Chapter 7 Bankruptcy – Kansas
A. Types of debt
There are two kinds of debt – secured and unsecured. Secured debts are those kinds of loans with collateral pledged on them, for example, car loans and house loans. Most loans from finance companies, such as HFC, ITT, Beneficial and American General, are usually also secured. In addition, some credit cards can be secured. For example, jewelry store credit cards (Helzberg’s, Zale’s) and electronic store credit cards (Radio Shack, Best Buy) usually claim a security interest in items purchased on the cards.
Most other kinds of debt are unsecured. Examples are medical bills, VISA and Mastercard-type credit cards, utility bills, personal loans, rent and phone bills.
B. What Happens to Debt
Chapter 7 generally “wipes out” unsecured debt, and gives you four options on secured debt. All your unsecured credit card debt and medical bills will go away, and the creditors can never try to collect it again.
However, some types of unsecured debt are generally not dischargeable (dischargeable means wiped out) in bankruptcy:
1. Taxes (unless more than 3 years old & returns filed on time);
2. Student loans (unless extreme hardship – must be totally & permanently disabled);
4. Child support;
5. Debts you were ordered to pay in a divorce decree (unless you can show that it would be an unreasonable financial burden on you to do so);
6. Court fines and penalties;
7. NSF checks.
There are some other unusual kinds of debt that are not dischargeable. When the attorney reviews your debts, he will be able to tell you if there are any of your debts that may fall into this category.
In Chapter 7, you have four options for the treatment of secured debt:
1. Surrender the secured property and wipe out the debt.
Example: Suppose you have a car that is worth $3,000, and you owe $5,000 on it. Outside of bankruptcy, if you give back the car, the lender will sue you for the $2,000 difference between what the car is worth and what you still owe (this is called a “deficiency”). In bankruptcy, they cannot do that.
2. If you are current on the payments, and wish to keep the property, you can do so, and the loan will be unaffected. If, later, you quit making the payments, the lender can repossess the property, but cannot sue you for the deficiency.
Example: You keep the car in the above example, and keep making your usual payments just as though you never filed bankruptcy. The lender cannot force you to give back the car unless you quit making the payments.
3. If you are not current on the payments, and wish to keep the property, you can make a cash settlement offer which is based on the value of the secured property. This is called redemption.
Example: Suppose you have a Best Buy account with a balance of $3,000, and the only secured property on it is a three-year-old refrigerator worth only $300. It doesn’t make sense to keep making payments on $3,000 to keep a $300 refrigerator. So, in this case, you would pay Best Buy $300 cash, keep the refrigerator, and wipe out the remaining $2,700 on the account.
4. If you are not current on the payments, wish to keep the property, but cannot afford to pay the value in cash, you can enter into a special agreement with the lender, called a reaffirmation agreement. If you do so, you must catch up on the payments within 45 days after filing, and then continue to make the rest of the payments on time. However, if you later fail to honor this agreement, then the lender can not only repossess the secured property, but can sue you for any deficiency.
Example: Suppose, in the above car example, that you were behind on the payments, and signed a reaffirmation. You would have usually 45 days to catch up on the payments, and would keep the car. Later, if you quit making the payments, the lender could repossess the car and sue you for the $2,000 difference just as though you had never filed for bankruptcy.
C. Exempt Property
There is certain property you are allowed to keep in bankruptcy, and the Court will not and cannot take it. This is called exempt property:
1. Your house, if it is worth less than $125,000 & you have lived in it
for more than 40 months.
2. One vehicle per person (two for a married couple), with a value of up to $20,000 each*;
3. $500 worth of clothing per person (based on auction/garage sale value, which is usually very low compared to what you paid for it);
4. $1000 worth of jewelry per person* (based on auction/garage sale value, which is usually very low compared to what you paid for it);
5. $7,500 worth of tools that are used in your job or business* (based on auction/garage sale value, which is usually very low compared to what you paid for it);
6. Pensions, IRAs or life insurance cash value, regardless of the value; and
7. Those household goods and furnishings reasonably necessary to maintain your current standard of living (i.e., they won’t take your furniture, TV, appliances, etc.)*.
* Provided that if you owe money on any of these items, you are willing to continue making the payments. The exception is tools and household goods – we may be able to file a motion to wipe out the lien on those, while still letting you keep the property. If you have a loan secured by these kinds of items, please advise the attorney during your appointment.
As you can see, by the time you take back what you are allowed to keep, there is usually nothing left for the Court to take (most of us only have one house).
There are certain kinds of property that are not exempt, and you could lose them:
1. Cash and money in bank accounts (so, on the date of filing, you should make sure that your bank accounts do not have more than $100 in them);
2. Tax refunds. If you are expecting a large refund back, let the attorney know immediately, as there may be ways of protecting it; and
3. Anything else not listed in the exempt property list above.
When Chapter 7 is Better
Chapter 7 is usually a better choice when:
1. Most of your debts are unsecured, and you would not have a problem making your house and car payments if the credit cards, medical bills and other unsecured debt were wiped out;
2. If you are current on your payments on the secured debt;
3. If you have no non-dischargeable debts such as taxes or student loans; and
4. If you are able to come up with the attorney fees and the filing fee in advance.
If you have questions on whether an item of property you have may be non-exempt, you can ask the attorney at your appointment.