided you are employed, because you are relieved of most,
if not all, of your debts. But beware of
getting deep into debt again after you file for bankruptcy because in most
Chapter 7 cases you cannot file again for six years. Chapter 13 bankruptcy may
be filed as soon as the last Chapter 13 is finished.
What Property Can I Keep?
Under most
circumstances, the following property is exempt from being taken by the
Bankruptcy Court. (More exemptions are listed in the Utah Code.)
·
The equity in your house or mobile home
up to $20,000 if it is your primary personal residence (plus another $20,000 if
the property is jointly owned) not to exceed $40,000
·
All wearing apparel, but not jewelry or
furs
·
Certain furnishings and other household
items
·
Professional books or tools needed for
your trade up to $3,500
·
A motor vehicle with a value not
exceeding $2,500
In the case where
exempt property has been pledged as collateral for a loan (called a secured
debt), the secured creditor will get the property back unless the debt is
reaffirmed. For example, if you were
loaned money to purchase a mobile home, the agreement you sign usually gives
the seller the right to take the item back if you miss payments. This is a secured debt.
How Much Does It Cost To File?
The court's filing fee
ranges from $185 to $200 depending on the type of bankruptcy you are
filing. (You cannot avoid paying the
filing fee by claiming poverty.) Husband and wife can file on the same
Petition. Attorney fees depend on the
complexity of the case and the attorney, although it is often the case that attorneys fees for Chapter 7 bankruptcies are lower than for
Chapter 13. Self-help bankruptcy forms are available (for a fee) from some
websites and stationery stores. The U.S. Bankruptcy Court cannot provide you with forms, nor can ULS.
What is a Chapter 13 Bankruptcy?
The Chapter 13 Plan or
"Wage Earner Plan" is another type of case you can file in Bankruptcy
Court. Under a Chapter 13 plan, you make monthly payments through the
Bankruptcy Court trustee to your creditors.
The plan usually runs over a three-year period and in most circumstances
you do not have to pay your unsecured creditors in full to be discharged from
the debts. An unsecured creditor is a
creditor to whom you have not given any particular collateral or security
interest in a specific piece of property.
A Chapter 13 plan will usually be approved by the Bankruptcy Judge if
the Judge finds you filed the Plan in "good faith" and that you earn
enough money each month to make your planned payments after paying your living
expenses. Under Chapter 13, you can
usually keep both exempt and nonexempt property, including your home.
Chapter 13 also has
other benefits compared to Chapter 7. First, the automatic stay (see page 1)
applies to co-debtors too, even if the co-debtor is not filing bankruptcy. For
instance, if you had a parent co-sign for the purchase of a car, filing Chapter
13 prevents the
creditor from going after your parent. Additionally, many debts that cannot be
discharged in a Chapter 7 bankruptcy can be discharged by Chapter 13. (But no
bankruptcy can discharge alimony and child support, student loans, damages
awarded for DUI offenses, or criminal restitution.)
Preventing Bankruptcy Discharge of Debt payments to be Ordered in Divorce Decrees
If the opposing party
to your divorce action is ordered to pay debts by the divorce court, the
opposing party may try to avoid actually making the debt payments by declaring
bankruptcy. If the opposing party has
the debts discharged by a bankruptcy court, the creditors can still collect on
certain debts from you. The way in which
the decree of divorce is written can reduce the likelihood of the bankruptcy
court discharging the debts.
Even if you do not
label debt payments by an opposing party as anything other than debts, a
bankruptcy court could still decide not to discharge the debts. The court will make an independent evaluation
for each debt in order to determine whether or not the debt should be
discharged. The court will look at the
reason the debt was incurred and what the intent of the divorce court was in
ordering the opposing party to pay the debts. You can improve the likelihood
that the bankruptcy court will not discharge debts if you provide some guidance
or "intent" by labeling the debt payments as either alimony or
support in your divorce decree.
Labeling a debt as alimony
shows a bankruptcy court that the divorce court considered the debt payment as
part of an overall alimony award.
Alimony is not dischargeable in bankruptcy. The bankruptcy court will still make an
independent assessment as to whether or not the debt payment really is alimony,
but calling the debt payment alimony in the final order will make it more
likely that the debt payment will be seen as alimony. However, before asking
that the divorce court order debt payment to be alimony, you should consider any
potential problems with having debt payments be alimony. First, the opposing party does not have to
pay alimony if you cohabit, remarry or die.
Thus, if you cohabited, remarry or die after your divorce, the
obligation for the opposing party to pay the debts could cease. Second, the person receiving alimony pays
income taxes on the alimony and the person paying does not have to. If the opposing party in your divorce pays a large
number of debts, you may end up paying income taxes on the amount of money
paid, without receiving any actual increase in your income that would help you
pay those taxes.
Labeling a debt as
child support shows a bankruptcy court that the divorce court considered the
debt payment as part of an overall child support award. Child support is not dischargeable in
bankruptcy. Therefore, you increase the
likelihood that the bankruptcy court will not allow the opposing party to
discharge the debts.
However, child support
usually only has to be paid until the youngest child living with you turns 18
(unless the court orders otherwise). If
your youngest child will turn 18 prior to the time calculated for the opposing
party to pay off the debts, the opposing party's obligation could cease.
Important
This document is only
a general statement of your rights and responsibilities. The law is complex and always changing. If you need specific legal advice, see a
lawyer. Many bankruptcy attorneys
advertise in the newspaper, the yellow pages of the telephone directory, and on
the internet. Utah Legal Services cannot assist you with a bankruptcy nor
answer your questions.
Utah
Legal Services, Inc.
205
North 400 West
(801)
328-8891 or 1-800-662-4245 toll free
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