What Makes Your Bankruptcy Simple, and Not So Simple?

If your financial life is legally simple, your bankruptcy will likely be simple. What is it about your financial life that makes for a not so simple bankruptcy case?

Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. My new clients are almost always amazed and relieved how well a bankruptcy game plan can solve all their financial problems. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.

To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.

1. No non-exempt assets vs. owning non-exempt assets:  In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.

2. Under median income vs. over median income:  If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.

3. Not behind on real estate mortgage vs. you are behind:  If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.

4. No debts with collateral vs. have such debts:  The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.

5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts:  Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.

6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge:  In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.

7. No debts from a business vs. have such debts:  Although there is nothing about business debts that necessarily makes for a more complex case, that still tends to happen. These cases often have more unprotected assets, more troublesome kinds of debts, and often larger amounts of debts for creditors to get excited about. However, bankruptcy has ways to deal with all of this.

8. Don’t operate an ongoing business vs. do operate one:  A dead business is usually easier to deal with in a bankruptcy than a live one. Although you can continue operating a business while going through bankruptcy, that can be difficult to do under Chapter 7, and very likely will add some complications to a Chapter 13 case.

9. Lived in your present state for the last 2 years v. lived there less than 2 years:  For you to use the asset protections—exemptions—which are available to debtors filing bankruptcy in the state in which you are now living, you must have lived there for at least 2 years. Otherwise you must usually use the exemptions available to residents of the state where you lived previously. That can complicate your case because of a potential dispute with the trustee about which state’s exemptions actually apply, and then possibly disputes about how to apply an unfamiliar state’s exemptions.

10. Never filed bankruptcy vs. filed prior bankruptcy:  Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.

We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.

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