Will Bankruptcy Wipe Out All My Debts?
Yes, with some exceptions. Bankruptcy will not normally wipe out:
- Child support & other domestic support obligations
- Governmental fines & penalties
- Most taxes
- Debts incurred through fraud
- Debts resulting from intentional harm
- Student loans (unless you bring a separate lawsuit in bankruptcy court and the judge decides that payment would be an undue hardship)
- Mortgages, car loans, liens and other security interests, which are not paid in your bankruptcy case, unless you surrender the collateral
What Property Can I Keep?
The vast majority of people who file bankruptcy are able to keep all of their property.
The law creates various categories of property and dollar maximums you can keep. These are called exemptions. What you can keep is determined by these exemptions.
Long-term Wisconsin residents (over two years) can choose to use federal or state exemptions, but you can’t mix and match. You must use all federal or all state. A brief summary of some of the more commonly used exemptions follows.
|Asset||Federal Law Amount||State Law Amount|
|Household goods and clothing||$13,400. No single item over $625.||$12,000|
|Jewelry||$1,700||Included in household goods above.|
|Tools of the trade (business assets)||$2,525||$15,000|
|Life insurance (cash value)||$13,400||$150,000 (but only $4,000 if acquired within the last 24 months)|
|Retirement/Pension||Unlimited if IRS & ERISA qualified, & not inherited.||Not to exceed $1,000,000 if IRS & ERISA qualified, & not inherited.|
|Motor vehicle (equity)||$4,000||$4,000 (plus unused household goods exemption)|
|Wildcard (can be used to protect anything)||$1,325 plus up to $12,575 in unused homestead exemption for a maximum of $13,900.||None|
|Bank account||None (use wildcard)||$5,000|
Exemption amounts are doubled for married couples filing bankruptcy jointly.
What Exemptions Apply to Me?
By way of background, each state has its own exemption laws. In addition, federal exemptions are provided for in the bankruptcy law. In some states, like Wisconsin, you can choose between your state’s exemptions or the federal exemptions. In other states, like Tennessee, you must use your state’s exemptions.
In order to determine which state’s exemptions apply to you, look to where you lived during the last 730 days. If you have lived in one state, Wisconsin for example, for the entire 730 day period prior to filing, then you can pick between the Wisconsin or federal exemptions. If you have lived in Tennessee the entire 730 days prior to filing the Tennessee exemptions apply, but you cannot choose the federal exemptions.
If you have lived in two or more states during the 730 days prior to filing we look to the 180 days preceding the 730 days before filing. In that situation, the applicable state exemptions are those for the state in which you lived for all or the majority of the 180 days preceding the 730 days before filing bankruptcy. If that state is Wisconsin you can choose between the Wisconsin and federal exemptions. If that state is Tennessee, you must use the Tennessee exemptions.
How Do I Value My property?
For exemption purposes, property is generally valued at what it would cost to replace it with a similar used item of the same age and condition. So the value might be similar to what such items sell for on Craig’s List, eBay, Goodwill or a rummage sale. This is generally substantially less than what you paid for the property.
What is Equity?
For property that is collateral for a loan, you need only exempt your equity in the property. For example, if you own a house worth $50,000 with a mortgage of $34,000 and a home equity loan of $6,000, you need only exempt $10,000 (i.e., your equity in the home).
Exemptions prevent the bankruptcy trustee from taking your property and selling it to raise funds for your unsecured creditors. Exemptions do not prevent “secured” creditors from taking their collateral if you are behind on the payments. In that case, you should consider filing chapter 13.
What Will Happen to My Home and Car if I File Bankruptcy?
In most cases, you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt & the property is insured.
Home and auto lenders generally have a “security interest” in your home or auto (the “collateral”). Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the auto, during or after the bankruptcy case.
There are several ways that you can keep the collateral (your home or auto) after you file bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. This is called reaffirmation. Under certain circumstances, you can pay the creditor the amount that the property you want to keep is worth and wipe-out of the balance of the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase those same goods), you can often keep your property without making any more payments on the debt.
Can I Surrender My Home or Auto in Bankruptcy?
Yes. If you no longer wish to keep your home or auto, bankruptcy is the perfect time to give it back.
