When a bankruptcy is filed, the debtor can keep anything that is “exempt.” That always includes household goods and personal effects, and, most of the time, provides a homestead exemption that protects the debtor’s home. But why?

Actually, bankruptcy exemptions are absolutely necessary to a fair and forgiving economic system. If filing bankruptcy meant losing everything, all we would accomplish would be to create a community of destitute, starving people who would have to live off of welfare or government aid unless we sentenced them to a Dickens’ debtor’s prison!

Further, studies show that the more liberal the bankruptcy exemptions, the greater the state’s economic growth. States with generous exemptions, like Texas and Florida, attract more entrepreneurs and businesses. The owners know that if their business should collapse, they can file bankruptcy and won’t become completely destitute.

Determining which set of exemptions to use, however, can be a little frustrating. Under current law, you can use the exemptions of the state where you are domiciled; if you have lived there for 730 days (two years). If not, you have to use the exemptions of the state you lived in for the 180 days before the last 730. And if there is no state that meets those criteria, then you use the exemptions of the state you lived in for the longest portion of that 180 day period. Clear?

This is confusing at best, and to make matters worse, some states don’t allow you to use their exemptions unless you are a resident. In those cases you can use the Federal exemptions. (These are laid out in the Bankruptcy Code at Section 522.)
Filing bankruptcy is traumatic enough without taking the chance that you could be giving up more property than you legally need to. Find a competent bankruptcy attorney to help.

Habib and Zalewski P.C. with office located in Queens, Nassau and Suffolk counties brings you an overview article on Bankruptcy basics. As always our consultations are free and our fees listed on our website are the fees we charge.

If you’re one of the 1.5 million people who filed for bankruptcy in 2010, the dark financial cloud may seem unending. But take heart: As time crawls on, if you don’t suffer additional money missteps, your financial picture will improve.

Rest assured that you are not alone. The recession ushered in a tidal wave of bankruptcies, with the number of new filers nearly doubling from 850,912 in 2007 to 1.5 million in 2010, according to the American Bankruptcy Institute. While a bankruptcy will cause credit score damage, there are steps you can take to turn things around.

“Becoming creditworthy after bankruptcy is a major concern to millions of Americans right now,” says Karen Carlson, director of education for InCharge Debt Solutions, a credit counseling organization in Orlando, Fla. After all, a bankruptcy can hurt your chances of getting a mortgage and make credit, in general, more expensive, with car loans sometimes costing consumers as much as 29 percent in interest after a bankruptcy, Carlson says.

The damage to your credit score can be substantial. In fact, a FICO score in the mid-to-upper 700s could fall by 200 points or more as a result of a bankruptcy filing, says Barry Paperno, consumer operations manager for MyFICO.com. Though bankruptcy remains on your credit report for seven to 10 years, you can start to turn your credit around in 12 to 18 months, experts say, by considering the following options.

Option No. 1: Correct reporting errors. While the last thing you may want to do is pull a copy of your credit report to see the bankruptcy’s damage firsthand, it’s important to make sure inaccuracies don’t drag your score down even more. “Get a copy of your credit report free from AnnualCreditReport.com and make sure everything that should have been discharged in your bankruptcy shows a zero balance,” says Carlson. If it doesn’t, contact those creditors and the credit bureau to make sure the information gets updated.

Option No. 2: Take advantage of current obligations. Many people mistakenly believe that a bankruptcy will wipe out all debts, but some, such as student loans, child support and, in many cases, mortgages will not be discharged, says Barry J. Roy, a bankruptcy attorney with Rabinowitz, Lubetkin & Tully in Livingston, N.J. By keeping on top of payments on those remaining loans, you’ll receive a credit boost for paying your bills over time.

Option No. 3: Rent your way to better credit. Earlier this year,, credit reporting agency Experian announced it would include rental histories in its credit profiles to get a more accurate reflection of consumers’ financial pictures. “We included consumers’ mortgages, auto loans, credit loans and student loans before, but we were missing the largest monthly expenditure for a third of the country — namely their rent payments,” says Brannan Johnston, vice president and managing director of Experian RentBureau.

