Bankruptcy Basics – Part 3: Limits of Bankruptcy

The following program was produced by the United States Courts.

As I mentioned before some debts cannot be discharged in a bankruptcy. Certain types of debts such as child support, alimony, most student loans, some federal income taxes, and all employer withholding taxes cannot be discharged in bankruptcy.

The debtor’s wrongful conduct may make some debts. Non-dischargeable examples of such conduct are incurring credit card charges without the intent or ability to repay or obtaining loans using false financial information. Bankruptcy does not wipe out most mortgages or liens. A debtor who wants to keep his or her house must continue making mortgage payments. A debtor who wants to keep a car which is being financed must likewise continue making the payments. A debtor who is behind on mortgage payments may use chapter 13 to keep his or her home by catching up on past due payments over time plus making regular mortgage payments, and in a chapter 7 case certain property can be redeemed from a lien or in other words purchased for what it is worth. For example, in a bankruptcy proceeding the court may determine that a car on which the debtor owes three thousand dollars is only worth $1,500. The debtor may then keep the car by paying the lump sum of fifteen hundred dollars. In either chapter, some liens on exempt personal property may be avoided altogether so that the debtor keeps the property without making further payments. Under certain circumstances a debtor may be denied a discharge all together and continue to owe all debts as if the bankruptcy had never been filed. Some of the reasons for being denied a discharge are fraudulently transferring assets, hiding assets, making false statements or disobeying the bankruptcy court. Such acts may also be federal crimes for which the debtor can be fined or imprisoned. We will tell you more about that in a later segment of this video.

The bankruptcy code limits the frequency with which an individual may receive a discharge. These limits depend on the chapters under which the debtors file. As mentioned earlier the law permits debtors in bankruptcy to keep or exempt certain property in order to make a fresh start. However, to keep lien property such as a home or a car the debtor must still pay the secured debt.

In chapter 7 the exemption process means that a trustee cannot sell exempt property for the benefit of creditors. Generally, the trustee can only sell non-exempt property. Sometimes an item of property is only partially exempt, and the trustee can sell it and pay the debtor the amount of the exemption. For example, if the debtor owns a car worth $3,000 and lives in a state where there’s a car exemption of $1,000, the trustee may sell the car, give the debtor $1,000 the exempt amount, and use the remaining two thousand to pay creditors. In such situations the debtor may keep the car by paying the trustee two thousand dollars, the value of the car that is not exempt. The bankruptcy code provides certain federal exemptions and also allows each state to adopt its own exemption law in place of the federal exemptions. The availability and amount of property you may exempt therefore depends on the state where you live. Some common examples of exempt property under the bankruptcy code are a portion of the equity in a debtor’s home; a portion of the equity in one motor vehicle, and some or all tools of the trade used by the debtor to make a living such as auto tools for an auto mechanic or dental tools for a dentist.

You’ll lose any exemption you don’t claim; it’s therefore very important for you to consult an attorney to determine which exemptions are available. It’s also important to carefully list, describe, and value all property you claimed as exempt in the schedules filed with your bankruptcy petition.