I have had a number of free consultations lately where the person I am giving debt relief advice to says something along the lines of “I thought I could just file bankruptcy and wipe out my debts.” This comes after they learn that they are not an “easy” Chapter 7 bankruptcy, usually because their income is too high to qualify or they have some non-exempt property that complicates the issue. I am going to explain here what I explain to them: bankruptcy is not one-size-fits-all.
INCOME AND ASSETS
Bankruptcy is a function of two things, income and assets. Every state has set median income limits for your household size. If you are below the median income limit for your state and household size, you technically qualify for Chapter 7 bankruptcy. Chapter 7 is the chapter most people think of when they think of bankruptcy. It is over quickly, it discharges most common debts (such as credit cards, medical bills, repossession deficiencies and personal loans) and the majority of people who file Chapter 7 keep everything they own through the process.
However, just because you qualify for Chapter 7 bankruptcy in income doesn’t mean it is a good fit for your situation. This is because of the asset prong of the equation. Whenever a person or married couple files for bankruptcy, they must disclose and include in the bankruptcy filing everything they own. Period. There is no partial bankruptcy. There is no such thing as a bankruptcy where you do not include your car, your house or your bank accounts. It is an all or nothing bargain to get out of debt. But, this does not mean that you lose your car, your house or what is in your bank account. Everyone who files bankruptcy gets to claim certain exemptions, or safe zones, for their property. Each state is different, but there are exemptions that allow you to protect your property in every state in the union. (Colorado’s Bankruptcy Exemptions)
When you evaluate your debt relief options, hopefully with an experienced bankruptcy attorney who offers free consultations (like Wink & Wink!), you will look at all of your assets and determine if you have any assets that are non-exempt—meaning NOT SAFE in bankruptcy. If you have assets that are non-exempt, then even if you qualify for Chapter 7 based on your income, you may lose property if you file a Chapter 7. This is when things get complicated.
I will use Colorado as an example, since that is the State in which I practice bankruptcy law. In Colorado, you are allowed to keep a certain amount of equity in your primary residence. If you are under 60 years of age and not disabled, the amount of equity that is safe in bankruptcy is $75,000. Equity is what if left over after a hypothetical sale where all mortgages are paid off. SO, for this example we will use a house that is worth $250,000 with a mortgage of $150,000. In that case, the equity in the property is $100,000. That is $25,000 more than the $75,000 you are allowed to keep in bankruptcy. Therefore, if you were looking to file bankruptcy but you own a house with $100,000 equity, you have a problem. If you were to file Chapter 7, the bankruptcy Trustee can sell your home out from under you as long as they pay you’re the $75,000 exemption amount.
Aside: Who is the Trustee? A quasi-Federal employee who is appointed to monitor your bankruptcy case to represent your creditors. The bankruptcy Trustee’s job is to collect non-exempt assets in bankruptcy cases and distribute them, pro rata, to the creditors. They take a cut of everything they collect, so they are financially motivated to collect non-exempt assets (i.e., those not protected by law).
So, if you have non-exempt home equity, you most likely will not want to file Chapter 7 bankruptcy, since you may lose your house. This is where you need to look at alternatives, such as filing a Chapter 13 bankruptcy, where you can pay to keep the property and pay for the non-exempt equity in a three to five year payment plan. Another option would be to settle your debt for less than what you owe. Yet another options is to liquidate the non-exempt property (it isn’t always a house!) prior to filing bankruptcy and spend the proceeds in a way that is not going to get you into trouble with the bankruptcy Trustee or bankruptcy Court (here, as in every bankruptcy, legal representation is a MUST.)
And to briefly touch on the income prong of the equation. Many people do not qualify for Chapter 7 based on their household income. As I mentioned earlier, each state has a median income limit for your household size. If your income is over the limit, you may not qualify for Chapter 7 bankruptcy and will need to look at the Chapter 13 option or debt settlement.
The bottom line is that every bankruptcy analysis is different. It is not a one-size-fits-all equation. For many, an “easy” Chapter 7 bankruptcy is in the cards, but if you have complications on either income or assets, you may still achieve powerful debt relief in bankruptcy or outside of it. It just may not look like the image you have in your mind when you think bankruptcy. The best advice is to get good advice. If you are struggling with debt, call an experienced, local bankruptcy attorney who offers free consultations and get educated. Most people qualify for bankruptcy relief, it is just a matter of what type fits your life.