Since the collection of rental data requires leasing companies to be part of a national network of property management companies and use special software, most individual landlords and small rental companies aren’t equipped to report rent payments at this time. But if you plan to lease an apartment from a midsized to large rental company, check with the leasing office to see if they’re reporting their data to Experian RentBureau, Johnston says. Though Fair Isaac’s FICO score (which can range from 300 to 850) doesn’t include the rental data in its credit scoring system, VantageScore (whose scores range from 501 to 990) does, and a record of paying your rent on time can make a difference. In fact, for those consumers who have rental data reported, 45 percent of them with VantageScores in the 500s and lower found their scores increased to 600 or above, RentBureau’s Johnston says.

Option No. 4: Take a slow and ‘secure’ approach. Secured credit cards let you take baby steps back into the credit game. To offset the card issuer’s risk, secured cards require a deposit that serves as your credit line, so if you put down $1,000, you’ll have $1,000 in credit available. Apply for a secured credit card through a local bank or credit union, suggests Katie Ross, education and development manager for Auburndale, Mass.-based American Consumer Credit Counseling. Avoid secured cards with high fees, and make sure the card issuer reports your payments to the credit bureaus, Ross adds.

Option No. 5: Explore unsecured offers with caution. While some people who find themselves in financial straits may swear off credit entirely, doing so won’t help your cause. Jacqueline Gikow of New York found this out the hard way after she filed for bankruptcy and then decided to operate solely with cash. “For about 10 years, I just used debit cards,” the 64-year-old says. Since she hadn’t built up her credit, she still had trouble getting credit cards after the bankruptcy had fallen off of her credit report. Though department store and gasoline credit cards tend to have high interest rates, they’re typically among the easiest types of credit cards to qualify for. A high interest card with no annual fee, in general, can be advantageous if you use it regularly and pay it off immediately so you rack up no interest charges, Ross says. “By doing this, it will be reported to the credit reporting agencies and will show that you are making payments in a timely manner,” Ross adds. Once you’ve shown your ability to pay on time and your credit score has risen accordingly, ask the card issuer to lower your rate, or apply for a card with better terms.

There’s no one-size-fits-all approach to rebuilding credit after bankruptcy, but with consistent financial discipline and a little patience, you will get easier access to credit again, says Roy. “You’ll be able to get a car loan, you’ll be able to get a lease and eventually you’ll be able to get a mortgage.”

