Most people think that if they go bankrupt, it will get rid off all of their debts. However, this is not the case; bankruptcy does not clear all debts in all circumstances. You may still be liable for some debts, even after discharge from bankruptcy. This also includes any new debts you may incur during bankruptcy.
Secured debts cannot normally be included in bankruptcy. These debts are secured against property such as your house or car. If the property or car was sold to provide funds towards the bankruptcy, but the amount it sold for did not cover the amount owed on the mortgage, secured loan or hire purchase agreement, then the balance (known as a shortfall) can be included in the bankruptcy.
Child Maintenance/CSA Payments
Any debts from an order made in a family or domestic court, such CSA claims for child support are not included in bankruptcy.
Income Support, Benefit and Tax Credit Overpayments By Means Of Fraud
If the DWP have stated that the overpayments of benefits and tax credits were fraudulent, then they cannot be included in bankruptcy.
Court Fines imposed for an offence (including speeding and parking fines) and liabilities from a confiscation order made under S.1 of the Drug Trafficking Act 1986 0r S.71 of the Criminal Justice Act 1988 will not be included in bankruptcy.
Debts due to fraudulent activity will not be included in bankruptcy.
Personal Injury Claims
Any amounts owing due to personal injury claims against you will not be included in bankruptcy; this often includes debts to the MIB (Motor Insurers’ Bureau).
Debts Gained Just Before Bankruptcy
Any debts obtained just before bankruptcy; where there was no possibility of the credit agreement being honoured (the debt paid) will be excluded from bankruptcy.
How Long Does It Take To Complete The Bankruptcy Application Forms?
You need to complete the necessary bankruptcy forms, before you can apply to go bankrupt. They consist of:
• The petition (Insolvency Rules 1986 form 6.27) – this form is your request to the Court for you to be made bankrupt and includes the reasons for your request.
• The statement of affairs (Insolvency Rules 1986 form 6.28) – this form shows all your assets (anything that belongs to you that may be used to pay your debts) and all your debts, including the names and addresses of the creditors and the amount you owe each one. The form contains a declaration of insolvency that you will need to swear on oath before an officer of the court or a solicitor. The time needed to complete your forms correctly, depends on how good you are with paperwork, and how complex your situation is. All paperwork must be completed correctly before you go to the Court.
Cash Flow Insolvency
When you can’t pay a debt because you don’t have the money, you are cash-flow insolvent. If insolvency were a medical problem, doctors might call it an acute condition. Many people see financial trouble in their future, what might be called a chronic problem, but they aren’t cash-flow insolvent until they can no longer pay their bills. Financial trouble is chronic; not paying you bills is acute, since that’s the moment when a problem becomes a personal crisis.
Cash flow, or equitable, insolvency impacts both businesses and individuals. Usually it occurs when they’ve exhausted other ways of resolving debt. If you have a credit card payment due, you might be able to liquidate an asset like a lawnmower to pay a debt and avoid cash-flow insolvency, at least for the moment. When you run out of assets to sell and places to borrow money, and your income isn’t enough to cover your debts, you’ll probably be forced to negotiate a payment agreement with your creditors, either directly or through a debt management firm. Deciding what to do about this type of insolvency requires taking a cash-flow test. The debtor needs to evaluate current and future cash flows to determine whether your income is enough to cover debt payments. If you have an inheritance distribution or some other windfall coming in a few months, your insolvency might be temporary, but if you’ve sold your assets and your income is not going to increase, you might not have a easy way out of insolvency. The analysis can help you decide whether to seek a debt settlement or file for bankruptcy protection.
Balance Sheet Insolvency
Businesses commonly use a balance sheet insolvency test to decide whether to take steps to stay afloat or file bankruptcy. To decide, the business will evaluate its inflows, outflows and assets. If inflows are less than outflows and the value of the business’ assets are worth less than what is owed a condition called negative net assets — it might conclude that restructuring without the help of a bankruptcy filing might be pointless. But if it has assets that could be sold – a truck or store locations, for instance – that could be used to cover debts, it might attempt to sell the asset and shrink the business.
