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    Andrew B Clawson Andrew B Clawson
    Attorney at Law

Bankruptcy Overview & FAQs

What is Bankruptcy?

Bankruptcy is a legal proceeding that allows individuals, businesses, and other organizations to get relief from debts that they are unable to repay. The main purposes of bankruptcy are to give debtors a fresh start and to pay creditors as much as possible from the debtor’s assets, without unnecessarily burdening the debtor. Federal bankruptcy law accomplishes these objectives by, among other things, imposing an “automatic stay” that stops creditors’ efforts to collect most pre-bankruptcy debts–including foreclosure and repossession–and providing a priority scheme for distributing a debtor’s non-exempt assets or the value of those assets to creditors. In most non-business bankruptcy cases debtors file for chapter 7 bankruptcy or chapter 13 bankruptcy.

Will Bankruptcy Stop Creditors From Trying To Collect The Debts That I Owe?

Yes, with a few exceptions. When you file for bankruptcy, an “automatic stay” is created. As soon as you file your bankruptcy petition, the automatic stay prohibits creditors from taking any action to collect a debt from you, including calling you to harass you into paying your debts, starting or continuing with a collection lawsuit, starting or continuing with the foreclosure of your home, and repossessing your car or selling it after it’s been repossessed. The automatic stay offers less protection if you file two or more bankruptcies within 12 months, and a creditor can get “relief” from the automatic stay in some situations. Creditors who wilfully violate the automatic stay, say, by continuing to make collection calls, send collection letters, or sue you to collect a debt after you file your bankruptcy petition, can be punished by the court. Because of this, creditors know better than to continue trying to collect a debt that you owe them after your bankruptcy case is filed.

Will I have To Give Up My Property?

Not unless you want to. In a chapter 7 “liquidation” bankruptcy case, most debtors are able to keep most, if not all, of their assets. This is because the federal bankruptcy allows all debtors to claim an exemption in and keep certain assets, even though they have filed for bankruptcy. For most debtors who file for bankruptcy in Utah, the most common exemptions that are used to protect assets are:
(1) a $20,000 exemption in the debtor’s primary residence;
(2) a $2,500 exemption in one automobile;
(3) one refrigerator, stove/oven, microwave, washer, dryer, and sewing machine;
(4) beds and bedding;
(5) all of the debtors clothes (except for furs and jewelry);
(6) certain furniture up to an aggregate value of $500;
(7) most retirement accounts, including IRAs and 401(k)s (except for contributions made in the last year before filing),
(8) the debtor’s life-insurance policies (except for contributions made in the last year before filing).

Most of these exemptions are doubled if spouses file their bankruptcy case jointly. Using these exemptions, most chapter 7 bankruptcy cases filed in Utah are what are called “no asset cases”, meaning that the debtor has no non-exempt assets that can be liquidated to pay your creditors.

In no-asset bankruptcy cases, unsecured creditors are paid nothing. Even if you have assets that are not exempt, for example where there is more than $20,000 equity in an individual debtors’ home or more than $2,500 equity in an car, debtors with a regular income and disposable income can file a chapter 13 or an individual chapter 11 bankruptcy petition and keep even their non-exempt assets by paying their disposable income and the value of their non-exempt assets to their creditors over time through a three or five-year chapter 13 or chapter 11 bankruptcy plan.

To make sure that you are able to take full advantage of your exemptions in your bankruptcy case, you and your bankruptcy attorney in Salt Lake City will have to keep a few things in mind. The value of the property is not necessarily the amount you paid for it, but what its replacement value was when you filed your bankruptcy case. This may be a lot less than what you paid or what it would cost to buy a new replacement–especially for furniture and cars. You also only need to figure out how much, if any “equity” you have in your property.

Equity is the value of the property minus the amount of money that you owe to a secured creditor that holds a lien or mortgage to secure payment of a debt. For example, if you are an individual debtor using the Utah exemption, and you own a $100,000 house on which you owe $90,000 to the holder of your mortgage, you have $10,000 equity in your home. Using Utah’s $20,000 homestead exemption, you would be able to claim a full exemption in, and thereby keep, your home–even in a chapter 7 bankruptcy case.

