What is bankruptcy?
If debt has become unmanageable, filing for bankruptcy may be the best way to consolidate, repay, or eliminate debt. Bankruptcy helps people get a fresh start or protect their businesses facing financial troubles. It’s important to decide if bankruptcy is an option for you individually, jointly with your spouse, or for your business. We here at Schwam-Wilcox & Associates recommend and specialize in two specific types of bankruptcy, Chapter 7, and Chapter 13 when your situation warrants a bankruptcy filing.
What is chapter 7 bankruptcy?
Chapter 7 Bankruptcy, also known as “Liquidation”, is primarily used when the filer has insufficient income to pay their debts and are not seeking to keep non-exempt property. A petition for bankruptcy including the following “schedules” as part of the filing:
- Schedules of Assets and Liabilities.
- Schedule of Current Monthly Income and Expenditures.
- Statement of Financial Affairs.
- Schedule of Executory Contracts and Unexpired Leases.
- Certificate of Credit Counseling (For individual filers with primarily consumer debts).
After the initial filing, a court-supervised procedure is overseen by a trustee to examine the filer’s assets to determine if any property is available to be sold or recovered for the benefit of creditors. Filers can retain certain exempt property while the remaining assets are usually liquidated by the trustee and the funds distributed to creditors in accordance with the Bankruptcy Code.
Debts that are commonly available for discharge include:
- Car Repossession Judgements
- Wage Garnishments
- Credit Cards
- Medical Bills
- Foreclosure Deficiency Judgements
- Personal Loans
- Cash Advancements
- Payday Loans
- Money Judgments
What cannot be discharged in chapter 7 bankruptcy?
Florida residents must use the state exemptions over the federal exemptions as long as the filer has lived in Florida for at least two years prior to filing for bankruptcy. If a full two-year residency in Florida cannot be proved then the filer will need to apply the exemption rules from the state where the filer lived during the six-month period prior to the two-year period. Federal exemptions will be used if the filer no longer qualifies for the exemptions in their previous state.
Bankruptcy exemptions in Florida include:
- Homestead Exemption – This covers homes on properties of half-acre or less in a municipality, or 160 acres or less everywhere else. The equity the filer has in their home, no matter the amount, is exempt as long as the filer has owned the home for at least 1,215 days (roughly 3 years and 4 months) before filing. If the home has been owned for a shorter period of time, federal exemptions will need to be applied.
- Wage Exemption – Paid or unpaid wages and wages deposited into a bank account for I six months prior to filing are exempt for the head of the family up to $750 per week. 75% of wages, or 30-time the federal minimum wage (whichever is greater) is also exempt for other family members.
- Personal Property Exemption – Florida applies this exemption to the filer, if their personal property falls within at least one of the following categories:
- Personal property of up to $1,000 (up to $4,000 if not using the Homestead Exemption). This generally includes items such as furniture, art, and electronics.
- Health savings, education savings, and hurricane savings.
- Tax credits and refunds (case specific)
- Prescribed home health aids.
- Costs of a funeral paid to Florida’s Preneed Funeral Contract Consumer Protection Trust Fund.
- Some of the property in a business partnership.
- Wildcard Exemption – If not using the Homestead Exemption, Wildcard Exemption can be used for $4,000 of personal property ($8,000 if filing jointly with your spouse). This can also be applied to homeowners with no equity to protect with the Homestead Exemption.
- Motor Vehicle Exemption – Up to $1,000 of the equity the filer has in a motor vehicle can be exempt. If more is owed on the vehicle, the vehicle may be repossessed if a payment agreement cannot be agreed on with the bankruptcy trustee.
- Pension Exemption – Most types of pension and retirement funds are exempt, including:
- ERISA-qualified retirement plans and pensions (401 (k)’s, 403(b)’s, profit-sharing plans, money purchase plans, IRAs, Roth IRAs, and other defined benefit plans).
- Teacher’s retirement benefits.
- Public employee retirement benefits.
- Firefighter and municipal police pensions.
- Insurance and Benefits Exemption – Some of the following may be exempt:
- Proceeds from a life insurance policy payable to a specified beneficiary.
- Disability income benefits.
- Cash surrender value of a life insurance policy.
- Proceeds of an annuity contract (except for annuities set up for lottery winners)
- Fraternal society benefits.
- Public Benefits Exemption – The following benefits are exempt from bankruptcy in Florida:
- Social security benefits
- Veterans’ benefits
- Workers’ compensation and unemployment benefits
- Crime victim’s compensation benefits (unless the filer is trying to discharge debt related to a crime-related injury).
- Local public assistance benefits.
- Reemployment assistance benefits.
- Alimony and Child Support Exemptions – If child support payments and alimony are reasonably necessary for your support they can be exempt.
