It is important to realize that changes may occur in this area of law. This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney.
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. 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 — are 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, a debtor may keep an automobile as long as the debtor’s interest in the automobile does not exceed $2,150. Household goods are exempt up to $3,000. Clothes and jewelry are exempt up to $1,800. A single debtor may exempt up to $30,000 of the debtor’s home. Two or more debtors who are members of the same household may exempt up to $39,500 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. If, however, your property is subject to a security interest, or if your house is secured by a trust deed or mortgage, such 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.
Note that if you are “judgment proof,” bankruptcy would not be helpful. If you have only a few assets of minimal value; if your income is from unemployment, welfare or some other type of government benefits; or if your wages are low enough, you may be judgment proof; even if your creditors file suit against you and obtain judgments, they cannot take any of your property or garnish your income. This is because 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 $2,150. Welfare, unemployment and certain other government benefits cannot be garnished. If you earn net wages of less than $170 per week, your wages cannot be garnished.
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.
More information about bankruptcy, including forms, is available on the Bankruptcy Court’s website at www.orb.uscourts.gov. You can also get a packet of information by calling the Bankruptcy Court at (503) 326-1500 or (541) 431-4000.
Legal Editor: Richard Slottee, Lewis & Clark Legal Clinic, November
2007
updated 4-23-08