Has your debt become so overwhelming that you simply can no longer keep up with your payments? Or perhaps you have lost your job and do not have any income to pay your creditors? At Ruff & Cohen, our Gainesville bankruptcy attorneys work with clients to seek debt forgiveness through Chapter 7 bankruptcy.
In Chapter 7, you essentially make a trade with the court where you (1) get something, and you (2) give up something. What you get is debt forgiveness. What you give up is your “non-exempt property”. Let’s take a look at these two concepts.
What you want from a Chapter 7 bankruptcy is debt forgiveness, and the document from the bankruptcy court that gives you this debt forgiveness is called the “Order Granting Discharge.” In bankruptcy, we usually don’t use the phrase “debt forgiveness.” Rather, we say the “debt has been discharged.” What we mean is that you have been “discharged” (relieved) of your obligation to pay the debt. Many ordinary debts like credit card debts, medical debts, and repo balances become uncollectible (the debt is forgiven) after the bankruptcy discharge is entered. Creditors and their collections agents must stop calling you and mailing you bills on discharged debts. Their lawyers must stop suing you and stop garnishing your wages. Creditors who have obtained a judgment against you he may not act on the judgment to collect from you personally. In fact, the cessation of collection activity occurs the moment you initially file your Chapter 7 case, but the prohibition of collection activity becomes permanent when the judge grants your discharge.
A chapter 7 discharge forgives many, but not all debts. Some debts will survive (continue to be owed) after bankruptcy. The debts that survive a bankruptcy discharge (and are therefore called non-dischargeable debts) fall in to three broad categories:
1. Category 1. Debts that are simply defined by the bankruptcy code as “non-dischargeable” will survive bankruptcy. Examples of non-dischargeable debts are child support obligations and (with rare exceptions) student loans. You simply cannot escape these. The creditors on these obligations need take no action to protect their rights to come at you for collection.
2. Category 2. Some debts may be “non-dischargeable” if the creditor complains to the court before the deadline and convinces the bankruptcy judge the debt should not be discharged. An example of this kind of non-dischargeable debt is money owed due to the creditor on account of alleged fraud by the debtor. There are two important differences between category 1 and 2 debts. In a category 1 debt, the creditor need take no action at all. The debt will not be discharged. In category 2 debts, the creditor must take action before a deadline set by the court. If the deadline is missed, the debt will be discharged even though fraud was present. The other difference is that the creditor must convince the bankruptcy court that fraud did indeed occur. The exact deadline to complain is 60 days after the creditors’ meeting and this deadline is stated in the very first document mailed by the Court to all creditors listed in your case. Since the creditors’ meeting takes place “approximately” a month after you file, the deadline is approximately 3 months after the bankruptcy case is filed. The way a creditor complains to the court is to file a “Complaint to Determine Dischargeability” and is in effect a lawsuit within a lawsuit. Within the bankruptcy case, a lawsuit is filed by the complaining creditor. The debtor can hire a different lawyer for defense representation in a Dischargeability action than the lawyer who was hired to file the original bankruptcy case in the first place. Please note that Complaints to Determine Dischargeability are rare and the bankruptcy fees paid to your attorney to file your bankruptcy case typically do not include defending a Dishchargeability complaint.
3. Category 3. Reaffirmed Debts. Finally, it is possible for you to voluntarily owe a debt after Chapter 7 that you could have escaped. If you voluntarily sign a document called a Reaffirmation Agreement before your Discharge is granted, and do not later back out of (“rescind”) that Reaffirmation Agreement in a timely manner, you will still owe that debt as if bankruptcy had never occurred. Typical debts that are reaffirmed are car loans and home mortgages. Reaffirmation agreements are discussed in more detail below.
