Questions and Answers on Personal Bankruptcy

Question 1: When individuals file a chapter 7 bankruptcy case, are they able to keep any of their property such as their house, car, or furniture? 

Answer 1: The short answer is yes.  Any discussion of what a person keeps in a bankruptcy case requires a discussion of three key concepts in bankruptcy:  the estate, the trustee, and exemptions.  

Let's start with an example of how bankruptcy cases were handled during the early days of this country.  Consider the case of a hard-pressed debtor in need of relief from debt.  The debtor would file a petition with the bankruptcy court.  All property of the debtor then became property of his bankruptcy "estate".   A trustee was appointed;  who immediately took possession of all property, period,  horses, wagons, plows, tools, etc., brought it all into town, and auctioned it off on the courthouse steps.  The proceeds were paid over on the spot to awaiting creditors.   Debtors were able literally to keep the clothes on their backs, a little food,  and off they went, free of debt.  

The modern system retains some of the elements of the previous system, but affords a much broader fresh start for persons who file bankruptcy.  Under current bankruptcy law, the debtor, with the assistance of his/her attorney, files a bankruptcy petition with detailed schedules of property and debts, and a statement of financial affairs.  All property still becomes property of the bankruptcy estate.  A trustee is still appointed.  Here the similarity to the old-time bankruptcy system ends.  Under current law, people filing bankruptcy can exempt substantial amounts of property, making the property unavailable to the trustee.  

Exemption laws are fixed by each state, and then are used in bankruptcy cases, which are federal proceedings.    Exemption laws protect a debtor's equity in property (meaning the difference between value and the amount owed).  If there is no available equity for the trustee after considering the exemption, the trustee does not sell the property, and it is retained by the debtor. 

Here are a few examples of property being saved from sale by the trustee by use of exemptions:

Note:  These examples are for teaching purposes only, using exemptions available in California under certain circumstances.  Every state has different exemption statutes.   Due to the complexity of the law, you should consult an attorney before considering a bankruptcy case. 

Question 2:   How long is my credit effected if I file a bankruptcy case?

Answer 2:  It is always good to consider all of the consequences of a bankruptcy case.  A bankruptcy filing remains on your credit report for 10 years.  This does not, however, mean that you will be denied credit for the next 10 years.   A person filing bankruptcy should plan to take a "vacation" from debt for the first few years.  Many people use this period as a time to rebuild credit by charging small manageable amounts, and paying it back promptly. 

Although lenders' policies toward persons who have filed a bankruptcy case vary, a few basics apply.  First, home mortgage lenders are usually more concerned with current income and expenses than with a past bankruptcy.  Also, persons who have filed bankruptcy may be required to pay a higher interest rate and/or a larger down payment.  Finally, after the passage of some time, the bankruptcy case becomes simply  a fact, one of many items taken into consideration when a credit decision is made.  

Question 3:  Are there some debts which are not discharged in a chapter 7 bankruptcy case?
 
 Answer 3:   Yes.   Non-dischargeable debts fit into two broad categories: 

1. Debts which are non-dischargeable as a matter of law.  Examples include most tax obligations, child and spousal support,  and criminal fines.
2. "Bad-boy or "bad-girl" debts which come into existence due to the debtor's bad acts, such as fraud, theft, or  breach of fiduciary duty.   Note that simply not paying a debt, even if one "promised" to pay it, does not fit into any of the non-dischargeable categories.

Debts in category no. 1 require no court action.  They are non-
dischargeable, period.   The debts in category no. 2, however, require the creditor to file a lawsuit in the bankruptcy case.  The case, which is called an Adversary Proceeding, is like any other law suit, requiring proof, and adherence to the rules of procedure and evidence.