Normally, when you voluntarily surrender your auto to the lender, the lender will sell it at auction and apply the sales proceeds to the debt you owe. If the sales proceeds are less the the amount of the debt, you still owe the balance (called the deficiency). But if you surrender your auto in bankruptcy, the deficiency is wiped out by your bankruptcy filing.
Bankruptcy is also a great time to get out of an auto lease.
Homes are a little different. A mortgage lender receives a shortened foreclosure process if it waives any deficiency (agrees to just take the house and not seek any money from you). 1st mortgage lenders commonly waive any deficiency. 2nd Mortgage lenders almost never waive a deficiency.
Can Bankruptcy Stop a Garnishment?
Yes. A bankruptcy filing will stop most garnishments. In addition, it is often possible to recover garnished wages. If more than $600 was garnished in the 90 days leading up to your bankruptcy filing, we can usually get that money back for you. If less than $600 was garnished in the 90 days leading up to your bankruptcy filing, it cannot be recovered. Anything garnished more than 90 days prior to your bankruptcy filing cannot be recovered.
Can Bankruptcy Stop a Utility Disconnection?
Yes. If you file bankruptcy before your utilities are disconnected, then you cannot be disconnected. If you file bankruptcy after you have already been disconnected, then you must be re-connected. Any charges incurred prior to your bankruptcy filing will be wiped out. You must pay any new charges incurred after filing. And the utility company is entitled to a security deposit in case you don’t pay the new charges. The security deposit is calculated by adding together the two consecutive highest months bills over the last year.
Do I Need a Credit Report?
That’s up to you. If you are confident that you have identified all of your debts, it’s probably not necessary. If you’re concerned that you may be forgetting about debts a credit report can be very helpful. However, credit reports are not perfect, and sometimes don’t include all of your debts.
Should I Reaffirm a Debt?
Generally, if you want to keep property that is collateral (security) for a loan, such as your home or car, you must sign a reaffirmation agreement. The lenders are familiar with this process and it is usually routine.
A creditor is secured if it has collateral (a lien on your property) it can take (repossess or foreclose) if you fail to pay (or keep the collateral insured). The most common secured creditors are mortgage and auto lenders. Debts on store issued credit cards are sometimes secured by the goods purchased with the card. Most other creditors are unsecured.
Effect of Reaffirmation
If you sign a Reaffirmation Agreement you owe the reaffirmed debt just as if you didn’t file bankruptcy. If you don’t sign a Reaffirmation Agreement, the debt is wiped out (unless an exception applies). The secured creditor retains its lien on its collateral regardless of whether or not you sign a Reaffirmation Agreement. So, if you sign a Reaffirmation Agreement, the creditor could seek to repossess the collateral and/or seek to collect money from you (if you fail to make your payments). If you don’t sign a Reaffirmation Agreement, the creditor can only repossess the collateral, but can’t to collect money from you.
You can surrender the collateral and wipe out the debt. If you want to keep the collateral, you could sign a reaffirmation Agreement and continue to make your payments. Under certain circumstances you can make one lump sum payment to the creditor in the amount of the current fair market value of the collateral, keep the collateral and wipe out the debt.
Under the Bankruptcy Code, if you want to keep the collateral, you must sign a reaffirmation agreement. Despite this, some debtors keep the collateral, keep making the payments, but don’t sign a reaffirmation agreement. This is called “ride-through” or “keep and pay.”
Why “Keep and Pay?”
Because if you later miss payments, the creditor can only take the collateral. The creditor cannot seek money from you. Or if you later decide to give the collateral back, you won’t owe any money. Or you may not qualify for reaffirmation if, for example, you can’t afford the payments.
What are the Risks of “Keep and Pay” or “Ride-Through?”
If failure to reaffirm is a breach of your loan agreement, the creditor could seek to repossess even if you are current on your payments. You may not be eligible for a loan modification of your mortgage. Your credit report may not reflect that you are making the payments and that the loan is current. The creditor will normally stop sending you statements.
When Should I Consider “Keep and Pay” or “Ride-Through?”
You owe more than the collateral is worth. Your budget (Schedules I & J) show you can’t afford the payments. You’re not sure if you want to keep the collateral or not.
