is kind of like life insurance policy. You don’t think about it very often, but if it becomes necessary, you are sooo glad that it is there. Similarly, it can bring some comfort to know that bankruptcy laws allow an escape if things go bad. This is particularly true for entrepreneurs. Think about it, how many people would be willing to roll the dice and risk it all if there was no way to start over? Before you jump into your next risky venture or even is you are not self employed but are in a position where you are incurring significant debt, it is important to understand that sometimes bankruptcy will not be option. Here are 7 areas where bankruptcy may be off the table.
During your bankruptcy case you will be required to disclose not only all of your debts but all of your assets. Most assets in bankruptcy are exempt – meaning that there is either a state or federal law that protects your stuff. Common exemptions protect things like your household goods, your wedding ring, your retirement accounts, a car, etc. However, sometimes people come to me who are in a serious debt crisis but who have significant assets that are not protected under Arizona’s exemption laws.
If an asset is not protected under Arizona’s exemption laws then in bankruptcy – specifically chapter 7 bankruptcy – there is a good chance you will lose it. The bankruptcy trustee will seize it, sell, it, and give the money to your creditors. If your non-exempt asset is something simple like a small utility trailer or some other minor asset then we can work with the trustee to allow you to keep the asset in exchange for paying the value of the asset to your creditors.
However, sometimes the asset is so valuable or has so much sentimental value that it is not possible to work something out with the trustee without the risk of losing the asset completely. For instance, sometimes a client will come in with land that has been in the family for generations. It is owned free and clear of any liens and has substantial value. A chapter 7 bankruptcy trustee would like nothing better than to sell the land and pay your creditors (and pay the commission they receive for administering your case). The only way around this is to sell the asset for fair market value and then invest the money you receive into an asset that is exempt (like a retirement account).
Be careful if you think you can simply transfer the ownership of an asset to a friend or family member and then file for bankruptcy. The court requires that we disclose any transfers of assets in the two years before your bankruptcy is filed. If you transferred an asset to a family member and didn’t receive the fair market value for the asset, in bankruptcy the trustee can go get whatever it was that you transferred to your relative. How do they do this? They sue them. Which makes all future family gatherings really awkward.
For some, one of the biggest hurdles to filing for bankruptcy is a prior bankruptcy filing. If you have filed chapter 7 bankruptcy and received a discharge of your debts at any time in the last 8 years, you will not be eligible to file another chapter7 case and obtain a discharge of your debts. Also, if you received a discharge of your debts in a chapter 13 bankruptcy in the last six years you are not eligible to receive a chapter 7 discharge. Similarly, if you filed a chapter 13 case and received a discharge at any time in the last 4 years, you are not eligible to file a new chapter 13 and expect to receive a discharge.
You can overcome this one by waiting, but sometimes in the debt game time is not on your side.
This one is pretty rare. In fact, I have been working in the bankruptcy area of the law for about 10 years and have run into this only a couple of times. If you incur your debts through fraud, the person you defrauded came come into the bankruptcy court and ask your judge to deny you a discharge to their particular debt. And when I say fraud, I am talking Bernie-Madoff-ripped-everyone-off fraud, not “I bought a TV and BestBuy and now can’t make the payments." Your bankruptcy lawyer can help you to understand if you have anything to worry about.
And even if you do have a fraudulent debt, it does not mean that all of your debts don’t go away. You can still discharge other non-fraudulent debts. But it always seems that the fraudulent one are by far the biggest!
I touched on this one earlier in #1. You can’t transfer all of your assets and then file for bankruptcy. When you think about it, this one makes sense. Some people (not you of course) may think it would be a good idea to transfer all of their cars, boats, house, land, etc. to their brother, file for bankruptcy, and then when the case is over, simply have their brother transfer all of the assets back. Pretty slick, huh? Not really. Bankruptcy laws have been around for a long time. Any idea people think they have come up with to beat the system has been thought up a thousand times over and rules have been put in place to stop the hiding of assets.
In my current example, the bankruptcy court will not allow you to transfer assets, file bankruptcy, and then get your stuff back. They will find out who you transferred the assets to, file a federal lawsuit against your brother or whomever you transferred the asset to, and get the stuff back to sell and then give the money to your creditors. You will be required to disclose any transfers of assets over the last two years.
Often, this rule snags people who transferred assets without any intent to defraud and with no idea that they would be filing bankruptcy a year down the road. I see it quite often with parents who transfer cars to their children who are heading off to college, or family members who transfer homes or land to assist in the administration of the estate of a loved one. All done completely innocently, but the same rules apply. Sometimes, if you have such transfers, it is best to wait at least the two years from the transfer before proceeding with your bankruptcy case.
Sometimes your debts are the type that simply won’t go away in a bankruptcy so it doesn’t make a lot of sense to file. For instance, taxes. Many types of taxes don’t go away and even the ones that do will require that certain criteria be met. For instance, if you own a business and have failed to pay payroll taxes, not only will you personally be held responsible for these, but they cannot be eliminated through bankruptcy.
Income taxes, on the other hand, can be eliminated through bankruptcy if certain criteria are met. First they must be at least three years old. You must have filed a return the year that they were due. And finally, they cannot have been assessed to you at anytime in the last 240 days. If all three criteria are met, income taxes can be eliminated. But if you are dealing with a bunch of fairly new income tax or payroll taxes, and no other debt issues, it may not make sense to file for bankruptcy.
The reason many people file bankruptcy is that they are afraid of what their creditors can take from them. Bankruptcy not only eliminates debt but stops your creditors from taking your stuff. However, as we discussed above, many times most of your stuff is exempt – meaning your creditors cannot take it. So, if all of your property is exempt, then even if your creditors sue you, and obtain a judgment against, they still can’t take your stuff because it is exempt.
I often see the scenario when someone is on Social Security Disability or with people who are retired and receiving Social Security. If you are retired and all of your other assets are exempt, you may not have anything a creditor can take. Social Security income is exempt. That being said, your creditors can still sue you and ruin your credit, but if you aren’t concerned about buying things on credit in the future, bankruptcy may not be necessary.
Some people believe you must have a certain amount of debt to file for bankruptcy. This is not true, but sometimes your debts can be so low that it doesn’t make any sense to take such a huge step as bankruptcy to deal with a small debt. As I have stated here on my website, I charge $1,700 plus filing fees for a chapter 7 bankruptcy. If you have $2,000 in debt, it wouldn’t make too much sense to file for bankruptcy (at least not with me). You could take that money and pay your debt or at a minimum settle the debt.
However, I have had clients in the past that have come to me with $10,000 or so in credit card debt that need to file bankruptcy. This is a relatively small amount to file bankruptcy over. However, sometimes, based upon income and potential for future income, it does make sense. To some that $10,000 in credit card debt might as well be $10,000,000, because there is no possibility of it ever being paid.
Can a person have too much debt to file for bankruptcy? Not really, unless you are looking at filing a chapter 13 bankruptcy case. Chapter 13 has debt limits. As of the writing of this article the limits for a chapter 13 bankruptcy case are no more than $1,081,400 in secured mortgage-type debts, and no more than $360,475 in unsecured credit card-medical-type debts. If you have more than these limits you will have to look at filing a chapter 7, 11, or 12 bankruptcy case.
Some of these hurdles you will not get over. There is simply no way around them. However, others can be dealt with through a competent bankruptcy lawyer. Even if you have debts or assets you are worried fall into one of the above scenarios, call a bankruptcy attorney. Have them evaluate your specific situation and help you find a debt solution that will work for you.