What Can Creditors Take In Bankruptcy?

If you have a lot of debt that you can’t repay and you’ve exhausted all other options, filing for bankruptcy may be your last resort.

Fortunately, we are not living in the Dickensian era and there is a civilized process to engage in this option. The law sets out the procedure for filing for bankruptcy and determines the properties your creditors can get hold of to offset your debts.

Types of bankruptcy

There is more than one process by which you can file for bankruptcy. The two types that people prefer are Chapter 7 bankruptcy and Chapter 13 bankruptcy.

A Chapter 7 bankruptcy allows you to legally release yourself from, or no longer be responsible for, most of the debt you owed on the date you filed for bankruptcy. This process takes about three months after filing the bankruptcy petition. You could lose some of your belongings by taking this route. If you transferred property before declaring bankruptcy, the transfer may be canceled.

A Chapter 13 bankruptcy allows you to enter into a payment plan to pay off your debt over a period of three to five years. Congress even extended the plan period to seven years, with a few exceptions, due to the covid crisis. This process protects your assets and prevents wage garnishment, and you are able to pay off your unpaid debts through your payment plan. You must make a payment out of your disposable income each month.

Go through bankruptcy proceedings

Before going through the bankruptcy process, you may want to consider some factors. In a post for the Oregon State Bar, legal writer Richard Slottee advises:

  • Make a list of your monthly income and expenses.
  • Even if you get rid of your debts in bankruptcy, you could easily accumulate new debt if you don’t have medical or car liability insurance.
  • Make a list of all your creditors, with their addresses and how much you owe them.
  • Some people may be “judgment-proof” in that they may not have property of sufficient value to seize or sufficient income to seize even though their creditors have obtained a court order against them. against. Creditors may think it’s not worth suing these people, but you may still want to file for bankruptcy to end their harassment.
  • If you tend to get into debt, filing for bankruptcy may not be a permanent solution. You can file another Chapter 7 bankruptcy only after eight years. It is best to deal with your financial problems in advance so that you no longer run the risk of bankruptcy.
  • Certain types of debt are exempt from the protection of bankruptcy law. If you owe child support or spousal support, you cannot escape those responsibilities by going bankrupt. Criminal restitution and criminal fines are also among those debts to which bankruptcy protection does not extend.
  • If you owe personal income taxes, they can only be paid in limited circumstances, and so do your liability for bad checks or fraudulent credit card activity. Student loan debt is also particularly difficult to eliminate.

What Can Creditors Take In Bankruptcy?

Your “bankruptcy asset” is made up of all of your income and assets that creditors could potentially obtain. This includes any property you own at the time of filing for bankruptcy, as well as any income you have earned, even if you have not yet received it.

Even some assets that you do not own at the time of filing, such as an inheritance that you are expecting, the proceeds of a divorce settlement or a judgment that you obtained within 180 days of filing for bankruptcy, could be included. to your bankruptcy estate. If you are entitled to a tax refund, this could also go into the pool.

If you transferred, sold, or donated property two to four years before declaring bankruptcy and you did not receive “reasonably equivalent value” in payment, your creditor could also claim that property.

If you paid $ 600 or more in debt to a creditor in the 90 days before you filed for bankruptcy, or paid $ 600 or more to a relative or friend during the one-year period before you filed, your creditor could also claim this amount.

Essential goods benefit from bankruptcy exemptions

There are certain essential assets that the law protects against seizure. For example, these assets could include your car, home, furniture, business tools, and retirement accounts.

There is a dollar limit for such an “exempt” property, and you will need to follow legal procedures to submit your exemption request. You can either opt for your state’s exemptions, which vary, or the federal exemptions.

If you file for Chapter 13 bankruptcy, all of your assets are usually exempt, as you will pay off your debt on a schedule.

What to know before declaring bankruptcy

Following your bankruptcy filing, your credit will be damaged for a period of 10 years if it is a Chapter 7 bankruptcy and a period of seven years for a Chapter 13 bankruptcy.

Even if you are not legally required to hire a lawyer to handle your bankruptcy, it may be in your best interest to do so. You can even benefit from free legal services.

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