Often clients tell me that it took a long time for them to finally make an appointment to see me about their bankruptcy. No one wants to file for bankruptcy, but sometimes it becomes necessary. The problem I often see is that people will wait too long to file their bankruptcy case, putting themselves in a more difficult spot than they otherwise would have been. Along those lines, here are four reasons to file your bankruptcy sooner than later:
#1 You May Not Qualify for a Chapter 7 Bankruptcy if You Wait
In order to file a Chapter 7 bankruptcy you must qualify under a means test. We are required to look at your income over the prior six months and take an average. We then compare what you earn to what the median income for a family of your size in Arizona makes. If you make about the same or less than the typical Arizona family of your size you will qualify for a Chapter 7 bankruptcy. If you make significantly more you will likely be required to file a Chapter 13 bankruptcy. If you are currently experiences lower pay than you have in the past, or if you anticipate that your pay will be going up in the near future, it is often in your best interest to get your case filed sooner while you still qualify for a Chapter 7 bankruptcy. Waiting may result in your income increasing and forcing you into a Chapter 13 bankruptcy.
#2 Delay Gives Your Creditors Time to Increase Collection Efforts Against You
If you are currently not paying certain bills such as credit cards, the collection efforts will continue to increase in intensity as time goes on. Most creditors will start the debt collection process by making a few phone calls or sending letters. If you don’t pay long enough you may lose your home to foreclosure, your car may get repossessed, and the credit card company may eventually sue you. If you get sued you may end getting your bank accounts and wages garnished. Filing your bankruptcy at the beginning of the collection process reduces the risk of losing assets or having your wages garnished. Further, when your bankruptcy case is filed the court enters an order that stops all collection efforts against you; this means you won’t have to deal with the endless collection calls either.
#3 Things Change
Sometimes I will meet with a client and then not hear from them for several months. When they return they are ready to move forward with their bankruptcy case, however I will then learn that their situation has changed slightly, that they have transferred an asset, or became entitled to an inheritance, or a countless list of other issues that will cause problems in their bankruptcy case. By meeting with a bankruptcy attorney early on in the process you can put together a plan as to when your case will be filed and some of the do’s and don’ts prior to filing your bankruptcy case.
#4 Don’t Deplete Your Retirement Accounts Paying Debts That Will Be Discharged in Bankruptcy
I see this way too often. Person comes in who has significant credit card debt – in the $80,000 -$100,000 range. And in hopes of avoiding bankruptcy they have been making payments here and there by raiding their 401(k) or IRA account. For most that are carrying substantial credit card debt the reality of ever being able to pay that off simply isn’t there without some kind of large windfall. It is painful to see someone drain their retirement accounts trying to pay down credit cards and then still end up in bankruptcy.
It is important to understand that retirement accounts like a 401(k) and IRA accounts are exempt during the bankruptcy process. This means that neither your creditors nor the bankruptcy court can take those funds. Equally important to understand is that in a Chapter 7 bankruptcy your credit card will be discharged/eliminated completely. That is why if you are dealing with large amounts of credit card debt you should meet with a bankruptcy attorney early on to determine whether bankruptcy is a good option and at the same time save your retirement for retirement.
I offer free bankruptcy consultations for this very purpose – to help clients in determining early on if bankruptcy is a good option. I can be reached at 718-303-4400

Habib and Zalewski P.C. with office located in Queens, Nassau and Suffolk counties brings you an overview article on Bankruptcy basics. As always our consultations are free and our fees listed on our website are the fees we charge.

Chapter 13 bankruptcy іѕ usеd bу an individual or business thаt dоеѕn’t wаnt to liquidate іn order to satisfy thеіr debts.
Instead, іt іs а restructuring оf debt, which allowѕ thе business tо avoid closure in order to meet thеir debt obligations. On thе other hand, a chapter 7 bankruptcy filing allowѕ thе business tо sell thеir assets tо pay their debtors. As a result, any remaining debt іѕ written off, whiсh giveѕ thе business or individual а “clean slate.” One оf the advantages of а chapter 13 filing is that althоugh thе credit rating іѕ affected the ѕamе аѕ in a chapter 7 filing, thiѕ type іѕ removed from one’s credit rating in fіve years іnstеad оf the standard ѕevеn years. The purpose оf thіs type оf bankruptcy is for а struggling business tо make its financial obligations, eѕpесially іf they seе ѕome financial recovery іn thе short term and ѕtill hаve ѕomе source of income.
For both types оf bankruptcy, the individual or business muѕt fіrst file а declaration оf bankruptcy wіth the courts. This is why іt is important tо hаve legal representation in thе event that уou are cоnsidering bankruptcy. In many instances, it iѕ poѕѕіble to settle theѕe debts without the court’s intervention. Additionally, іt is important to understand whiсh filing wіll be bеѕt fоr yоu оr уоur business, аnd it іѕ simply impossible tо dо thіѕ wіthоut legal counsel. Furthermore, therе havе beеn mаny сhаnges in bankruptcy law that wіll require а trained professional to navigate thе nеcеsѕаrу paperwork and filings. Many individuals havе hаd thеіr bankruptcy cases dismissed becauѕe theу dіd nоt understand hоw to satisfy sоme requirements whеn filing.
A bankruptcy lawyer cаn help thе debtor draft a three to fіve year repayment plan tо submit to the court for approval. This plan muѕt bе detailed tо include all debts owed and anу transactions аnd income thе debtor expects tо receive during thе restructuring period. Once approved fоr a chapter 13 bankruptcy, а federal bankruptcy court wіll supervise the debt restructuring. This means the court must provide written approval for thе business оr individual tо obtain a nеw line of credit.
A chapter 13 bankruptcy filing has many othеr advantages оvеr other types. For instance, onсe а payment plan has been approved, thе creditors аre not allowed to contact thе debtor about theіr debts owed еxсept through thе bankruptcy court. In addition, thе court cаn halt a foreclosure proceedings whilе thе case іs stіll in bankruptcy court. A chapter 13 bankruptcy allowѕ fоr a businesses tо stay іn operation, whіle individuals can regain control оf thеіr finances wіthout hаving to sell theіr assets.

