Should I file bankruptcy?
Making the decision to file for bankruptcy is not an easy decision that should never be taken lightly. For most it is a choice that feels like it has been forced upon you when you have run out of other options. However, it can be a temporary setback which allows you to move forward with your life free from the shackles of debt.
The downside of bankruptcy is that your credit will be negatively affected for 2 – 7 years. You will likely not be able to secure a mortgage for 4 years. Any credit you can secure for the first few years after your bankruptcy will likely have a high interest rate.
The benefits of bankruptcy are numerous. The moment you file for bankruptcy, an “automatic stay” is issued by the court. The automatic stay stops most legal proceedings against you, prevents your creditors from calling you or attempting to collect the debt, and can even halt a foreclosure action against your home. Additionally, depending on which chapter of bankruptcy you file choose to file, your debts will be cleared anywhere between a few months to five years.
Once you have made the decision to file, figuring out where to begin can be even more mind boggling. In television, commercials, and the news we hear about different kinds of bankruptcy, without ever really learning and understanding the difference between the different options. Figuring out what kind of bankruptcy is best for your situation can be just as taxing as making the decision to file in the first place.
The two main types of bankruptcy: which is right for you?
For individuals there are two primary forms of bankruptcy: Chapter 7 and Chapter 13. The name comes from the chapter in the bankruptcy code where each type is defined. There are benefits to both options, and you may only qualify for one. However, before even trying to figure out what kind of bankruptcy will be best for you, you need to best understand your current situation.
Bankruptcy proceedings are based on what your average monthly income is, your disposable income, and how much debt you owe.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows the debtor to wipe out some if not all of their debt, but the debtor might have to give up some of their property. A debtor automatically qualifies for chapter 7 bankruptcy if their monthly income is less than or equal to the median income of that area for a household of that size. This income threshold fluctuates over time but is generally in the ball park of $43,000 for an individual or $58,000 for a family of 3.
If a debtor’s monthly income is more than the median income of that area for a household of that size, they may still qualify for chapter 7 bankruptcy if they pass the means test. The means test is a complicated formula where your disposable income must be less than statutorily prescribed amounts. It would be difficult to describe here but an attorney can help you to determine if you qualify.
As stated above, chapter 7 bankruptcy allows you discharge most of your debts without having to pay them back. Property might be taken by a bankruptcy trustee (appointed by the courts) to satisfy the debts before the debt will be discharged. Certain property will be exempt and cannot be taken through bankruptcy, these exemptions depend on what state you live in: some states follow the federal exemptions in the Bankruptcy Code, others have a list of their own.
Florida has their own exemptions. The most common and possibly most important exemptions in Florida is the Homestead Exemption.
Florida Homestead & Exemptions
The Homestead exemption protects your residence and some land from being seized in many cases. The Homestead exemption also protects some personal property from being seized. Specifically protected property is:
- One-half acre of property and the residence upon it if located within a municipality, or 160 acres and the residence and all improvements made upon it if located outside a municipality. This applies specifically to where you or your family lives. You can only have one homestead at a time; the purpose of this exemption is so that people and families do not lose their home in the event of liens or bankruptcy. The homestead exemption does not protect your residence if you are not paying your mortgage, if there are liens for improvements of the property, or from federal tax liens. If you decide to sell your homestead, the money made from that sale is also protected if it is used within a reasonable amount of time to purchase another homestead.
- Up to $1,000.00 in personal property is also exempted. To determine what property you are going to exempt, you will have to make an inventory of all personal property listing its current fair market value, and then designate certain property as exempt.
There is also an exemption for personal property up to $4,000.00 known as the wild card exemption. This exemption applies if you do not claim the homestead exemption.
Certain types of savings accounts are also exempted. These include certain college savings accounts, hurricane savings accounts, certain retirement accounts, and some health care savings accounts.
Property may also be saved if the Trustee abandons the property. Abandoned property is property that does not meet one of the exemption listed above, but it is difficult for the trustee to sell or it is not worth very much, so the trustee lets you keep the property.
Property that is likely to be seized is property that is used as collateral for a secured debt. This property maybe redeemed if you are able to make payments on it. The most common is a vehicle. Not only is your property protected for up to $1,000.00 in equity (possibly more if married), if you are current and able to continue making payments on your vehicle, you may be able to keep it. Depending on your specific situation, you may lose little to no property and still have debts discharged.
The entire Chapter 7 Bankruptcy process takes between 3 and 6 months. During this process, you are required to file the bankruptcy papers and attend a creditor’s meeting. At this creditor’s meeting, representatives of all of your known creditors have the opportunity to be present, and you will be asked questions about your bankruptcy. Throughout this process, there is an automatic stay that protects you from creditors trying to seize any of your assets, and temporarily relieves you from having to pay debts that are incurred prior to your filing.
Chapter 13 Bankruptcy, known as a reorganization bankruptcy, is an option for individual debtors that do not qualify for Chapter 7 bankruptcy. Under chapter 13, a debtor gets to keep their property, but they are required to repay debts over a three to seven-year period through a repayment plan.
To be qualified for Chapter 13 Bankruptcy, you must be an individual (cannot be a business of any kind), your unsecured debts may not exceed $1,149,525.00 and unsecured debts may not be more than $383,175.00. You must also have sufficient disposable income to pay a repayment plan. Income can come from a variety of sources, including (but not limited to): wages, social security benefits, alimony you receive, and rents paid to you. Lastly, you must have filed federal and state (where applicable) income taxes for the past four years. If you are not able to provide proof or become current on your filings, your case will be dismissed.
Under Chapter 13 Bankruptcy, you will be required to complete a repayment plan over three or five years. The duration of your repayment plan depends on your monthly income. Monthly income is your average income over the six months preceding your filing of bankruptcy. If your monthly income is less than the median income for your area and a family of your size, then you may propose a 3-year repayment plan. If, on the other hand, your monthly income is more than the median income for a household of your size for your area, you may propose a 5-year repayment plan. A 3-year plan may need to be extended depending on the amount of your debt; a 5-year plan may be paid off early if you are able to pay debts in full.
Under your repayment, excess disposable income goes towards paying your debt. Your repayment plan must also include regular payments to your secured creditors; these payments will account for current payments owed and any previously missed payments. Unsecured debts may not be paid in full under the repayment plan, and any remaining balance will be discharged at the end of the repayment plan. There will be certain debts that cannot be discharged, and must be paid in full. These debts include:
- Filing fee for filing for bankruptcy
- The trustee’s commission which is three to ten percent of the montly payments
- Attorney’s fees
- Back alimony
- Tax debts
- Wages, salaries, and commissions owed to employees
- Mortgage defaults (or lose your house)
- Secured debts (or lose the property).
The last requirement for chapter 13 bankruptcy is that you must complete an approved credit counseling class. Agencies that offer such classes are allowed to charge a fee, but must offer a reduced fee or rate based off of your ability to pay.
Throughout your repayment plan, you will be required to follow a strict budget that will not allow you to spend money on many extras; however, at the end of your plan, your debts will be discharged and you will still have most of your property.
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