Call Us: 954-859-6662
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Bankruptcy 101

What is a bankruptcy?

For individuals, there are two main types of bankruptcy.  The first is a Chapter 7 bankruptcy.  The two main things to know about Chapter 7 bankruptcy is first that you list all your assets, and second you are allowed $1,000.00 of personal property exemptions plus $1,000.00 in equity in a vehicle.  This is the exemption allowance if you own a homestead.  If you don’t own a homestead property, the bankruptcy laws allow an additional $4,000.00 in personal property exemptions.  Personal property exemptions are usually things like, cash on hand, money in all personal bank accounts, the value of your clothing, jewelry, and furniture.  Also, the bankruptcy exemptions include the value of any stock you own (publicly traded stock or stock in your private company), the value of any lawsuit you may have, if someone has died and left you money (this includes any inheritance that you may be entitled to within six months of the filing for the bankruptcy) and any equity in a vehicle over $1,000.00.  There are additional exemptions like your homestead, qualified retirement plans (401k or IRA’s), child support or alimony are just some of those exemptions that would be recognized by the bankruptcy court. If you have more assets than allowed by the bankruptcy court, the Chapter 7 bankruptcy trustee can take the amount over the exemptions to give to your creditors.  Chapter 7 cases usually take between six and eight months to complete.  Once you get your discharge (order telling creditors that the debts are forgiven), you can start to rebuild your credit.

If you have more assets than the bankruptcy court allows, you have the option of filing a Chapter 13 bankruptcy.  In a Chapter 13, you would have to pay your unsecured creditors the same amount of money they would receive if you had to pay the Chapter 7 bankruptcy trustee.  There are many more things you can do in a Chapter 13 bankruptcy.  You can strip down the interest on a car loan.  In some cases you can strip the value of the car down to its actual value, and the rest of the money owed on the vehicle would be treated as an unsecured debt.  You can get rid of a second mortgage or maintenance (homeowners or condo) on your homestead if there is no equity after the payment of the first mortgage.  You can strip down the mortgage on an investment property to its value and reduce the interest to pay over five years.  At the end of the five year period, you will own that investment property free and clear or the second mortgage and/or maintenance will be discharged.  Also, you would own the vehicle free and clear.  There are a lot of additional things that can be done with a Chapter 13 bankruptcy.  It is very helpful  in a lot of different ways to be in a Chapter 13 bankruptcy.

Although it takes between three to five years to complete a Chapter 13 bankruptcy, you can begin to rebuild your credit immediately.  By the end of your bankruptcy (Chapter 7 bankruptcy or Chapter 13 bankruptcy) your credit may be much better than when you started.

What is a Chapter 7 bankruptcy?

A Chapter 7 bankruptcy is a liquidation bankruptcy.  You agree to have assets of no greater than $1,000.00, if you own a homestead, and $5,000.00, if you don’t own a homestead.  You are also allowed $1,000.00 in equity in a vehicle whether you own a homestead or not.  As stated above, there are other assets you may have that are exempt according to the Florida laws.  As far as valuations are concerned, the question is if you had an item (say a vehicle), and you needed to sell it, what could you get for it.  If it needed to be repaired, the cost of that repair would reduce the value of the car.  So it’s the retail value of the vehicle after its put is perfect condition.  I would advise that you get an appraisal from Carmax, and if the vehicle needs any repairs, go to the dealer and get an estimate for the repairs.  That will give the true retail value of the vehicle.

What is a Chapter 13 bankruptcy?

A Chapter 13 bankruptcy is a bankruptcy that has a repayment plan.  If you cannot file a Chapter 7 bankruptcy because you have too many non-exempt assets, or you are behind on your mortgage or car payments or income taxes, Chapter 13 bankruptcy is the bankruptcy you should file.  Once your house is sold at a foreclosure sale or your car is repossessed, it’s too late to save that asset.  You need to see an attorney as soon as possible to get advice as to what your best option is.  Many times, the best option is to do nothing.  But many times, a lot can be accomplished if you file for bankruptcy.  In a Chapter 13 bankruptcy, you can cure any deficiencies you have in  mortgage payments or car payments, as well as repay non-dischargeable income taxes and real estate taxes.  Dischargability  of income taxes will be discussed below.