Financial advisors will review business operations, suggest scenarios for reducing or eliminating debt and suggest a course of action. Staying in business might require that the company convince its creditors that it has made the correct assumptions about future cash flows, but many times businesses and their lenders don’t see eye to eye. A business can be cash flow insolvent, but balance sheet solvent, if it holds non-liquid (non-cash) assets worth more than its liabilities. The reverse is also possible: A business can be balance sheet insolvent (more debt than assets), but cash flow solvent if its revenues allow it to meet its immediate financial obligations. Many companies that hold long-term debt operate continually in this state.
Insolvency vs. Bankruptcy
Insolvency is not the same as bankruptcy. Insolvency is a state of economic distress, whereas bankruptcy is a court order that decides how an insolvent debtor will deal with unpaid obligations. That usually involves selling assets to pay the creditors and erasing debts that can’t be paid. Bankruptcy can severely damage a debtor’s credit rating and ability to borrow for years. An individual or company can be insolvent without being bankrupt especially if the insolvency is temporary and correctable but not the opposite. Insolvency can lead to bankruptcy if the insolvent party is unable to successfully address its financial condition. Insolvent companies can reverse course by cutting costs, selling assets, borrowing money, renegotiating debt or allowing themselves to be acquired by a larger corporation that agrees to take over the insolvent company’s debts in return for control of its products or services.
What If I’m Insolvent?
If you are financially overwhelmed and sure you can’t pay your debts, you should contact a non-profit debt counselor or debt management company that can help you review your balance sheet. Even if you don’t have enough income to pay your debts, a debt manager can try to negotiate a settlement that will partially repay what you owe and avoid a bankruptcy filing. You can also try to negotiate with creditors on your own. If you owe a large credit-card debt, contact the card issuer and explain your situation. Though the debt holder is under no obligation to offer a workout plan, reduce your debt or trim you interest rate, it’s in their best interests to try. So, you might be able to reach an agreement if you can convince the creditor that it’s either an agreement or default. Remember, if you reach an agreement that involves debt forgiveness, you might be liable to pay taxes on the amount the creditor writes off. However, the Internal Revenue Service allows insolvent and bankrupt taxpayers to reduce cancelled debt by their insolvency amount.
For example, if a creditor agrees to settle a $20,000 debt with a $5,000 payment from you, you would have cancelled debt income of $15,000. But if you only had $3,000 in assets at the time you reached the agreement, you would insolvent in the amount of $12,000 ($15,000 cancelled debt income minus $3,000 assets). You would then report $3,000 in income on your taxes ($15,000 less the $12,000 insolvency amount).
If you are unclear about this, contact a nonprofit credit counseling agency or a tax professional.
A court can deem a company or individual insolvent by issuing an insolvency order. A debtor can petition for an insolvency order as part of a request for personal bankruptcy protection. In most jurisdictions, an insolvency order temporarily prevents any attempts at debt collection. Conversely, a creditor can, in some instances, request an insolvency order to be issued against a debtor, if there is reason to believe that the debtor can repay all or part of the debt. In that case, the court can issue an insolvency order, requiring the debtor to repay all or part of the debt.
Reasons for Insolvency
Individuals and businesses can become insolvent for a vast number of reasons, but some of the most common include:
• Job loss or salary reduction
• Medical bills
• Imprudent use of credit
• Financial mismanagement
What Are Bankruptcy Exemptions?
Exemptions allow you to keep a certain amount of assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account. If you can exempt an asset, you don’t have to worry about the bankruptcy trustee appointed to your case taking it and selling it for your creditors’ benefit. Many exemptions protect specific property types, such as a motor vehicle or furniture, up to a particular dollar amount. Sometimes an exemption protects the entire value of the asset. Some exemptions, called “wildcard exemptions,” can be applied towards any property you own.
The purpose of bankruptcy isn’t to strip you of all of your belongings—it’s to give you a fresh start. In addition to protecting the basics, you’ll likely be able to protect other things, too, like religious texts, a seat in a house of worship, or a burial plot. Some states even exempt chickens and feed. But you shouldn’t assume that everything will be safe.