For most people who are looking to file bankruptcy the choice really comes down to filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. In this article I would like to go over seven reasons why Chapter 7 can be preferable over a Chapter 13. Not all bankruptcy attorneys agree with me on this, and in fact there is a reputable attorney back East that has put a list of 50 reasons why a Chapter 13 is preferable, but I think in most situations people are much happier with the benefits offered in a Chapter 7 bankruptcy case.
#1 – Chapter 7 is a Much Shorter Process
In Arizona the typical Chapter 7 bankruptcy lasts about five to six months from the day the case is filed with the court. That seems like a long time but is actually a pretty quick proceeding in federal court world. Also, it is a fraction of the time you will spend in a Chapter 13 bankruptcy. Chapter 13 cases are a minimum of three years and a maximum of five years. Chapter 7 is designed to get you in, get you out, and on with life.
#2 – There is No Pay Back on Most Unsecured Debts
In bankruptcy different debts are treated differently. Essentially your debts are broken down into two groups: secured debts (i.e. houses, cars, anything with collateral) and unsecured debts (i.e., credit cards medical debts, personal loans). There is also a sub-category of unsecured debts that are given special treatment. Student loans and taxes fall into this sub-category. In a Chapter 7 bankruptcy case your unsecured debts, with the exception of student loans and most taxes, are completely discharged/eliminated. There is no payment plan. They are eliminated 100%.
Compare this to a Chapter 13 case where you are required to pay back (albeit a small amount) of your unsecured debts over the three to five year period I mentioned above.
#3 – Your Future Income Is Not Part of Your Bankruptcy
In a Chapter 7 bankruptcy the court is most concerned with the amount of income you have earned in the six months prior to your bankruptcy filing. The income you receive going forward after your case is filed is not part of what is called your “bankruptcy estate.” There are a couple of exceptions, such as money your receive from an inheritance within six months after your case is filed, but generally what you earn after your case is filed is yours to keep.
In a Chapter 13 bankruptcy the income you receive after your case is filed is property of your bankruptcy estate and you will be required to turn over your monthly disposable income to your creditors.
#4 – You Can Usually Keep Your Assets and Eliminate Your Debt
One benefit a Chapter 13 bankruptcy does provide is that you will retain possession of all of your assets. Some people don’t like Chapter 7 cases because there is a risk that you could lose some of your property through the Chapter 7 process. While it is true that in a Chapter 7 case there is a risk of losing non-exempt property to your creditors, in most cases nothing is lost. The numbers I have seen show that 94% of Arizona Chapter 7 bankruptcy filers do not lose a thing through the process.
This is because Arizona’s exemption laws are pretty good. Most people have heard of exemption laws like the homestead exemption, which protects up to $150,000 of equity in your home. Arizona also has exemption laws that protect your household goods, wedding rings, cars, and retirement accounts. Most people who file Chapter 7 don’t lose a thing and get the benefit of the complete discharge of all of their debt and the shorter process.
#5 – The Legal Fees for Chapter 7 Bankruptcy are Less
In a Chapter 7 case you are hiring an attorney for a five to six month legal process. In a Chapter 13 case you are hiring an attorney for up to five years. Because of this you are going to pay more for a Chapter 13 case than you will a Chapter 7 case. I charge $1,700 plus costs for a typical Chapter 7 bankruptcy while a Chapter 13 bankruptcy will cost you $4,000 plus costs.
#6 – There is No Monthly Payment or Paperwork to Worry about in Chapter 7
As I mentioned above in #2, in a Chapter 13 case you are required to pay your monthly disposable income to the court for the benefit of your creditors. In Chapter 13 we put together a payment plan and you are responsible for making sure that the payment is paid on time each month. If you happen to be self-employed or own your own business you are also required to submit a monthly profit and loss statement detailing your monthly income. You must submit these payments and monthly reports for the entire five year process. If you stop making these payments or submitting these reports your case can be dismissed.
In a Chapter 7 case, because there is no pay back of debts there is no monthly payment. Further, because your future income is not part of your bankruptcy there are no monthly reports that need to be completed.
#7 – You Will Recover More Quickly from a Chapter 7 Bankruptcy
Most people are surprised that their credit score has actually increased 12 months after their Chapter 7 bankruptcy case is complete. Further, most people are unaware that if you have good payment history after your Chapter 7 case, FHA can qualify you for a home loan within two years of your bankruptcy case being completed. While you can also qualify for FHA loans while in your Chapter 13 case, the reality of it is you are going to have a more difficult time getting financing while you have an active bankruptcy case, and in Chapter 13 you will have an active case for three to five years.
There is no question that filing a Chapter 7 case hurts your credit, but it is a static event and every day you get further away from it the more likely you will be able to obtain new financing if you need it.
Some people will not have a choice because they won’t qualify to file a Chapter 7 bankruptcy based upon their income. However, I evaluate all clients for a Chapter 7 case and if possible I will often recommend it even if it means losing some minimal property.