Liens. Liens also survive bankruptcy. Why are liens not listed as a Category 4 debt along with the others above? It is because the underlying debt itself is discharged, but the associated lien is not. To understand this, let’s start at the beginning. What is a lien? As an example, we all know that if you are supposed to be making car payments and then fail to pay on time, the bank has a right to repossess and sell your car. In that situation all the following statements are true, just different ways of saying it:
It’s the same situation with a house mortgage. We know that if you miss house payments, the bank can foreclose the mortgage and and your home will be auctioned off. In both examples of the car repo and the mortgage foreclosure, the proceeds of the sale are paid to the creditor to reduce the debt, or even eliminate the debt entirely if the sale of the collateral produces enough money. So a lien is a right held by a creditor against something you own, a right to force the sale of the item if you fail to pay on time, and apply the sale proceeds to the debt balance. In all cases where a creditor has a lien on something you own, that creditor is classified as a “secured creditor.”
We can get a little more sophisticated about secured loans. Let’s say your car is worth $10,000 and the bank has a lien on your car. If the balance on the car loan is only $8,000, the bank is not just secured, but more accurately is “over secured” because if the bank repos and sells the car for $10,000, there will be more than enough money to pay off the car loan entirely (think bank with a smiley face). The bank has more than enough security to cover the loan. This loan is also said to be “right side up.” But if your car is only worth $6,000 and you owe the bank $8,000, there is no way that a repossession and sale will produce enough money to pay off the bank loan; there will be $2,000 still owing on the loan (think bank with sad face). That loan is “upside down” and the bank is “under secured.”
Liens in bankruptcy. So what happens to liens in bankruptcy? Here is our situation: You own a car and you are making payments to the bank. The bank has a lien on your car. To take the next step, let’s change how we look at this simple situation. First, it’s obvious that YOU owe money to the bank. After all, you signed a “promissory note” (an I.O.U.) at the bank. Even if there were no lien on the car, the bank could still sue you if you failed to pay the promissory note on time. But you also signed a “security agreement” when you took out the loan and the security agreement is what gave the bank a lien on your car. So, you could view the situation as follows: I owe the bank, of course. My car also owes the bank. It’s almost as if your car is a co-signor on the loan! So the bank has two rights, the right to sue you for the unpaid balance plus the right to seize and sell the car (and apply the sale proceeds against the loan balance) if you don’t pay. Are you ready?If a secured debt is discharged in bankruptcy, the bankruptcy court tears up the promissory note and stomps on it, but leaves the security agreement (and the lien) intact. In other words, on a discharged secured debt, the bank loses the right to file suit to collect the funds from you personally (so there will be no subsequent wage garnishment) but the bank retains its lien rights to seize and sell the collateral. Put another way, the lien will pass through bankruptcy unaffected. Example: First Bank has a mortgage (a type of lien) against your home. That mortgage continues in effect, even after bankruptcy, so you don’t get a free house through a Chapter 7. But let’s say your house mortgage is “upside down” meaning you owe more on your house mortgage than the house is even worth. Example: You think your house would sell for $200,000 but the mortgage balance is $250,000. We say your mortgage is “upside down” by $50,000. The smart move in a Chapter 7 bankruptcy is to surrender the house to the bank and walk away from the house and the loan. The bank can still foreclose against the house, however, because the bank’s mortgage lien survives the bankruptcy. So you are going to have to move out. But, and here is the crucial point, the bank cannot thereafter sue you for the remaining unpaid $50,000 balance after the house is sold at public auction and the bank realizes it can’t get all of its money back. Stated another way, the bank’s rights against the property (the house) continue after bankruptcy but their rights against you personally, are extinguished. So the bank gets the house, but that’s all, it can’t sue you for the unpaid balance. You just saved $50,000. Are you ready for some Latin? The bank has the right to proceed in rem (against “the thing” – here the real estate) but cannot proceed in personam (against you personally.) If you surrender upside-down real estate, the bank will eventually get permission to file a foreclosure lawsuit, in rem. Later, when mortgage foreclosure lawsuit begins, you are going to have a panic moment because you will be named as a defendant and a complaint and summons will be handed to you either by a deputy sheriff or a special process server. At that moment you are going to think everything you just read here was plain wrong. Here is what is going on: you are listed as a defendant in the mortgage foreclosure lawsuit, but not because the bank is trying to collect money from you personally (in personam), but rather to eliminate your ownership rights in the real estate (in rem.) That is entirely proper, but clients receiving a Summons and Complaint in a foreclosure action after a bankruptcy often panic, though there is no need to.
