Bankruptcy Basics

Understanding Bankruptcy With Help From a Plant City Bankruptcy Lawyer

There are two questions to be answered before determining whether bankruptcy is a good choice for you, and if so, which Chapter to file. The first question is "what is your income?" The second question is "what are your assets?"

Below you’ll find some guidance in why these questions are so important and how to answer them correctly.

First Question: What is Your Income?

Determining your income is so important because it makes all the difference whether you will be allowed to file a Chapter 7 bankruptcy, or whether you will have no other option but to file a Chapter 13 bankruptcy.

Click here for a more detailed explanation about Chapter 7 vs. Chapter 13

Your ability to pay back your creditors will be determined by your GROSS INCOME for the six months prior to filing bankruptcy. Gross income is your income before taxes and health insurance are taken out of your paycheck. This is called the means test. The calculation starts the month before you file bankruptcy. For instance, if you file on January 1, you calculate your gross income from December, November, October, September, August, and July.

If your married and living with your spouse, you need to use both spouses’ gross income. YES, even if one spouse is not filing.

NOT SURE WHAT YOUR GROSS INCOME WAS FOR THE LAST SIX MONTHS?
CALL (813) 280-0973 FOR A FREE CONSULTATION TO FIND OUT.

After calculating your gross income, you need to compare your gross income with the median income for a household of your size in your County and State. As of January 2015, the median income in Hillsborough County, Florida is:

Household Size	Median Annual Income	Median Monthly Income
1	42,036	3,503
2	51,584	4,299
3	57,052	4,754
4	66,041	5,538

Household Size: This means how many people live in your home with you. In general, just list household members that are your dependents or your spouse. This can become a gray area if you live with a roommate, or an adult child that is employed, so I advise you to call and set up a free consultation to discuss your options if you have any questions about household size.

Next Step. If your gross income is below the median income, you pass the means test and your unsecured creditors are not entitled to be repaid based on your income. According to the test-you don’t have any.

If you are over the median income, you go to the second step of the means test. Here you will be allowed to take deductions set by law. These include:

An IRS standard for housing, food, clothing and utilities.
Federal income taxes, social security and Medicaid.
Health Insurance
Day Care
An expense for vehicle operation for a vehicle you own.
An expense for vehicle loan payments made.
MANDATORY Retirement Plans and Union Dues.
Life Insurance Payments.
Child Support and/or Alimony Payments.
A standard deduction of $60 per person in the household for non-covered medical expenses (You can claim more if your out of pocket medical expenses are greater than that).
In a chapter 7, you can deduct any scheduled payment on a secured debt-even if your surrendering it. You cannot do so in a Chapter 13 means test.

The formula is technical and complicated, but in essence, it is designed to determine if you have any “disposable” income left to pay back your creditors taking out all of your necessary living expenses. If the means test shows you have “disposable income”, then you will not qualify for a Chapter 7, and you must file a Chapter 13. You will be required to pay back your unsecured creditors the monthly amount as calculated by your means test. It has been my experience that 80-90% of those who are over the median income still pass the means test after taking out all allowable deductions.

Second Question. What are your assets?

What is secured debt?

Secured debt is any debt where if you don’t pay what you owe, the bank can take property that secured the loan. The most common secured debt is a mortgage and car loan.

What is unsecured debt?

Unsecured debt is any debt where, if you stopped paying the bank, they cannot take any of your property, but they could sue you to get their money back. The most common unsecured debt is credit card debt and personal loans.

Why does it Matter if a Debt is Secured or Unsecured?

Because if you own property that is secured by a loan, it will not be an asset if you owe more than what the property is worth. If your car is worth $5,000, but you owe $10,000, then your vehicle is not an asset.

In order to determine if you need to file a Chapter 7 or a Chapter 13, you need to know all of your secured and unsecured debt, and you have to have a clear objective.

Do you want to your home or walk away?
Would you keep your home if you could get rid of the second mortgage?
Would you keep your home if the mortgage payments were reduced?
Do you want to keep your car or surrender it?
Would you keep your car if the payments were lowered?
Would you keep your car if the amount you owe on the car were reduced to the current value of the car?

You need to know your unsecured debt because it’s your unsecured creditors that you have to pay back if your income is too high or you have assets above your allowed exemptions.

The answers to these questions will lead you to a Chapter 7 or a Chapter 13. Trying to navigate it without knowing may lead you to file a Chapter in Bankruptcy that will not allow you to accomplish your goals. In fact, it could derail your goals.

What is an asset?