In Wisconsin a mortgage lender receives a shortened foreclosure process if it waives any deficiency (agrees to just take the house and not seek any money from you). 1st mortgage lenders commonly waive any deficiency. So even if you reaffirm a 1st mortgage, and the house later goes onto foreclosure, the lender may never seek money from you. 2nd Mortgage lenders almost never waive a deficiency. So if you reaffirm a 2nd mortgage and the house later goes into foreclosure, the 2nd mortgage lender will almost certainly seek money from you.
Reaffirmation Agreement Red Tape
To be valid, a Reaffirmation agreement must be signed by you, your lawyer and the creditor and filed with the court within 60 days of your 1st scheduled meeting of creditors. You have 60 days from the date the reaffirmation agreement is filed with the court, or the date of your discharge, whichever is later, to revoke the reaffirmation agreement. Revocation should be in writing, mailed to the creditor and filed with the Court.
Can You Pull My Credit Report?
Do I Need a Credit Report?
That’s up to you. If you are confident that you have identified all of your debts, it’s probably not necessary. If you’re concerned that you may be forgetting about debts a credit report can be very helpful. However, credit reports sometimes don’t include all of your debts.
What Different Types of Bankruptcy Should I Consider?
There are four types of bankruptcy cases provided under the law:
Chapter 7 is the most common form of bankruptcy since it is the cheapest, quickest and easiest chapter. Chapter 7 is sometimes called “liquidation” bankruptcy. It requires a debtor to give up property that exceeds certain limits called “exemptions”, so the property can be sold to pay creditors. However, the vast majority of clients do not have to give up any property.
Chapter 11 is used by businesses and a few individual debtors whose debts are very large.
Chapter 12 is reserved for family farmers & fishermen.
Chapter 13 is sometimes called “reorganization” or “debt consolidation”. It requires a debtor to file a plan to pay part or all debts from current income. Chapter 13 is helpful for clients who are behind on home or car payments and want to save the car or home. Chapter 13 is also an option for clients who do not qualify for Chapter 7 because they did not pass the means test.
Can I Wipe Out Taxes in Bankruptcy?
Here are the basic rules for wiping out taxes in bankruptcy. This is a complicated subject so call for more information.
You must meet all five of the below rules to wipe out your income taxes in bankruptcy:
- The tax has to be for a year whose return was due, including any extensions granted, more than 3 years prior to the date you filed bankruptcy.
- The tax return must have been actually filed more than 2 years prior to the date you filed bankruptcy. (Some courts have held that taxes from late filed returns can never be discharged. Other courts have held that taxes from late filed returns may be discharged if the return was filed before the taxing authority assessed the tax. This is an evolving area of the law.)
- The IRS or WDoR (Wisconsin Dept. of Revenue) must have assessed the tax more than 240 days prior to the date you filed bankruptcy.
- The tax return in question cannot have been fraudulent.
- You must not have willfully attempted to evade or defeat the tax.
The time frame for the 1st 3 rules are extended for certain events, so it’s important to have Pete review your situation prior to filing bankruptcy.
Will I Have to Appear in Court?
No. It is very unlikely you will ever appear before a judge. Most people make only one appearance before a Chapter 7 Trustee. This meeting is called the Meeting of Creditors, because creditors get a chance to question you at the meeting. However, creditors rarely show up. What really happens at this meeting is the Chapter 7 Trustee will ask you questions about your property, debts, income, living expenses, etc. 4 meetings are scheduled every 1/2 hour so they are brief. We will be there with you.
How Long Must I Wait Between Bankruptcy Filings?
- If you previously filed a Chapter 7, you must wait 8 years to file another Chapter 7.
- If you previously filed a Chapter 13, you must wait 6 years to file a Chapter 7.
- If you previously filed a Chapter 7, you must wait 4 years to file a Chapter 13.
- If you previously filed a Chapter 13, you must wait 2 years to file another Chapter 13.
Time is measured filing date to filing date.
What If My Prior Case was Dismissed?
If your prior bankruptcy was dismissed without a discharge, generally you can file a new case right away. There are exceptions, however. For example, if you willfully failed to comply with a court order or to appear before the court, you will have to wait 180 days to file again. If you voluntarily dismissed your case after a Motion for Relief from Stay, you will also have to wait 180 days.