Should you file bankruptcy? Part 2

Bankruptcy may be an option to rescue you from financial distress, but the risks may not be worth the reward.

Should you file bankruptcy? Part 2

Should you file Bankruptcy? If you are in financial trouble, you should certainly avoid filing bankruptcy. Title 11 of the United States Code (Bankruptcy Code) governs all bankruptcy filings. We are not going to explore all the chapters of the Bankruptcy Code, but we are going to focus on Chapter 7 and 13. First, you should be aware that a bankruptcy stays on your credit report for up to ten years. Second, you should be aware that you may lose property when you file bankruptcy.

When a person files bankruptcy, that person becomes a Debtor, and a bankruptcy estate is created. The bankruptcy estate contains all of the Debtor’s personal and real property. Does this mean that you lose all of your property? The answer is complicated. The Debtor is entitled by State or Federal law to exempt certain property from their bankruptcy estate. Exempt property may be kept by the Debtor. For example, a Debtor may want to keep their home, their furniture, their car and other real and personal property. If the Debtor’s ownership interest in the property is less than or equal to the value of the claimed exemption, and there is no objection to the claimed exemption, the Debtor may typically retain the property. However, if the value of the owner’s interest in the property exceeds the value of the claimed exemption, the Debtor may lose the property.

For example, if you have an ownership interest in certain property valued at $100 and for that type of property you have available exemptions of only $50, then that means $50 of the total value of that property is not exempt. The value of your property must meet the value of your available exemptions in order to be fully exempt. Non-exempt property may be lost if the bankruptcy estate is liquidated. The value of exemptions depends on Federal or State laws and must be claimed by the Debtor. This is a reminder that anyone considering filing bankruptcy should seek legal advice specific to their circumstances.

As stated above, the person filing the petition for bankruptcy relief is the Debtor. I have told clients that it is akin to “asking for help” from the Court. Help comes in a number of ways, some of which we will explore later. By signing the petition, the Debtor is swearing and affirming (under penalty of perjury) that the petition, as well as schedules listing assets, debts, income, expenses and other general financial information is true and accurate. In addition, there are other duties to perform. For example, the Debtor must appear and submit to an examination under oath. This examination is called the meeting of creditors. I have often told clients, “You are an open book financially.”

I have attended hundreds of meetings of creditors. I have yet to meet any Debtors that were happy to be there. In fact, these meetings, usually conducted by the bankruptcy trustee assigned to the case, can be very stressful to Debtors. After all, it is an examination. Why would someone put themselves through this process voluntarily? The answer in short is for relief, but relief from what? We will look at the “what” in the next installment. For those of you with money problems, Michigan State University Extension offers a variety of money management programs throughout the state of Michigan, check out MI Money Health for more information.

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