To summarize, some debts will survive bankruptcy and the debtor will continue to be personally responsible for payment. These are (1) debts that are defined as non-dischargeable like child support, (2) debts that were adjudged by the bankruptcy court to be non-dischargeable after a complaint by a creditor (for example due to alleged fraud by the debtor) and (3) debts that were voluntarily reaffirmed by the debtor. Apart from the personal liability of the debtor to pay these types of debts after bankruptcy, liens (like mortgages) against the property of the debtor can continue after bankruptcy.
Your goal in a Chapter 7 bankruptcy is to be granted the Discharge. But you have to give up something in return, and what is that? What you are required to give up in Chapter 7 is any excess (“non-exempt”) property you own. What does “excess property” mean?
We start by making a list of what you own. We are going to file with the Bankruptcy Court a list of everything you own. We will group certain things together so the list isn’t ridiculously long, so “pots and pans” is listed as a single entry; we don’t individually list each skillet. But the overall list is accurate and complete. We will also list the dollar value of each thing on the list, the value being the replacement cost (used, as-is). From this list, you are permitted to identify the items you are entitled to keep in the bankruptcy. There are limits on what you can keep. These limits come from another list, called your list of available “exemptions.” What appears on the list of available exemptions depends on facts such as (a) where you have been living for the past 2 ½ years and (b) whether you own land you want to claim as exempt. We have an in-depth explanation of exempt property, but for now just understand that what you get to keep out of everything you own is called your “exempt property.” We use the word “exempt” because these assets are “exempt” from the claims of creditors and therefore protected from the creditors’ champion called the bankruptcy “trustee.” The things you own that you are unable to exempt are called, collectively, your “non-exempt” assets.
Now, this brings us to the crucial point: your excess (non-exempt) assets must be turned over to the “trustee” to be sold (“liquidated”) and the sale proceeds divided among your creditors, with the bigger sharks getting a bigger bite. To sum up: you keep “exempt” property and you give up “non-exempt” property. In some Chapter 7 cases the debtor is able to exempt all assets and there is therefore no “non-exempt” property and nothing need be turned over to the trustee. This is not unusual. At our consultation we will take a look at your available exemptions and try to make an initial estimate as to whether you might be able to exempt all your assets. Even if there is some non-exempt property, instead of handing the non-exempt property to the trustee, many clients elect instead to pay the trustee cash equal to the value of the non-exempt property and usually trustees will allow the debtor a few months to pay this cash. This kind of arrangement, where the debtor gives the trustee cash payments rather than turn over the non-exempt property is called a “buy-back” because the debtor is essentially “buying back” their own non-exempt property from the trustee. Can you see that the trustee ends up in the same situation whether (a) the trustee receives the non-exempt property from the debtor, sells it all, and holds a pile of cash proceeds or (b) the trustee receives from the debtor a pile of cash in a buy-back equal to the value of the non-exempt property. In a buy-back, the non-exempt property never leaves the debtor’s house.
To sum up, what you want in a Chapter 7 is a discharge of debts. What you are required to give up in Chapter 7 is any excess property. If you do not own any excess property, you will not be expected to give up anything. Our Jacksonville Chapter 7 bankruptcy lawyer can discuss the list of exempt and non-exempt property to determine what if anything you will be required to give up.
If you would like to make an appointment for a free consultation to discuss filing for Chapter 7 with our help, call our office today at (352) 364-8688.