Why hire a bankruptcy attorney?

Bankruptcy is very complicated.  Many lawyers will not get involved in bankruptcy cases because of the complexities of the bankruptcy code.  A lawyer who files the bankruptcy for you, needs to be familiar with the bankruptcy code.  There is a form called the Means Test.  In this test, you need to show that you qualify for a Chapter 7 bankruptcy or if you are filing a Chapter 13 bankruptcy, you need to know what deductions you are allowed to take.  The bankruptcy code requires you to use your income from all sources for the six months prior to the filing of the bankruptcy.  Your actual expenses are not relevant in most cases.  The bankruptcy court uses what the IRS says are reasonable expenses.  They are 100% not reasonable expenses, but those are the only expenses that you are allowed to use.  There are some actual expenses that you can use, like secured debt (mortgage or a car payment).  If the Means Test shows you have excess income, you must file a Chapter 13 bankruptcy, and pay your creditors the amount the Means Test say is your excess income.  Also, your lawyer needs to know about all the exemptions you are entitled to take according to the bankruptcy code, Florida Statutes and the Florida Constitution.  Without that knowledge, your bankruptcy case is destined to fail.

Are debts to the IRS dischargeable?

This is a very complicated question.  The bankruptcy code says that an income tax that is more than three years old, that has been filed on time and has been assessed by the IRS within 240 days of the filing of the bankruptcy, that tax can be wiped out.  The problems arise if the tax return has been filed late, or if the IRS has not assessed the return within 240 days or a lien has been filed.  If a lien is filed, that makes the normally dischargeable tax non-dischargeable up to the value of your assets.  So if you owe $20,000.00 to the IRS, and the IRS has filed a lien and you have assets of $5,000.00, you would have to pay back $5,000.00 back to the IRS with a small amount of interest.  This IRS lien also attaches to exempt property as well.  So if you have equity in your homestead, or you have a retirement, the lien would attach to those assets.

Exemptions allow you to exclude assets from the reach of creditors.  Depending on your citizenship status, you may be able to use the U. S. Bankruptcy Code exemptions located in Section 522 of the U. S. Bankruptcy Code, Florida Statutes Section 222 (among other statutes) and the State of Florida Constitution. 

A homestead exemption makes you homestead (the home where you live) exempt from the attachment of lien or forced sale by creditors.  Under the Florida Constitution, ½ acre located within a municipality or 250 acres outside a municipality (Article x Section III) are exempt from the reach of creditors.

A secured debt is where you have signed a promissory note and there is collateral for the loan (a mortgage or a car).  If you default on the loan the creditor can take the stuff that secures the loan.  They can foreclose on the mortgage and take your real property, or they can repossess your car.  An unsecured debt is when you promises to repay a loan, and there is no collateral.  So the creditors only option is to sue you for the return of the money if you default on the loan.

For both a Chapter 7 bankruptcy and a Chapter 13 bankruptcy, there is one hearing that all Debtor’s must attend.  It’s not before a judge.  It’s before the bankruptcy trustee.  The hearing is very informal.  During Covid-19, the hearings are by phone.  The hearing generally lasts two to three minutes.  They usually ask everyone the same questions.  You should be prepared prior to the hearing by you attorney.  Once that hearing is over, you generally do not have to attend any more hearings.

When people come to see a bankruptcy attorney, their credit is usually already bad or soon will be.  You cannot rebuild your credit until you resolve all of your negative financial issues.  The fastest way to do that is by filing for bankruptcy.  Once the bankruptcy is filed, you can start to rebuild your credit.  You will be able to get a credit card (not a debit card).  Every month you will make a charge, and immediately pay the card off in full.  Within two years, your credit should be in excess of 700.

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