Misconception 1: You will lose everything if you
file bankruptcy.
Reality: Even in a liquidation bankruptcy a
debtor is entitled to claim his state law exemptions, which allows a debtor to
retain substantial (perhaps all) property. Certain other forms of bankruptcy allow a debtor
to keep everything he owns, even non-exempt property.
The
most commonly filed type of bankruptcy is under chapter 7 of the bankruptcy
code, and which is commonly referred to as the liquidation or “fresh start”
bankruptcy. In a chapter 7, a debtor’s
non-exempt assets are liquidated to pay creditors. To the extent the debtor has insufficient (or
no) non-exempt assets to pay creditors, most forms of unsecured are then
discharged as part of the process.
While
a debtor is required to surrender non-exempt assets to discharge debt in a
chapter 7, he is allowed to claim his state law exemptions and retain all
qualified exempt property. Every state
has a body of exemption laws that effectively shield certain assets from the
reach of an individual’s creditors. In
other words, there are certain things under state law that can never be taken
from you by your creditors. Those state
law rights are recognized in bankruptcy.
Nevada
happens to have amongst the most generous state law exemption rights in the nation. Notably, Nevada law allows an individual to
protect up to $550,000 of equity in a primary residence, up to $500,000 in
retirement accounts, up to $15,000 equity in a motor vehicle and usually all household
goods, furnishings, clothing, art and jewelry.
While
most people envision a chapter 7 liquidation bankruptcy case when thinking
about bankruptcy, other forms of bankruptcy exist that allow a debtor to retain
all non-exempt property. For example,
while in a chapter 7 debtor gives up non-exempt assets to discharge debt, in a
chapter 13 a debtor will retain all of his non-exemption property. Rather than surrendering non-exempt property,
the debtor is required to make monthly payments for a period of time to pay
back a portion of his debt, while discharging a portion of his debt.
Misconception 2: Bankruptcy is only for those at the
doorstep of financial ruin.
Reality: Often times, the most beneficial
bankruptcies are filed as financial tools to allow individual or business to
preserve assets, restructure and reduce debt, and ultimately avoid financial ruin.
While
bankruptcy certainly provides a safe harbor for those in financial ruin, it can
also provide protection and benefit for individuals and businesses trying to
reduce their debt load, restructure their financial affairs and create net cash
flow. For example, the bankruptcy code
allows a debtor to modify various forms of secured debt, even without the consent/agreement
of their creditors. Certain secured
claims can be reduced to the current market value of the collateral, interest
rates can be reduced and repayment terms can be extended. Bankruptcy
also provides a means of terminating bad lease agreements and capping the
damages of the landlord. In many cases, most
of the capped lease damages are ultimately discharged as part of the bankruptcy.
Bankruptcy
can also provide some unique benefits for individuals with tax
liabilities. While tax liabilities
cannot be discharged in bankruptcy, penalties can be discharged. In addition, by creating a structured
repayment of the actual tax liability through a bankruptcy, the debtor will be
able to repay the tax liability without any further accruing interest or
penalties. Specifically, once a
bankruptcy is filed, the amount of the tax claim is fixed as of the date of
filing. While that liability must be
paid in full, interest is not required.
Misconception 3: It is
impossible to file bankruptcy these days.Reality: Some form of bankruptcy relief is still available to everyone who is an
honest, but unfortunate debtor.
In
2005, bankruptcy law was changed to make it more difficult for an individual with
regular disposable monthly income to file a chapter 7 bankruptcy. The purpose of the law changes was to force
more people to file chapter 13 bankruptcies, where creditors usually receive some
small return on their claim through monthly payments made by the debtor. The law was not intended to, and in fact did
not, eliminate the ability for an individual to file bankruptcy.
While
the test used to determine whether one qualifies for a chapter 7 is complex and
involved, it can be generally stated that anyone with income below the median
for the state automatically qualifies for a chapter 7. Even individuals with earnings greater than
the state median may still file a chapter 7, if their monthly obligations
(including secured debt payments, living expenses, child costs, etc.) leave
them with little to no “disposable” monthly income.
In
addition, anyone whose debt is considered “primarily business debt”, as opposed
to “primarily consumer debt”, automatically qualifies for a chapter 7.
For
those that do not qualify to file a chapter 7, bankruptcy still affords relief
under either chapter 11 or 13.