If you cannot pay your debts, are receiving telephone calls from collectors demanding payment or are dealing with a lawsuit, bankruptcy may help you. One of the major aims of bankruptcy law is to give a financially distressed person an opportunity to make a new financial start. Filing bankruptcy generally results in the "discharge," or release from obligation, of your debts — or at least of many of them — so that no further legal action can ever be taken against you on those debts. In short, bankruptcy gives you a fresh start. However, careful consideration should be given before filing for bankruptcy, because doing so may affect your credit and have other adverse consequences.
Chapter 7 is the most common type of bankruptcy. It is called a "liquidation bankruptcy," because the debtor is relieved of personal liability for all debts (with certain exceptions). In return, a debtor must give up possession of the debtor's assets (again, with certain exceptions). While a liquidation bankruptcy is a valuable tool for the debtor, a debtor only will be granted a discharge once every eight years. Once such a Chapter 7 bankruptcy is filed, it generally takes about 3 months to complete.
Some debts are not discharged by a Chapter 7 bankruptcy. The most common of these debts are child support, spousal support, criminal restitution and criminal fines. Other debts may or may not be discharged, depending on the particular circumstances. For instance, debts arising out of giving a false financial statement, fraudulent use of a credit card, or for willful and malicious injury may not be discharged. Tax liabilities may be discharged depending on whether a tax return has been filed and sufficient time has passed. Educational loans can be discharged in whole or in part only after proving the existence of undue hardship, something which requires a separate proceeding from the bankruptcy case.
Difficult legal questions arise when looking at these kinds of debts. To avoid serious problems, you should discuss these issues with an attorney before filing for bankruptcy. Many people ask, "Will I have to give up all of my property if I file for bankruptcy?" The answer is usually that you will not. The law recognizes that some things are necessary for a person's survival. You typically will have the option of choosing one of two alternative sets of exemptions: the state exemptions or the federal exemptions. Depending on which set of exemptions you use, certain property — like your working tools, cash surrender value of insurance, household furnishings, musical instruments, the federal earned income tax credit, some checking and savings accounts, retirement accounts, your automobile, and your home — will likely be exempt. Exempt means that you will be allowed to keep the property as long as the value of the property does not exceed certain amounts and you take the proper steps to claim the exemption in bankruptcy. For instance, at the time of this writing, under the Oregon exemptions a debtor may keep an automobile as long as the debtor's interest in the automobile does not exceed $3,000. Household goods are exempt up to $3,000. Clothes and jewelry are exempt up to $1,800. A single debtor may exempt up to $40,000 of the debtor's home. Two or more debtors who are members of the same household may exempt up to $50,000 of their home. Under the federal exemptions at the time of this writing, a debtor may keep an automobile as long as the debtor's interest in the automobile does not exceed $3,675. Household goods, clothes, jewelry and musical instruments are exempt up to $12,250. A single debtor may exempt up to $22,795 of the debtor's home. Two or more debtors who are members of the same household may exempt up to $45,590 of their home.
Only property which you have, and income to which you are entitled, on the date you file bankruptcy is subject to the bankruptcy. Property which is acquired at a later date generally cannot be taken, regardless of the value. Some property, such as the right to an inheritance or proceeds from a divorce decree or divorce settlement acquired within 180 days after the date you file, may nevertheless be included in your bankruptcy. Under certain circumstances other property, such as your right to tax refunds for prior years or the current year, may also be included in your bankruptcy, even though you have not yet received the refunds.
If your property is subject to a security interest, or if your house is secured by a trust deed or mortgage, the property will not be exempt from the creditor holding the security agreement or trust deed or mortgage. If you want to keep the property, you will have to continue to make payments to prevent the creditor from repossessing your automobile or foreclosing on the house, despite the exemption from general creditors and from the bankruptcy trustee. For instance, if you are purchasing an automobile, you most likely will have to sign a formal agreement, called a reaffirmation agreement, whereby you agree to continue making payments to keep the automobile. This agreement has to be approved by either the court or your attorney as in your best interests. If the agreement is approved, you will not lose the property but you will have to keep making the payments. And, the debt will not be discharged in the bankruptcy.
Chapter 7 bankruptcy does not make sense for everyone.
Other types of bankruptcies are available. You may file a Chapter 13 petition if you have debts within a certain range and have a regular income (whether from wages, unemployment, or otherwise) and you wish to pay some or all of your debts when you can. Chapter 13 will permit you to propose to the bankruptcy court a plan for paying off your debts gradually, generally within three to five years. Chapter 13 allows you to discharge more types of debts than you can discharge in Chapter 7, but the judge must approve the plan you propose. You will have to agree to give a portion of your income to a trustee who will distribute that money among your creditors on a pro-rata basis. You will not be able to pay only when you can, but will have to make the payments each month or specified time period. You generally will not lose any of your property in a Chapter 13 case, and the court will restrain your creditors from garnishing your wages or taking other action against you and your property and sometimes even against a co-signer. You may not file a Chapter 13 if you are a corporation or partnership.
A somewhat similar bankruptcy, if you have a large amount of debts and are involved in a partnership or business, is a Chapter 11 bankruptcy. Chapter 11 primarily is used to reorganize business entities, such as corporations, but may be used by an individual. As long as you comply with a court-approved plan, you will be permitted to remain in business without harassment. There is also a somewhat similar bankruptcy for certain family farmers under Chapter 12. Finally, there is a Chapter 9 bankruptcy that applies to municipalities, and a Chapter 15 bankruptcy which applies to certain cross-border international situations.
Note that if you are "judgment proof," bankruptcy would not be helpful: If you have only a few assets of minimal value; if you have no income or your income is from unemployment, TANF or some other type of government benefits; or if your wages are low enough, you may be judgment proof. This means that even if your creditors file suit against you and obtain judgments, they cannot take any of your property or garnish your income.
A creditor that does not have a security interest in particular property may not take any of your property or garnish your wages unless it files a lawsuit against you, serves you with a summons and complaint, gives you an opportunity to respond, and ultimately obtains a judgment. A judgment is not a court order that you have to pay any money. Rather, in most circumstances, a judgment is a court determination that you owe a certain amount of money. The judgment creditor has to determine how to collect the money specified in the judgment from your property or income.
Oregon law provides that certain property and income of a debtor is exempt from the claims of creditors, even if the creditors have obtained judgments. As described earlier, your automobile cannot be taken if it is worth less than $3,000. TANF, Social Security, unemployment and certain other government benefits cannot be garnished. If you earn net wages of less than $218 per week, your wages cannot be garnished. In any event, a judgment creditor cannot garnish more than 25 percent of your net wages.
Often factors to consider in deciding whether to file bankruptcy include: am I likely to incur debts in the future that I cannot pay? Do I have any property or income that a judgment creditor could take if I do not file bankruptcy? Even though I have a lot of debts that I cannot pay, will filing bankruptcy result in any more money for me after I pay my basic living expenses? Is my financial situation going to improve in the future and, if so, should I wait to file bankruptcy until that improvement happens? Should I delay filing bankruptcy so that I do not lose any property, such as the right to tax refunds?
There are a number of factors to consider in deciding whether bankruptcy is an appropriate option. You may wish to consult an attorney before proceeding to file for bankruptcy.
Legal Editor: Richard Slottee, Lewis & Clark Legal Clinic, October 2013