Many people have little or no financial security. Almost half of Americans cannot afford to make a $400 emergency payment. With so many people living paycheck to paycheck, even a seemingly minor financial shock can have people thinking about what type of bankruptcy to file. Everyone’s story is different, but many of them sound like one of these three:
- Derrick Debtor moved in with his widowed mother to help care for her after his father died. At first, it would only be for a few months until she got settled in. But a few months turned into a few more months. Since he wasn’t earning a full-time income, Derrick fell behind on his credit card payments and on an old hospital bill. The debt is not enormous, but it is well over $10,000, and he is now only able to make minimum payments.
- Doug Debtor had a reasonably successful lunch counter in a downtown office building. But a new sandwich restaurant opened up across the street, and business at his lunch counter plummeted. He fell behind on his mortgage and car payments, and he is not sure that his income will ever be back to the level it was a few years ago.
- Daniel Debtor lost control of his car on a rain-slicked road and ended up in a rather serious crash. Although he was off work for several months and fell behind on his bills, he is back at work now. However, he’s unsure how to deal with the unpaid bills that have piled up in the last few months.
The Bankruptcy Code offers both immediate and long-term relief for all the Derricks, Dougs, and Daniels.
This type of bankruptcy is often called liquidation, but that is only a partially-accurate term. While it is true that all non-exempt assets can be liquidated to pay creditors, most people do not have non-exempt assets. Exempt assets include:
- Homestead: An unlimited amount of home equity is exempt under state law; if the debtor chooses federal exemptions, there is a cap.
- Retirement Account: Under both state and federal law, most IRAs, 401(k), pension plans, and other such savings are exempt. This exemption is important, because in many households, a retirement “nest egg” is the largest asset.
- Personal Property: Cars, household goods, electronics, jewelry, tools, clothing, and many other items are exempt.
- Wild Card: Under both state and federal law, debtors can choose to protect some or all of their otherwise non-exempt assets, like boats or lake houses.
The key word here is that non-exempt assets can be liquidated to pay creditors. Many times, the property needs work or the market is bad, and the bankruptcy trustee will allow the debtor to keep non-exempt assets because their final monetary value is so low.
What Happens First
Prior to filing, all bankruptcy debtors must complete at least one pre-bankruptcy credit counseling session. In most cases, this class can be taken online at little cost, and completed in less than an hour. Debtors also need to gather identification documents, including their Social Security cards, and financial documents, including pay tubs and tax returns. Depending on jurisdiction, the trustee doesn’t always ask for all these documents, but the best practice is to have them ready.
Based on the financial information that the debtor provides, as well as a questionnaire that the debtor completes, a bankruptcy attorney files a certain type of petition, along with supporting schedules. All creditors are automatically notified; if there is a pending adverse action – like a credit card lawsuit – these creditors receive special notice.
What Happens Next
About six weeks after the petition is filed, there is an informal meeting with the bankruptcy trustee. In a Chapter 7, the trustee essentially reviews the paperwork, makes sure all the supporting documents are in place, and looks for red flags. In most cases, the discharge order comes about six months later.
The trustee will pay close attention to the means test. To be eligible for a Chapter 7, the debtor’s income must be no greater than the average income in the state. In Arkansas, that’s $60,000 a year for a family of four. Many exceptions and exclusions apply, and your bankruptcy attorney can review them in detail.
Sometimes called the wage earner plan, this type of bankruptcy is ideal for people who temporarily fell behind on payments due to unforeseen circumstances, like a job loss, divorce, or illness, and they need some time to repay their debts. The same exemptions apply.
What Happens First
Notice also goes out to creditors in the same way. The automatic stay nearly always applies to all adverse action, and not just credit card lawsuits. Foreclosures, repossessions, evictions, and other such things all halt, even if the auction sale is the next day or the repo man is already en route. Special rules apply to renters who owe delinquent rent and for debtors who have filed prior voluntary petitions.
In addition to a petition and schedules, Chapter 13 debtors file a proposed repayment plan. Depending on their income, this plan lasts either three or five years. Secured debts, like delinquent mortgage payments or past-due car notes, must be paid in full. The debtor must show enough excess income in Schedules I and J to be able to make the monthly payments, or the trustee will reject the plan.
What Happens Next
As long as the debtor makes the monthly trustee payments on time, the automatic stay remains in effect for either three or five years, giving the debtor time to bring the account balances current. At the end of that period, any remaining unsecured debt is discharged.
If the monthly payment turn out to be unaffordable, conversion is an option. Under the Bankruptcy Code, debtors have a near-absolute right to change their Chapter 13 to a Chapter 7 at any time, provided they are otherwise eligible.
Whatever type of bankruptcy is best for you and your family, we can help you get your fresh start. We have four office locations in Arkansas.