I heard that you can keep your vehicle in Chapter 13 and pay less than your vehicle’s outstanding loan balance. Is this true?

Get Caught Up on Car Payments
In all situations filing a Chapter 13 bankruptcy petition will allow you to keep your vehicle. Even if you are behind on your vehicle payments by several months or more, a Chapter 13 plan will let you make up these payments over the life of your plan.
For example, if your vehicle payment is $300 and you are behind by 5 months , you will be behind a total of $1500. Chapter 13 allows you to pay this $1500 over the life of the plan. If you have a 5 year plan this would work out to a payment of only $25/month. This is a small price to pay each month to ensure that your vehicle will not be repossessed by your creditors.

Reduce Car Payments Through Chapter 13 Bankruptcy
Furthermore, in some situations Chapter 13 actually lets you REDUCE the amount of money you must pay for your vehicle. The general rule is that if you bought a vehicle in the last 910 days (2 ½ years) for PERSONAL use, you MUST pay the full amount of the loan value. For example, suppose you purchased a vehicle 1 year ago. Currently you owe $15,000 on the vehicle but it is only worth $12,000. According to the rules under Chapter 13 you must continue to make your monthly payment based on the $15,000 amount. So what happens if you have purchased a vehicle more than 910 days ago OR the vehicle is not being used for PERSONAL use, but rather, being used for BUSINESS purpose? The law allows you to “Strip Down” the amount of your vehicle loan to the ACTUAL VALUE of the vehicle. In the above example this would mean you would be paying $12,000 instead of $15,000. A savings of $3000 for you.

The Same Rules Apply to Other Property
The same rules apply to personal property purchased within the last year (365) days. For example, say you purchase your washing machine on credit. If you bought the washing machine 6 months ago, you must pay the full price of the washing machine over the course of the Chapter 13 plan. However, if you bought it 2 years ago, you only have to pay the actual sale value of the washing machine. In almost all cases, this results in savings to you.

What Happens if a Vehicle is Surrendered?
But what happens if you decide to surrender (give up) your vehicle. Here the law says that if you elect to surrender your vehicle to your creditor, you are still liable for the FULL amount of the claim if your creditor is entitled to the difference under your vehicle contract and state law allows them to do so. (Whether or not this applies to you will depend on your unique situation, contact an attorney for more details).

Pay Less by Stripping Down
Overall, Chapter 13 can allow you to pay less for you vehicle through the process of “strip down” if you meet certain criteria. Given the complexity of this area of law it is important to consult an attorney who can tell you exactly how your vehicle will be treated in a Chapter 13 bankruptcy plan.