• Luxury items. Exemptions for yachts, collections, expensive artwork, and vacation homes don’t exist. Owners of such valuable assets often sell the property and pay off debt instead of filing for bankruptcy.
• Jewelry. Many states protect wedding rings up to a particular dollar amount. However, don’t count on keeping a Rolex, diamond necklace, or antique broach collection.
• Pets. The dog or cat you rescued from the shelter is probably safe from the trustee’s clutches. Why? It’s not that you’ll have a specific exemption to protect it, but rather that in most cases, it would cost more for the trustee to sell it than what it would be worth. If, however, you own an expensive show dog or a racehorse that fetches sizeable breeding fees, you might have to turn it over or pay for it in bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation bankruptcy where the appointed trustee sells off your nonexempt assets to pay your creditors. Exemptions help you protect your assets in Chapter 7 bankruptcy because the bankruptcy trustee can’t sell exempt property. For example, if your state has a $5,000 motor vehicle exemption and you only have one car worth $4,000, then you can keep it. For more information, see Exemptions in Chapter 7 Bankruptcy.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy allows you to keep all your property and reorganize your debts (which can mean paying less on some of them). However, the amount you must pay particular creditors still depends on how much property you can exempt. Non-priority unsecured creditors (such as credit card issuers) must receive an amount equal to your nonexempt assets. So in Chapter 13 bankruptcy, exemptions help keep your plan payments low by reducing the amount you must pay creditors.
State and Federal Bankruptcy Exemptions
Each state has a set of bankruptcy exemptions. Federal law provides an exemption set, too. Some states require you to use the state exemptions; others give you the option of choosing either its set of exemptions or the federal system (you cannot mix and match the two). Which state’s exemption laws you’ll qualify to use will depend on where you lived during the last two years (called the “domicile requirements.”).
Federal Non-bankruptcy Exemptions
In addition to state and federal bankruptcy exemptions, there is a set of federal exemptions that exist under non-bankruptcy law. These exemptions function similarly to bankruptcy exemptions in protecting your property in bankruptcy. However, federal non-bankruptcy exemptions are only available to you if you are using your state’s exemptions (you cannot combine the federal bankruptcy and non-bankruptcy exemptions). If you are using state exemptions, then you can use the non-bankruptcy exemptions in addition to those.
Cons of Filing Chapter 7 Bankruptcy
You can’t file Chapter 7 if you make too much money
If you’re making less than the median income, you’re probably wondering how that’s even possible. Don’t fret; this is not about you. This is about folks who have money they can put into savings after paying their main living expenses.
That’s called having disposable income and it’s calculated by the means test. Having too much disposable income means you’re not eligible to simply walk away from your debt. But, while you can’t file Chapter 7, you can still get a bankruptcy discharge after completing a Chapter 13 repayment plan.
If you have good credit, it will likely take a temporary hit
Those that are able to maintain their monthly payments and keep their credit score high before filing their bankruptcy petition will see their score drop initially. But, a bankruptcy filing often does more good than harm to the filer’s credit score. Plus, once their bankruptcy discharge is granted, they can begin increasing that pesky credit score immediately.
It does not erase all unsecured debts
Some unsecured debts, like alimony or child support can never be discharged in bankruptcy. Other things, like tax debts and student loans can be quite hard to eliminate by filing bankruptcy.
You can lose certain types of property
One of the trades-offs for getting a bankruptcy discharge in a matter of a few months is the requirement to give up certain expensive items. Nonexempt property – the type of property the bankruptcy trustee can sell to pay creditors in a Chapter 7 bankruptcy case – is pretty rare.
If you own expensive property you don’t want to lose, it’s best to speak to a bankruptcy lawyer. Then you’ll know whether that’s really a possibility and, if so, whether filing Chapter 13 is a better debt relief option for you.
Your Chapter 7 bankruptcy filing does not protect others
A bankruptcy filing under Chapter 7 eliminates only your obligation to pay the debt. It does not wipe out the debt for anyone else. Chapter 13 is the only type of bankruptcy that can protect a co-signer, but that only works because you end up paying the debt through your repayment plan.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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