Hi this is Blake Goodman. Nice to be with you again today.
We're going to be talking today about bankruptcy and assets. It's a very common misnomer that if you file bankruptcy, somebody is going to round up all your assets, knock on your door, have you turn things over, take bank accounts, and lose houses and cars, etc., and basically start without the shirt on your back, your economical life all over again.
And while that might have been the systematic design hundreds of years ago when the bankruptcy system was established that'll put your assets together equitably distribute them among everybody that you owe money to and you are kind of starting all over with very little. That "very little" today has expanded to a pretty normal amount that the average consumer has, and that translates to people losing almost nothing when they file for bankruptcy.
There are a couple of reasons for that: One is that there are a couple bankruptcy chapters that you can take advantage of to eliminate the loss of assets. And the second thing is the exemptions that you're granted when filing bankruptcy are pretty generous in this day and age.
How Bankruptcy Exemptions Work
Let me start a little bit by explaining what an exemption is. When you file a bankruptcy, you kind of create a big pie - it is called a bankruptcy estate, which is everything that you own under the sun in this pie. The pieces of the pie that you get to keep are the exemptions. The things that aren't below a certain value amount or of a certain category are taken away from you by the bankruptcy trustee, sold, and turned into money to pay creditors.
It just so happens that in the United States, 99% of the pie is the piece that you get to keep. The whole thing is your piece.
A couple of the exemptions are your homestead exemption, your wildcard exemption, and your car and household goods.
The homestead exemption means the equity in your house for a husband and wife basically need to be about $45-46,000. If it's greater than that and you're filing a Chapter 7, which is a rounding up of all the assets type of case, you could lose your house in bankruptcy. And I'm going to help you not do that, and you're going to be like almost every client I've represented in my career that doesn't want that to happen by filing a different kind of bankruptcy if you're in that category of a high-equity debtor and you own real estate.
Let's talk about the wildcard exemption. The wildcard exemption is anything that doesn't fall neatly under the other exemption baskets like household goods, a car, or homestead. And that's anything like cash in the bank, money or money equivalent, you can pile that exemption on. If you didn't have an exemption for your vehicle, you can put the wildcard on top of that, and the next thing you know, you've got another way to protect something that by itself wouldn't be.
The wildcard is about $11,000 per person, and that's usually way more than people at this stage where they're thinking about filing bankruptcy have in the bank. And that's not retirement money - that's completely exempt just by itself by virtue of being retirement money. That is just money - the bank, stock, bond money equivalent.
Your car, you have about $3,500 in the equity position of your car, and your household goods are universally exempt regardless of their value, even though it's capped at about $8-9,000 per individual. The garage sale value of all the stuff you have in your house is probably not worth that much. The couch, the sofas, think of what you can buy for all these things in Craigslist - the valuation of all that is pretty low.
So that's the exemption story, and the reason why so few people lose assets is because they have less than the amount that they're allowed.
If they have more than the amount that they're allowed, we file the Chapter 13 bankruptcy, which is a bankruptcy but unlike the 7 where a piece of pie is created, you are supposed to pay your creditors back in the amount of money equivalent to what that piece of pie would have been if you hypothetically filed the other chapter.
If you file the Chapter 7, and you lose $20,000, you've got to pay $20,000 back but you have 5 years to do that. So you don't lose anything, you just have to pay the piper the equivalent amount and that's the way to avoid losing assets, and that's usually what individuals opt for.
So that's why so few assets are lost in bankruptcy in this day and age. It's about 1% of every bankruptcy that's filed in the country is called an asset case where it's something that the trustee has to administer and sell.
How Do You Keep Your House When the Mortgage Company Is Filing for Foreclosure?
Chapter 13 bankruptcy is your magic wand when you're falling behind on your mortgage payments and you can't get caught up, and it's getting so bad that you're getting nasty letters from attorneys at the bank and then maybe even a foreclosure process begins.
Chapter 13 bankruptcy was invented in the mid-70s for exactly this reason so that the ranks of the homeless in this country would not increase by virtue of people falling on hard times.
So the way that Chapter 13 works is, you file it and the plan that you're submitting to the court and wanting them to sanction, will include the payments that you are behind on your mortgage. You have a very lengthy 3 to 5 years, mostly 5 if people would like to pay back the mortgage arrears.
Another caveat though, is that the Chapter 13 is not a loan modification per se, where you are available to reduce your monthly mortgage payment. Unfortunately, that monthly mortgage payment will stay the same. You need to be able to pay that monthly mortgage payment when you file your bankruptcy, and that's called maintaining your payments. The payments that are behind are called curing the payments. So you're doing a cure and maintain type of plan for your creditors. It stops the foreclosure, stops the taking of your house.
As long as you can do those two things, and that is paying the ongoing future payment (the normal amount) and pay the trustee plan that the Chapter 13 plan payment to the trustee for 5 years, you win and you get to keep your house if you can behave yourself during that 5-year period time. Not fall behind anymore, keep your Chapter 13 plan payments up, you will have your house back on track and keep it forever as long as you keep behaving yourself.
So work hard, pay your monthly payments on your house, your plan payments if it comes to needing to file Chapter 13 to save your house. But there is a good chance we'll be able to save your house in Chapter 13.
How Do You Keep Your Car When Your Payments Are Behind?
Chapter 13 again is the vehicle to keep your vehicle when you've fallen behind on your car payments. Everybody hits a skid once in a while in their income. They get sick, somebody loses a job, all kinds of reasons while income hits a blip along the way.
If you fall behind on your car payment, and as you are aware if you've ever fall behind, you're going to get some nasty calls from the bank at first and then some nasty letters. And then you can even wake up one morning and your car will be gone. They don't have to warn you. They don't have to send you any kind of statutory notice to repossess your vehicle. It could just be gone in the night, in the morning, when you're coming out of the grocery store with a handful of bags.
So actually the most emergent reason to file a Chapter 13 bankruptcy is to stop a car repossession. Foreclosure, wage garnishments, and all these kinds of things kind of come at you like a slow boat. You know about them happening and yo get plenty of notice and time to react. But a car can just be gone immediately if it falls behind just 1 day, and according to the contract, they have the right to repossess the vehicle, but they usually don't do that. They usually don't even do it within 30 days, and not even 60. But 90 days is a pretty dangerous amount of time to be behind on a vehicle.
If you are filing a bankruptcy, the Chapter 13 is the kind we want to file. You could do one of two things: you could put the entire car payment inside the bankruptcy plan payment, cram it down, stretch it out, change into a straight and pay it a new with a new payment over the 5-year Chapter 13 plan. Or you could just put the arrears inside the plan and pay the ongoing future normal payments directly to the bank. Those are two options.
And so Chapter 13 is the vehicle that you want to opt for when you're falling behind on your car payments when you want to keep that vehicle and losing it is not an option.
If you have any questions about bankruptcy, contact us.