Introduction to Bankruptcy for Individuals in Phoenix and Tucson
Bankruptcy is often a confusing subject. As with most issues involving the law, it can be hard to dig through all the legal jargon used. Especially when you’re feeling stressed about your finances, it can be even harder to understand the process.
We’re here to walk you through the bankruptcy process and understand what relief bankruptcy offers you as an individual. In this next series of blog posts we want to offer you information about how bankruptcy works.
Under United States law individuals have the option of filing different types of bankruptcy when they are under the burden of too much debt. We’ll be discussing Chapters 7, 11, and 13 bankruptcy. We’ll spend the most time on Chapters 7 and 13 bankruptcy as those are most applicable to individuals like you.
Basic Concepts in Bankruptcy
First let’s look at some common terms used in bankruptcy.
Once you file bankruptcy you are considered the “debtor.” Everyone you owe money to is a “creditor.” All the property that is dealt with during bankruptcy is called the bankruptcy “estate.” Under the law, you’re allowed to “exclude” some property from your estate, and you can claim an “exemption” for certain amounts and kinds of property.
Chapter 7 bankruptcy is often referred to as liquidation or straight bankruptcy. In a Chapter 7 bankruptcy anything you own that included in the bankruptcy estate is converted to cash and then given to your creditors to settle your debt.
At the end of Chapter 7 bankruptcy you receive what is call a “discharge.” A discharge means that you no longer have any personal responsibility to pay the debts included in the discharge.
In contrast to Chapter 7 bankruptcy, Chapter 11 or 13 bankruptcy is often referred to as a reorganization of your financial situation. We most often hear about Chapter 11 being used for companies. And more commonly you’ll hear about Chapter 13 being used for individuals.
The requirements and rules under Chapter 13 usually make it more attractive for individuals to use rather than Chapter 11.
For example, if you ever read news about large companies reorganizing business finances through Chapter 11 bankruptcy, you may have seen that creditors have the right to vote on or approve of the companies proposed reorganization.
Under Chapter 13 bankruptcy, the companies or individuals you owe money to don’t vote on or approve your proposed plan for paying back some of what you owe. And unlike Chapter 11, only you propose the plan for some or all of your debts. In Chapter 11, your creditors can also propose plans.
If you consider that Chapter 11 is most often used by large companies, it makes sense that creditors have the right to propose or vote on the plan to repay debt. Because very large sums of money that impact multiple companies are usually involved, creditors have a much larger stake in what happens in the bankruptcy.
Just as in Chapter 7 bankruptcy, at the end of payment plan period under Chapter 13 you will receive a discharge. This means you no longer have any personal responsibility to pay the debts included in the discharge.
An important point to remember is that when you owe money on a house or other property such as a car (secured loans), the mortgage company or bank can’t come after you personally if that loan was discharged in the bankruptcy. However, the company has a right to the property itself unless you pay the debt, which means that it can foreclose or repossess the property if you can’t make the payments.
Why is bankruptcy available?
Bankruptcy has two purposes. The first is to give individuals and companies the chance to get a fresh start when faced with financial problems. The second purpose is to give all creditors an equal chance to recover what is owed to them by the debtor who is filing bankruptcy.
Individuals who file bankruptcy often have little property to be distributed to creditors. So the most important factor in bankruptcy is to give individuals and companies a new beginning.
The Supreme Court has described bankruptcy as giving “…to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)
Bankruptcy has also been described as a tool that “greases the wheels of a capitalist economy, offering a safety valve that somewhat tempers its harshness for those who do not fare well in free-market competition…. (It also) encourages risk-taking and expansion.” (Consumer and Bankruptcy Law Practice, 2009)
For creditors, bankruptcy offers them an equal opportunity to the assets owned by an individual or company. It also discourages (and stops) creditors from rushing in to foreclose or repossess property owned by the individual.
What Property is Included in Your Bankruptcy Filing? Understanding the Bankruptcy “Estate”
We most often hear the word estate when someone dies and leaves property or money to family and friends. Estate is used in bankruptcy to describe all of the property that is handled by the court in a bankruptcy.
When you file bankruptcy, the “estate” is created. The estate consists of whatever property you own or have some legal right to, including property that is jointly owned.
If you own property with another person, but only you file bankruptcy, it is only your portion of that property that is included in the estate as a general rule. However, this can be a complicated issue. If you have jointly owned property it is best to set up a free consultation with one of our attorneys to discuss the specifics of your case.
Examples of what is included in your bankruptcy estate would be rents from property owned by you that are included in the estate already. So if you have a rental property and collect rent, that money is included in the estate. If you filed an insurance claim for a car accident before you filed bankruptcy and then receive the money after bankruptcy started this is included in the bankruptcy estate.
Most of the time, if you get property after filing bankruptcy this will not be included in the estate. But, there are exceptions to this when you get the property within 180 days after filing bankruptcy. If you inherit money or property with 180 days, this will be included in the bankruptcy estate. And if you get a divorce and receive a property settlement, or you receive life insurance proceeds within 180 days, these are included in the estate.
Property Not Included in the Estate
There are some kinds of property that are not included in the bankruptcy estate. In general, all retirement plans are not included in the estate. Before the 2005 bankruptcy law changes, certain retirement plans were not included, but since 2005, most retirement plans are exempt from bankruptcy. If you have an IRA that has never been rolled over, this amount is capped at $1,095,000.
If you have started education savings accounts for your children, they are generally not included in the estate. There are some limitations on this. If you deposited money into an education savings plan within 1 year they are included in the estate. And if a deposit was made within 1-2 years before filing bankruptcy then you can only exclude $5475 per student/child.
In order to make sure that education savings accounts are not included in the bankruptcy estate, the money must be for a child, stepchild, grandchild, or stepgrandchild.
Another question many clients have is about tax refunds. Because tax refunds are generally included in the estate, it is important to consult with our attorneys to make sure that you chose the right time to file your bankruptcy when expecting a refund.
In this general overview of bankruptcy, we’ve merely touched the surface of the issues surrounding the filing of your case. We’ll going into depth over the next weeks and months to give you a better look at bankruptcy. However, you may need to talk to an attorney sooner. For detailed information about how bankruptcy will affect you, sign up for a free consultation with one of our attorneys.