Bankruptcy Law

Bankruptcy Law Is Federal Law

Bankruptcy was provided for in the U.S. Constitution. Article I, Section 8 authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” Today, bankruptcy is governed by federal law found at Title 11 of the United States Code. As federal law, it supersedes any conflicting state law by virtue of the Supremacy Clause. With the exception of exemptions, it is the same from state to state.

State Law Plays a Role Because It Decides Exemptions

While federal law dictates the basic framework of a bankruptcy, state law usually decides what property is protected as exempt, how much equity a person can shield in a home or car, and what a trustee can potentially reach. Because of the exemption provisions, two people with the same debts and income can have different options depending on where they live.

For example, California and Nevada are both “opt out” states under bankruptcy law, meaning the state’s law on exemptions governs, not federal law. However, each state has different rules. California has what is referred to as System 1 and System 2, governed by Chapters 703 and 704 in California law. Nevada has its own list of exemptions, and they are significantly different.

In Nevada and California, you must be a resident for 180 days to file a bankruptcy; however, you must be a resident of the state for two years (730 days) in order for the bankruptcy to utilize that state’s exemptions.

The Purpose of Filing Bankruptcy

One of the reasons people file bankruptcy is to get a “discharge.” A discharge is a court order stating that you do not have to pay the debts which are discharged. Some debts cannot be discharged. For example, you generally cannot discharge:

• Many types of taxes
• Child support or alimony
• Debts owed to a child or ex-spouse arising from divorce or separation
• Attorney’s fees for child custody or support
• Student loans (consult your bankruptcy lawyer)
• Fines or penalties owed to government agencies
• Criminal restitution and other court fines and penalties
• Debts for wilful and malicious injuries to person or property
• Personal injury debts arising out of a drunk driving accident
• Debts omitted from the bankruptcy petition, unless the creditor knew of the bankruptcy

There are other situations where a discharge may be denied. These do not involve categories of debt but the behavior of the debtor — for example, purchasing more than $650 of luxury goods during the 90 days prior to filing, a prior bankruptcy filed within a certain window of time, or fraud involving perjury, hidden property, destroyed records, or a failure to account.

The Automatic Stay

When you file a bankruptcy, nearly all collection activity must come to a halt, including most court actions. This is referred to as the “automatic stay” and is an injunction imposed against certain creditors who want to start or continue taking action against the debtor. The automatic stay provides breathing room from creditors. However, a bankruptcy does not stay all collection activity. Consult with a bankruptcy lawyer so you understand what kinds of activity are not enjoined. The automatic stay and its exceptions are laid out in 11 U.S. Code section 362.

Types of Bankruptcy

Chapter 7 is a liquidation. The bankruptcy is filed and attorney’s fees must be paid prior to filing. There is a meeting of creditors, and a time period following it that allows creditors to object. If no objections are made, the court will enter a discharge. All dischargeable debt is discharged upon entry of the court order; secured debt is not discharged. You must be current on payments on your mortgage or deed of trust when filing and remain current during the bankruptcy. The trustee controls your business and assets during the pendency of your bankruptcy and has the power to close your business.

Unsecured debt is discharged with the exceptions noted above. Exempt assets are retained by the debtor. The trustee has the power to demand that non-exempt assets be transferred and then sold, paying a dividend to creditors who have filed claims. If there is nonexempt equity in your home, you are at risk — the trustee can sell a home to pay creditors. This is an important reason to obtain a lawyer to file your bankruptcy. A lawyer will know how to negotiate a deal for you to pay for the nonexempt equity and retain your home. You can only obtain a discharge once every eight years.

Chapter 11 is a business bankruptcy but can be used in other situations. You may continue to operate your business, but the creditors and court must approve a plan to repay debts. There is no trustee unless the judge decides one is necessary; if a trustee is appointed, they take control over your business and property.

Chapter 12 is only for family farmers and family fishermen.

Types of Debt

Which bankruptcy can be used, how it can be used, and what it accomplishes depends on the debt, the assets you own, and your income. In general, there is unsecured debt, secured debt, and priority debt.

Unsecured debt is debt which is not attached to property — credit card bills, medical bills, payday loans, and promissory notes are typical.

Secured debt is where the obligation is secured by property. A home may be secured by a mortgage or deed of trust; a car loan may be secured by the car. With secured debt, if the obligation is not paid, the creditor may foreclose, repossess, or reclaim the property.

Priority debts are child support, alimony, most student loans, court fines and restitution, taxes, and certain kinds of court judgments.

What Is a Reaffirmation Agreement?

Reaffirmation agreements are promises to pay debt following the bankruptcy. For example, you file the bankruptcy and schedule the car loan on your petition. The creditor can repossess your car before or after the bankruptcy is filed. In order to retain your car, you agree to “reaffirm” the debt on the terms specified in the agreement.

Reaffirmation agreements are voluntary, must not place too heavy a burden on your family, and must be in your best interest. They can be cancelled any time before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time. If you are an individual and not represented by counsel, the court must hold a hearing to decide whether to approve your reaffirmation; absent court approval, the agreement is not legally binding.

If you have reaffirmed the debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover the property on which it has a lien or mortgage, and can also seek a deficiency judgment against you. If you did not sign a reaffirmation agreement, you can continue to pay the car loan and keep the car — and if you fail to pay, the creditor’s only relief is repossession.

Note: Online articles cannot fully and completely address your financial issues, as they are not written with the facts of a particular case in mind. The best way to protect your assets in bankruptcy is to hire a bankruptcy lawyer knowledgeable in your local rules and practices. If you want more information or have questions about how a bankruptcy will affect you, you may need legal advice — the trustee in your case is not responsible for giving you legal advice, as the trustee represents the creditors in your bankruptcy.

Can I keep my credit card in my Chapter 7 bankruptcy? How do I value my home? What is my homestead exemption? What will I get to keep? What will it cost? These are some of the questions we routinely hear — and we are glad to answer them.