In my last article I wrote about creditor priorities and how the order in which creditors are paid can and should inform your decision to pay debts when there isn’t enough cash to pay them all. Knowing creditor preference can be useful in negotiating with creditors in order to stop the bailiffs from visiting you, in the subject of today’s article, we are going through the bankruptcy process.
The United States Constitution authorizes Congress to enact “uniform laws on the subject of bankruptcies throughout the United States.” Bankruptcy is designed to give those with overwhelming debt, who truly have no other options, a fresh start. Through a standard bankruptcy, a person’s debts are wiped out. However, there are exceptions. Taxes, student loans, child support obligations, and similar debts do not go away with bankruptcy.
Also, you can’t keep all your stuff and still have your debts disappear in bankruptcy. Instead, you can only keep a limited amount of property which is considered to be “exempt” from the claims of creditors. For example, in Nevada, a person can keep their home as long as the equity in the home doesn’t exceed $550,000 (on the other hand, Utah’s exemption on homes is only $20,000). There is also an automobile exemption in Nevada which protects equity in your car up to $15,000. Other exemptions include certain household goods, furniture, life insurance, individual retirement accounts, social security, disability benefits, and certain trade tools. In many cases, people have already spent all or their money or have sold all of their property so they do not have to surrender any additional property. The little they have left already falls under one of the bankruptcy exemptions; however, it is important to talk with an attorney if you are considering bankruptcy to determine which exemptions will apply to your property.
It is also important to remember that bankruptcy doesn’t allow you to get rid of your “secured debts.” Secured debts mean loans that, when you took out the loan, you promised the lender that they could have an item of property (usually a house or a car) if you didn’t make your payments in full. Thus, If you default on your mortgage payment or car loan, the bank can still foreclose on the home or repossess the vehicle even if you are in bankruptcy protection. However, the bankruptcy would prevent the bank from later suing you for a deficiency, which the unpaid balance owing on the loan. In other words, you can get rid of the secured debt in bankruptcy, but be prepared to also lose the car or house to the bank that loaned you the money to purchase it.
In short, while sometimes abused, bankruptcy is designed to allow those with no other options an opportunity to start over with a clean slate. At the same time, the law is designed to protect the rights of creditors that have loaned money to the debtor and are entitled to be re-paid. In fact, the bankruptcy system is actually provided for in the Constitution and was seen by the founders as being essential to the commercial success of the United States.
Clifford Gravett is a local attorney with the Virgin Valley law firm of Bingham Snow & Caldwell and is licensed in Nevada, Arizona, and Utah (702-346-7300 / www.binghamsnow.com).