Chapter 13 bankruptcy involves crafting a repayment plan to your creditors over a 3-5 year period. If like many chapter 13 debtors, your income is too high to qualify for chapter 7 bankruptcy, your repayment plan will take place over a 5 year period. At the end of the repayment plan, the debtor’s remaining debts are discharged or forgiven. However, according to bankruptcy expert Steve H. Nickles, most chapter 13 bankruptcies don’t end with a discharge of debts. Instead, most chapter 13 cases are either dismissed or converted to chapter 7 bankruptcy.

Reasons for Dismissal of a Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also often referred to as a “wage earner’s plan.” This is obviously because it takes regular income in order to fund a chapter 13 plan. Perhaps the number one reason chapter 13 cases are dismissed is change of circumstances that doesn’t allow for monthly payments to be made on time. If you’re in chapter 13 bankruptcy and don’t make payments, the trustee will motion to dismiss your case. Unless you can then cure your past due chapter 13 payments, the court will grant the motion. Chapter 13 dismissed. Once a chapter 13 case has been dismissed, creditors can once again proceed with collection activity. As Georgia bankruptcy attorney, Jonathan Ginsberg explains:

When a Chapter 13 case is dismissed, creditors can immediately pursue all non-bankruptcy alternatives.  If there is a home and mortgage delinquency involved, the mortgage lender can start foreclosure proceedings.  If there is a car payment involved, the car lender can immediately start the repossession process.  Credit card lenders can restart collection efforts including calls and letters.
It should also be noted that some chapter 13 dismissals occur at the request of the debtor. Chapter 13 bankruptcies are more easily dismissed than chapter 7 cases and sometimes debtors just simply change their minds.

Converting Chapter 13 to Chapter 7
The tragedy of chapter 13 dismissal for non-payment is that, in many cases, a change in circumstances has unwittingly allowed the debtor to qualify for chapter 7 bankruptcy. Reduced income can change a failing means test grade to a passing one and open wide the doors to the quick debt relief of straight bankruptcy. Section 1307(a) of the bankruptcy code gives a debtor the absolute right to convert a case from chapter 13 to chapter 7, assuming they otherwise qualify for chapter 7.

Why Would a Debtor Choose to Convert to Chapter 7?
The most common reason for conversion is the inability to make plan payments due to a change in financial circumstances. Another related catalyst for moving to chapter 7 is problems with mortgage and car payments. Many debtors enter into chapter 13 bankruptcy because of the opportunity it affords to catch up on past due home and car payments. While this is a wonderful option that allows many to keep their homes and cars, the bankruptcy rules still require that normal monthly payments be maintained. If a chapter 13 debtor realizes that, despite their best efforts, maintaining a car or mortgage has become too expensive, chapter 7 allows for relief in the form of surrender.

In October 2010, six-time Grammy Award winner Toni Braxton filed for bankruptcy a second time. In her Chapter 7 bankruptcy petition, Braxton claimed debts of between $10 million and $50 million, which grew even worse when a heart condition – diagnosed as microvascular angina – forced her to cancel a series of Las Vegas shows in 2008.

The United States Trustee, after reviewing her petition, filed a document in Bankruptcy Court asserting that Braxton’s filing is presumed to be an “abuse of the bankruptcy process” because she did not file paperwork showing the results of the required “means test.”

In her filing for bankruptcy, Braxton says she has assets worth up to $10 million. These assets, combined with many potential sources of income, cause the trustee to assert that Braxton should be forced to file a chapter 13 bankruptcy, which requires her to set up a plan to repay her creditors.

Braxton’s lawyers state that Braxton is exempt from the means test because the majority of her Chapter 7 debt is business debt. They hope to clear up the matter so the bankruptcy trustee agrees that the bulk of Braxton’s debts are business related, which means her filing for Chapter 7 bankruptcy is not an abuse of the bankruptcy process.

What are the Eligibility Requirements for Chapter 7 Bankruptcy?
To be eligible to file a Chapter 7 bankruptcy, you must meet several criteria. First, you must measure your “current monthly income” against the median income for a family of your size in your state. Your “current monthly income” is your current monthly income over the past six months before you file for bankruptcy. If your income is less than the median income, then you can file for Chapter 7 bankruptcy.