To be clear, while exemptions can make it so that you do not have to turn your property over to your bankruptcy trustee, exemptions do not alter the right of a mortgage holder or car loan creditor to get permission from the bankruptcy court to take secured property to cover your debt to them if you get behind.

In a chapter 13 case, you can usually keep all of your property if your plan meets the requirements of the bankruptcy law. In most chapter 13 cases, you will have to pay the mortgages or liens and cure any defaults (albeit, over the full term of your plan) as you would if you didn’t file bankruptcy.

Exemptions vary from state to state, and if you moved to Utah within two years before filing bankruptcy, we will have to look to the exemptions allowed in the state from which you moved. Depending on what state you lived in prior to coming to Utah, you can claim either that state’s exemptions or the federal exemptions allowed in the Bankruptcy Code.

Will Bankruptcy Wipe Out All My Debts?

Yes, with some exceptions. Bankruptcy usually will not wipe out:
(1) money owed for child support or alimony;
(2) most fines and penalties owed to government agencies;
(3) most taxes and debts incurred to pay taxes which can not be discharged (there are, however, exceptions, so ask your bankruptcy lawyer);
(4) student loans, unless you can prove to the court that paying them will be an “undue hardship”;
(5) debts not listed in your bankruptcy papers;
(6) loans that you got by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
(7) debts resulting from “willful and malicious” harm;
(8) debts incurred by driving while intoxicated.

Although bankruptcy will not get rid of most mortgages or other liens or security interests (see the section below on “Lien Stripping” and “Cram Down” for exceptions), bankruptcy will wipe away your obligation to pay any additional money if the property is ultimately repossessed or foreclosed and sold by the creditor.

Will Bankruptcy Affect My Credit?

There is really no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be damaged. Bankruptcy will probably not make things any worse. The fact that you’ve filed a bankruptcy can appear on your credit record for ten years from the date your case was filed. But because bankruptcy generally wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. Also, if you do file bankruptcy, remember that debts that are discharged in your bankruptcy should be listed on your credit report as having a zero balance, meaning you do not owe anything on the debt any more. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct.

Will I Have to Go to Court?

In most bankruptcy cases, you only have to go to a proceeding called the “meeting of creditors” to meet with the bankruptcy trustee and any creditor who chooses to come. Most of the time, this meeting will be a short and simple procedure where you are asked a few questions about your bankruptcy forms and your financial situation. On rare occasions, if complications arise, or if you choose to dispute a debt, you may have to appear at a hearing. In a chapter 13 case, you may also have to appear at a hearing when the judge decides whether your plan should be approved. If you need to go to court, you will receive notice of the court date and time from the court and/or from your attorney.

What Else Should I Know?

Utility services–Public utilities, such as the electric company, cannot refuse or cut off service because you have filed for bankruptcy. However, the utility can require a deposit for future service and you do have to pay bills which arise after bankruptcy is filed. Discrimination–An employer or government agency cannot discriminate against you because you have filed for bankruptcy.

Government agencies and private entities involved in student loan programs also cannot discriminate against you based on a bankruptcy filing. Driver’s license–If you lost your license solely because you couldn’t pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back. Co-signers–If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt.

If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan. Fraudulent Transfers–If, within four years before you file for bankruptcy, you have transferred assets to someone (including family members) for less than reasonably equivalent value, while you were insolvent, or if you made such a transfer with intent to hinder, delay, or defraud your creditors, a bankruptcy trustee might be able to compel the recipient of such transfer to turn the transferred property or its value over to him or her.

You might not get a discharge of your debts if you have made a fraudulent transfer. Preferential Transfers—If, within 90 days before your bankruptcy (or one year in the case of insiders, such as family members) you pay back unsecured debts to your creditors (including family members), while you are insolvent, a bankruptcy trustee might be able to compel the recipient of such a transfer to turn the payment or its value over to him or her, for the benefit of your creditors.

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