Exemption for Some Damage Awards – Proceeds from lawsuits and pending legal claims from damages for injuries while working in a hazardous occupation are often exempt. If there are unresolved lawsuits when the filer files for bankruptcy it is advised to retain an attorney and decide if these suits should be settled or proceed to trial.
What is chapter 13 bankruptcy?
Chapter 13 bankruptcy or “Reorganization” of past-due debts to repay creditors over a three- to five-year period. This period is determined by the filer’s current monthly income relative to the state’s applicable median. If the filer’s income is less than the state median, the payment plan is typically scheduled for three years – with exceptions. If the filer’s income is greater than the median, the payment plan is typically scheduled for five years.
A plan to repay all or part of the money owed is submitted for the bankruptcy court to approve and the filer’s payments will be distributed to creditors by the Chapter 13 trustee. The trustee will receive payments from the filer regularly – typically monthly and will schedule a meeting of creditors where the filer must attend to answer questions regarding the filer’s financial affairs and proposed terms of their payment plan.
With the filing of the Chapter 13 bankruptcy, the filer must also include
- Schedules of assets and liabilities.
- Schedule of current income and expenditures.
- Schedule of executory contracts and unexpired leases.
- Statement of financial affairs.
- Certificate of credit counseling.
- Copy of any debt repayment plan developed through credit counseling.
- Evidence of payment from employers (if any) received 60 days before filing.
- Statement of monthly net income and any anticipated increase in income or expenses after filing
- Record of any interest the filer has in federal or state qualified education or tuition accounts.
If the filer seeks to retain the collateral securing a particular claim, the payment plan submitted must include payments that equal the value of the collateral. Secured claims used to buy collateral within a certain time frame before the bankruptcy filing will also need to be outlined in the payment plan for the full payment of the debt, not just the value of the collateral. Unsecured claims do not need to be outlined for payments in full as long as all disposable income over an applicable commitment period is detailed in the payment plan. Payments of secured debt must be completed prior to any discharge or “buy out” being received.
What cannot be discharged in chapter 13 bankruptcy?
Chapter 13 bankruptcy is complex and continually evolving. To be entitled to a discharge, all payments under the Chapter 13 plan must be completed and supported with:
- Certification (if applicable) that all domestic support obligations that came due prior to making the certification have been paid.
- No discharge has been received from a prior case filed within
- 2 years for a prior chapter 13 case
- 4 years for a prior chapter 7, 11, and 12 cases
- Completion of an approved course in financial management (if courses have been determined to be available to the filer).
- A notice and hearing to confirm there are not any pending proceedings that might give the right to a limitation on the filer’s homestead exemption.
Exemptions from the discharge of a debt may include but are not limited to
- Tax or customs duty
- Specified by periods of time listed in the code
- A return or equivalent report or notice was not filed or given, was filed or given after the filing date or return was due
- If a fraudulent return is filed or willfully attempted in any manner to evade or defeat such tax
- For money, property, services, or an extension, renewal, or refinancing of credit obtained by:
- False presences, a false representation, or actual fraud.
- Use of a statement in writing
- Consumer debts owed to a single creditor and aggregating debt for luxury goods or services within 90 days before an order for relief. This does not include goods or services reasonably necessary for the support of maintenance or the filer or dependent of the filer
- Cash advances that are extensions of consumer credit under an open-end credit plan obtained within 70 days before an order for relief
- Unlisted or unscheduled debt owed to creditors if:
- Such debt is not specified in the payment plan or the creditor has notice or knowledge of the filing
- Such debt is filed with notice to creditors for determination of dischargeability with their notice or knowledge of filing
- Fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.
- Domestic support obligation.
- Willful and malicious injury by the filer to another entity or to the property of another entity.
- To the extent such a debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit and is not compensation for actual pecuniary loss, other than a tax penalty:
- Relating to a kind not specified in the subsection
- Imposed with respect to a transaction or event occurring at least 3 years prior to the date of filing
- Qualified educational loans.
- Personal injury or death caused by motor vehicles, vessels, or aircrafts while intoxicated from alcohol, drugs, or other substances.
What is the difference between chapter 7 and 13 bankruptcy?
Forbes released a comparison between chapter 7 and chapter 13 bankruptcy which summarizes the major traits of each chapter. Chapter 7 is a liquidation of certain assets to pay creditors where debts are discharged. Filers are required to pass a test that measures their household income against the state median income. Chapter 13 is a wage earner’s plan where a steady income from employment is redirected toward certain debts that have been adjusted. This is restricted to certain debt limits and a detailed repayment plan; however, you will not be required to surrender any of your assets in order to file in the Chapter 13.