Income Considerations
If your income is greater than the median, then you must pass the means test before you can file for Chapter 7 bankruptcy. The purpose of the means test is to determine whether you have enough disposable income to repay at least part of your unsecured debts over a five-year repayment period.

Have You Filed Before?
In addition, you cannot file for Chapter 7 bankruptcy if you discharged your debts in another Chapter 7 case within the past eight years, or in a Chapter 13 case within the past six years. Further, the court will not allow you to file Chapter 7 if it believes you are trying to cheat your creditors.

Free Pass: Under the new bankruptcy law, if your debts come primarily from running a business, you get a free pass to Chapter 7 bankruptcy, without meeting other requirements. Toni Braxton is relying on this free-pass provision because her debts are business related. In addition, the free pass is also available to disabled veterans whose debts were incurred during active duty.
Like Toni Braxton, many Americans find themselves faced with bankruptcy due to business debt, personal debt, credit card debt, unpaid taxes or mounting mortgage payments. To find out more about Chapter 7 bankruptcy, Chapter 13 bankruptcy and eligibility for free pass to Chapter 7 bankruptcy, call Chicago money lawyer Rich Fonfrias.

Divorce filings and Bankruptcy filings often intersect.  In my years as an attorney practicing heavily in bankruptcy law, I have seen countless individuals in consultations where a divorce is an issue.  It is such a frequent occurence that I even list a “divorce decree” as part of the relevant documents in my standard retainer agreement as a final reminder to anyone retaining my services of the importance of informing me of any past divorce proceeding.  But how does a divorce have a bearing on someone’s potential bankruptcy filing?

If a potential client has had a divorce in their recent past, it may not be adviseable for them to file a Chapter 7 Bankruptcy.  A divorce prior to the filing of a bankruptcy may include what is known as a “hold harmless clause” in the separation agreement and/or divorce decree and such language has a dramatic effect upon one of the parties filing a bankrupcy.  In a recent Kentucky Supreme Court decision, Howard v. Howard, a debtor had filed Chapter 7 Bankruptcy and included an obligation that was part of their divorce decree as an obligation subject to a hold harmless agreement.  A charge to find the debtor in contempt of a state court order due to violating the divorce decree as it pertains to the joint debt was filed in the lower court and deemed appropriate, ruilng that the debtor was indeed in contempt.  The Supreme Court, on appeal, agreed that the debtor was in contempt of the court ordered divorce decree.

The ruling in Howard v. Howard goes even further in explaining that, in addition to holding the debtor in contempt of the divorce decree order, contrary to the arguments of the debtor’s attorney, the debts themselves were non-dischargeable under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) even though the debtor’s wife never objected to the bankruptcy filing.  This means that you will be held in contempt of court for filing a Chapter 7 Bankruptcy when your divorce contains a hold harmless agreement AND that you won’t even be entitled to a discharge of those debts regardless of whether or not the ex-spouse objects in the bankruptcy.  You get in trouble and then as an extra slap, you get no protection from those debts.
This does not mean that such debts CANNOT be discharged in some way, though.  As a matter of law, these obligations cannot be discharged in a Chapter 7 Bankruptcy, but that does not preclude someone from discharging those same debts in a Chapter 13 Bankruptcy.  A Chapter 13 Bankruptcy gives rise to a discharge that attorneys commonly state is a “super-discharge” meaning that those same obligations that are NON-dischargable in Chapter 7 may be addressed and discharged in a Chapter 13.  The filing of a Chapter 13 bankruptcy shows that “best efforts” are being given to pay something back to creditors.  In the Eastern District of Kentucky, this may mean that a restructuring may mean that those obligations are wiped out just as they would be in a Chapter 7 or that they’ll be wiped out after receiving a few pennies on the dollar toward the obligation.  Chapter 13 is an effective way to avoid the issues caused by a Chapter 7 filing where a divorce decree proves problematic.