Key takeaways
- Bankruptcy is handled through the federal courts. Debtors typically file for Chapter 7 (liquidation) or Chapter 13 (reorganization) bankruptcy.
- All assets must be disclosed with any bankruptcy. The court needs to know the value of your assets for liquidation purposes or to determine what you pay to creditors.
- Assets are either non-exempt (not protected by the bankruptcy court) or exempt (assets that help you maintain your job, shelter and living requirements).
There are many options when it comes to reducing crippling debt. But if you’ve tried everything and debt continues to overwhelm your efforts to tame it, bankruptcy might be the way to go. When handled correctly, filing for bankruptcy can help clear debt, allowing you a fresh financial start. However, in addition to causing your credit score to drop precipitously (although your score might already be low if you’re struggling to make payments on time), bankruptcy requires a lot of paperwork and preparation.
The U.S. Bankruptcy Code has multiple requirements when dealing with bankruptcy, including listing all your assets. The court needs to know everything you own, from a primary or secondary residence to stamps, wine collections, furniture, household items, and clothing.
If you’re considering it, get to know how bankruptcy works and why it’s important to report every asset, even those that are protected.
What is bankruptcy, and how does it work?
Before we get into asset disclosure, there are a few important things to understand about bankruptcy:
- It’s always handled through federal courts.
- The process begins when you (the debtor) file a petition with the bankruptcy court.
- A bankruptcy can remain on your credit report for seven to ten years.
“The simple definition is that bankruptcy is the filing of a petition for relief from the court by a person whose debts exceed their assets,” says Jessika Arce Graham, a bankruptcy attorney and partner with Weiss Serota Helfman Cole & Bierman. “Someone who files bankruptcy usually can’t keep up with their debt service and is therefore asking the court to extinguish all debts owed to creditors.”
Chapter 7: Liquidating nonexempt property
Chapter 7 requires you to sell assets of value for cash so the proceeds can be distributed to creditors.
“As part of the process, a trustee is appointed to oversee and manage the liquidation of the debtor’s assets into proceeds used to repay creditors,” says Scott Barna, president of bankruptcy services and technology firm Stretto. He explained that Chapter 7 bankruptcy can be helpful for those who have little hope of organizing their debts for repayment. Chapter 7 could also benefit if you have limited income and are in a deep debt hole.
However, Chapter 7 doesn’t provide an automatic “get out of debt completely” card. There are exceptions to what qualifies as a Chapter 7 debt, including “certain taxes, family support obligations, student loan debt and fraudulently incurred debt,” Barna says.
There are exceptions to discharging student loan debt through bankruptcy. Barna says that the Departments of Justice and Education set up guidelines that could assist a debtor in discharging student loan debt through bankruptcy in cases where “undue hardship requirements are met showing that the debtor is unable to pay their loan based on certain criteria.”
Chapter 13: Setting up a repayment plan
Sometimes known as a “wage earner’s plan,” a Chapter 13 bankruptcy allows you to generate a plan with the court to repay all or part of what you owe to creditors.
A Chapter 13 bankruptcy might be your best bet as long as you have:
- A guaranteed, regular income.
- Total secured and unsecured debt totaling no more than $2.7 million.
Unlike Chapter 7’s emphasis on asset liquidation, “Chapter 13 is a reorganization of an individual’s debts,” Graham says. “The debtor needs to have some kind of income that supports a plan of repayment to unsecured creditors and certain secured creditors.”
The Chapter 13 trustee is responsible for keeping track of your payments and distributing those funds to creditors.
Chapter 13 also might come into play if you have an asset you want to keep — like a home. “Debtors in fear of losing their home can utilize the Chapter 13 process to come current on the arrears and also make the regular monthly payments,” Graham says. To keep your home, you must continue to make payments on your mortgage and property taxes during the bankruptcy process.
Asset disclosure requirements in bankruptcy
As mentioned above, a great deal of preparation is needed to file for bankruptcy. An essential part of that preparation — whether you’re filing for Chapter 7 liquidation or Chapter 13 reorganization — is listing all your assets. You must provide an inventory of everything you own, whether small or insignificant.
When it comes to this requirement, overdisclosure is better than not disclosing enough. Here’s why:
- The value of your assets is essential for liquidation purposes in a Chapter 7 filing; the court needs to know how much money would be available to creditors after your assets are sold.
- The value of your assets determines the amount paid to creditors in a Chapter 13 filing; if you have significant assets of value, you could pay more to creditors over time.
Listing your clothes, for instance, as an asset for the bankruptcy court might seem a little silly — if your clothes are primarily for casual or work purposes. However, suppose you own several Armani suits or Dior dresses or regularly stock up on Versace or Prada outerwear. In that case, the bankruptcy court might consider these valuable enough to sell at an auction.
As such, it’s better to list everything and then let the bankruptcy court decide whether your assets are “non-exempt” or “exempt.”
Non-exempt: Unprotected in bankruptcy
Non-exempt assets aren’t protected in a bankruptcy situation. This means they could be sold in a Chapter 7 liquidation or accounted for when the court determines a Chapter 13 reorganization plan.
Examples of non-exempt assets might include:
- Business-related property
- Clothing
- Collectibles (artwork, coin or stamp collections or wine collections)
- Financial assets (deposit accounts, CDs or investments)
- Furniture and household items
- Jewelry
- Real estate
- Vehicles
Barna notes that debtors must also list contingent or unliquidated, non-exempt assets. “These would include pending lawsuits against third parties, potential inheritances and intangible assets,” he says. Intangible assets would include patents, intellectual property ownership and copyrights.
Exempt: Items required for a standard of living
The goal of bankruptcy is to provide you with a fresh start, not leave you homeless, penniless or ill-equipped to work for an income. As such, the bankruptcy court will consider some of the assets you list “exempt” or protected.
By and large, exempt assets might include:
- Assets with a lien on them
- Child support or alimony
- Part of the equity in your primary residence
- Part of the equity in your vehicle
- Personal injury damages awards
- Public benefits (Social Security or unemployment)
- Retirement accounts and life insurance policies
- Tools of your trade
Your assets’ exemption status varies depending on their value, liens and your state’s bankruptcy laws.
The bottom line
An essential component of preparing for bankruptcy court involves listing every single one of your assets, no matter how seemingly small or insignificant. The court and trustee need to know what you own so they can help you build an effective plan to repay your creditors.
As such, you’re better off disclosing too much. Doing so provides information while demonstrating that you’re serious about getting your financial house in order.
Frequently asked questions
Read the full article here
