Understanding Bankruptcy in New York State
What is a chapter 7 bankruptcy?
How is it different from a chapter 13 bankruptcy?
Is it possible to protect my assets during a bankruptcy?
Can my debts be discharged?
Can filing for bankruptcy reduce my mortgage?
Are you asking these questions also? If you are filing bankruptcy, or are contemplating it, I know for a fact that these are some of the most pressing concerns you might be having. This blog will answer these questions and help you determine your best course of action.
Chapter 7 Bankruptcy
A chapter 7 bankruptcy is a full bankruptcy where you are able to discharge that in your retiring. Typically, a chapter 7 bankruptcy is going to eliminate unsecured creditors and at the same time allow you to reaffirm, and continue to pay on secured creditors such as mortgages and car loans. The benefits of a chapter 7 bankruptcy are substantial to the indenter. Firstly, you may eliminate all unsecured debt. You will be able to take care of the garnishments and eliminate those also. You will also be able to rid yourself of all the harassing phone calls that you are likely receiving daily. And finally, I am often able to protect most, if not, all of your assets. Even though a chapter 7 bankruptcy is a full bankruptcy, it does not mean that you lose everything. Many of your assets are exempt under the bankruptcy code.
- A chapter 7 bankruptcy enables you to discharge all unsecured debts and protect most, if not all, your assets.
Chapter 13 Bankruptcy
Most people are not completely aware of what a chapter 13 bankruptcy is. Consequently, they are also not aware of the benefits and the repercussions of filing a chapter 13 bankruptcy. The chapter 13 bankruptcy is designed for those people who fall behind on their mortgage or car payments, and want nothing more than to be able to catch up.
TO further explain this, let me illustrate with an example. Let us assume a hardworking individual went through a period of unemployment because they simply were not able to work, or because they were laid off, or even because of was a medical issue. Now that they are back at work, they realize they can afford to meet their regular monthly mortgage and car payments. However, they cannot afford to pay a lump sum to the creditor in order to bring those accounts to current and good standing.
In such a situation, a chapter 13 bankruptcy allows the individual to pay the arrears that they owe on their mortgage or car over a period of 3 to 5 years. At the same time, it allows the individual to resume making their monthly mortgage payments. It is very beneficial for an individual who has had a situation where they have fallen behind through no fault of their own, and want to catch up on payments now that their financial situation is more stable.
- A chapter 13 bankruptcy allows individuals who have fallen behind on regular car and mortgage payments to pay the arrears they owe over 3-5 years to catch up with their payments.
I understand a vast majority of people believe that they will lose all of their assets if they file bankruptcy. Rest assured, this is a misconception and is far from the truth. In New York State, there are two sets of rules that your attorney will typically adhere to in order to protect your assets. Firstly, we have the federal court exemptions and secondly, we have the state exemptions. These vary, of course. In New York State for instance, I shall be able to protect $75,000 for an individual or $150,000 worth of equity that a couple may have in their own personal residence. Under the federal code, I can protect $20,200 for an individual, and a little over $40,000 for a couple who file for a chapter 7 bankruptcy to protect their homestead.
Now you may be wondering why you would choose to file a federal code as opposed to the state code. There are some very important reasons why. As your attorney, I will look at your assets and try to fit you under the code that will enable me to best protect the majority of your assets. If you want to protect a bank account with $10,000 sitting in it by filing under the state code, you cannot use the same exemption to protect another asset, like a house. It is also important to note that I do not get any cash exemption. This means all the money in your bank account will be turned over to the bankruptcy court to benefit your creditors. Or for that matter, if you are going to receive a refund with regard to your income taxes, that refund could be confiscated on a pro-rated basis. Under the federal code, I will not have to use your full house exemption. In fact, I will be able to take the difference and use that toward taking care of those types of assets and at the same time, protect your house, protect the money in your bank account and your cash refund if necessary.
- Under the federal and state codes of bankruptcy, most (if not all) of your assets can be protected.
In a chapter 7 bankruptcy, there are certain debts that are dischargeable. However, there are others that may not be discharged. For instance, unsecured credit cards and obligations are generally dischargeable in bankruptcies, so long as they were incurred in good faith. Creditors, such as the state or the federal government are generally not going to be dischargeable, unless the taxes were acquired more than two years ago. Student loans, which are governmentally insured, are generally not dischargeable either. There are however, some instances where student loans can be discharged in bankruptcy if the proper criteria are met.
- Most unsecured debts (like credit card debt) can be discharged, although creditors like the federal government are not dischargeable.
In a chapter 13 bankruptcy, it is not possible to reduce the principal balance on your first mortgage. However, there are situations where a client may have a home equity loan or a second mortgage, where the value of the two mortgages put together exceeds the value of the property. In such a situation, we can file what we call a “pawned” motion. It is a motion that is brought before the court. It is the obligation of the debtor to prove the value of the property and what is outstanding on the mortgages. Following this, we can have the courts reduce the second mortgage so that the amount that exceeds the value of the property is eliminated.
- A first mortgage cannot be reduced. A second mortgage may, however, be reduced.