Understanding Exemptions

Understanding Exemptions in bankruptcy

Many people worry about having to give up some or all of their property or personal belongings if they file a bankruptcy. Generally, an individual does not have to worry about this problem.

No matter which type of bankruptcy a person chooses, the law allows certain property in specific categories to be exempt from the bankruptcy. This means that the person can hang on to this property with generally no adverse consequences. The only time a person may have to worry is if the value of their personal property exceeds the limits allowed by law. If that happens, then a Trustee can demand that the excess property be sold, or require you to pay its value into the bankruptcy for the benefit of unsecured creditors.

Arkansas is a state that allows a debtor to use either the federal exemptions or the Arkansas constitutional exemptions, whichever is most advantageous to the debtor. Sometimes, if a debtor has a paid-for homestead that has a lot of equity, it may be necessary to use the Arkansas exemptions to fully protect the homestead. Even though the Arkansas exemptions are more liberal with respect to a homestead, they are more restrictive as to other items of personal property. Your lawyer can fully advise you on this issue.

The federal law lists specific categories of property that are considered exempt, such as: equity in a homestead, equity in a vehicle, household goods & furnishings, jewelry, tools, books, IRA’s, 401(k)’s, etc. However, there are dollar amount limits on each of these categories. One part of the bankruptcy process will have you identify all such personal property and place a current value on each item.

Your lawyer will review your individual list of property, apply the exemption law and determine if there is any reason for concern. Most individuals never have a problem with their exemptions.

The Prize At The End – A Discharge

The Prize At The End - A Discharge in bankruptcy

No matter which chapter of the bankruptcy law you and your lawyer choose, the reward to be expected is a “discharge” of your unsecured debts. There are lots of things to be considered from a legal point of view. There are limits on the discharge of many types of debts. However, subject to some restrictions, once a debtor has completed his/her bankruptcy, the Court will issue an order granting a discharge to the person named as the debtor. A discharge is not the same thing as a dismissal. A discharge is a good thing; a dismissal is usually not a good thing.

Collection of Discharged Debts Prohibited

The discharge prohibits any attempt to collect from the debtor a debt that has been discharged. For example, a creditor is not permitted to contact a debtor by mail, phone or otherwise, to file or continue a lawsuit, to attach wages or other property, or to take any other action to collect a discharged debt from the debtor. [In a case involving community property: There are also special rules that protect certain community property owned by the debtor’s spouse, even if that spouse did not file a bankruptcy case.] A creditor who violates this order can be required to pay damages and attorney’s fees to the debtor.

However, a creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the debtor’s property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case. Also, a debtor may voluntarily pay any debt that has been discharged.

Debts That Are Discharged

The Chapter discharge order eliminates a debtor’s legal obligation to pay a debt that is discharged. Most, but not all, types of debts are discharged if the debt is provided for by the Chapter 13 plan or is disallowed by the Court, pursuant to Section 502 of the Bankruptcy Code.

Debts That Are Not Discharged

Some of the common types of debts which are not discharged in a Chapter bankruptcy case are:

The Prize At The End - A Discharge in bankruptcy

a. debts that are in the nature of alimony, maintenance or support

b. debts for most student loans

c. debts for most fines, penalties, forfeitures or criminal restitution obligations

d. debts for personal injuries or death caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated

e. debts provided for under Section 1322(b)(5) of the Bankruptcy Code and on which the last payment is due after the date on which the final payment under the plan was due

f. debts for certain consumer purchases made after the bankruptcy case was filed, if prior approval by the Trustee of the debtor’s incurring the debt was practicable but was not obtained

Qualifying For Bankruptcy Under The New Law

Qualifying For Bankruptcy Under The New Law

With the passage of the 2005 bankruptcy law amendments, Congress created a “means test” to act as a method of determining those persons who can best afford to repay some of their debts through a Chapters bankruptcy. This means that you have to “pass” the means test in order to qualify to file a Chapters bankruptcy. Generally, anyone with a regular source of income can file a Chapters bankruptcy. Congress believed that too many people were filing Chapters bankruptcies when they, in fact, had the “means” to repay some of their debts.

Congress has created a two-part “means test” in order to determine who gets to file which type of bankruptcy. There are now two types of debtors: Above Median Income debtors and Below Median Income debtors.

In Part One, a debtor’s past six months’ income is calculated and averaged, then multiplied by 12 for a projected annual income. This annualized income is then compared to a chart maintained by the U. S Department of Justice/Office of U.S. Trustee that is based on U.S. Census data for the area in which you live. From these tables, a person is determined to be either “above” the local median income or “below” the local median income. These tables can be found by going to the United States Trustee’s website at www.usdoj.gov.

Qualifying For Bankruptcy Under The New Law

If you are an “above” median income debtor, then the law allows you to deduct certain pre-established expenses along with some discretionary expenses from your monthly income to determine if that brings you below the “threshold.” The “threshold” is determined by whether you have “projected disposable income” after the allowed expenses are deducted from your income. If you have more than $100 of “projected disposable income. If you have less than $100 of “projected disposable income,” then you generally have the choice of filing either a Chapter 7 or a Chapter 13.

This “means test” is artificial and a mechanical calculation. It does not have any real connection to your true current income or your true current expenses. However, this is what Congress has mandated.