Anything you own or have a legal interest in. Your home. Your real estate (even life estates, or future interests). Your car, truck, van, motorcycle, airplane. YES, you have to list it even if you owe money on it. (It may not have value as an asset, but you have to list it). YES, a vehicle is your asset, even if it’s really your son/daughter/friend/neighbor’s car. If your name is on the title, for the most part, it’s your asset. Your checking/Savings Account. (YES, you have to list it even if all the money in your bank comes from social security. You can exempt it as social security, but you have to list it). YES, you have to list it even if your son/daughters/mother/father’s name is also on the account and it’s really their money. (You can claim that you are just a custodian of the account-but you have to list it). Your furniture, tv’s computers, cells phones, cameras, lawnmower. (All listed at garage sale value). YES, you have to list it even if your aunt Tilly gave it to you for free. Your timeshare. YES, even if you owe money on it-you have to list it. Debts others may owe you. Lawsuits you have against someone else. INCOME TAX REFUNDS. Your interests in a business that you own. YES, if you own a corporation, that is an asset, even if the corporation is a separate legal entity. The question becomes, what is your interest in the business worth? That’s the asset.

There’s many more, but if you’re not sure if something you have is your asset or not, set up a free consultation to find out now.

What is an exemption?

When you file bankruptcy, an estate is created for you. Everything you own becomes property of your estate. You are allowed to “exempt” property from your estate. Although bankruptcy law is Federal Law, each state decides what its residents can exempt from their bankruptcy estate.

What State Exemptions Do I Take?

First question: Where did you live for the two years prior to the day you filed bankruptcy? If you have lived in one state for the last two years prior to the day you filed bankruptcy-you take that state’s exemptions.

If you have not lived in the same state for the past two years…

Second Question: Where did you live the majority of the time for the six months prior to the two period prior to the day you filed bankruptcy. Take that state’s exemptions. (For example. You plan on filing January 1, 2015. You moved to Florida June 2013. You have not lived in Florida for the two years prior to filing, so you may not take Florida’s exemptions. Where did you live from June 2012-January 2013? That is the six months prior to the two year period before you filed.)

What’s the difference? Well, when you don’t know enough to know what you don’t know – you need professional guidance. Call or click here to schedule a free consultation to guide you through the process. Trying to claim Florida’s exemptions when you have not resided there for two years could have catastrophic financial implications. Claiming Florida’s exemptions when you are entitled to use another state’s exemptions or Federal Exemptions might have catastrophic financial implications. You need to know before you file.

What Property Is Exempt in Florida?

By Florida Law, you can exempt:

$1,000 in personal property. $2,000 for a married couple who file together.
$1,000 in ONE vehicle. $2,000 for a married couple who file together. (Note that your spouse cannot use his/her $1,000 vehicle exemption if his/her name is not on the title to the car.)
Your homestead property (real estate you own or have a legal interest in-that you live on) is exempt. (There are some major nuances in the law when it comes to taking the homestead exemption, and there are some exceptions. Best to seek legal advice on the specifics of YOUR case before filing.
You get an additional $4,000 in personal property if you either (1) do not own any real estate, or (2) do not take your homestead exemption. A person might not take their homestead exemption if their home is in foreclosure and they have already moved out. A married couple not taking the homestead exemption can take an additional $8,000 in personal property exemptions.
Retirement accounts and pensions are 100% exempt.
Your Social Security is 100% exempt.

Why is it important to know what your assets are? Because if you own property that is worth more than the exemptions you are allowed to take, the Trustee in your case can demand that you either turn the property over, or pay the difference. The Trustee will then take that money and distribute it to your unsecured creditors. If you have property worth more than your exemptions, you can file a Chapter 13 bankruptcy, and pay the value of your property over your exemptions. A person who has valuable assets can still file, and still keep their property, as long as they pay the value of it to their unsecured creditors over time.

If all of your property is worth less than the amount you are allowed by Florida Law to exempt, then you can file a Chapter 7 bankruptcy, and not pay back your creditors anything.

ONE MAJOR PITFALL PEOPLE WHO FILE A BANKRUPTCY BY THEMSELVES RUN IS FILING WITHOUT KNOWING WHETHER THEY CAN EXEMPT THEIR PROPERTY OR NOT. WHEN YOU FILE A CHAPTER 7 BANKRUPTCY, YOU ARE NOT ALLOWED TO JUST DISMISS YOUR CASE AND WALK AWAY IF YOU DIDN’T REALIZE YOU HAD $5,000 WORTH OF PROPERTY THAT THE CHAPTER 7 TRUSTEE NOW WANTS YOU TO TURN OVER. REMEMBER, ONCE YOU PULL THE TRIGGER ON A CHAPTER 7 AND FILE THE PETITION, YOU CANNOT “TAKE IT BACK”. IN A CHAPTER 13, HOWEVER, YOU CAN VOLUNTARILY DISMISS YOUR CASE AT ANY TIME.

Who is the Trustee?

The Chapter 7 Trustee is someone appointed by the Court who oversees your “estate”. Think of it like this, on the day you file for bankruptcy, everything you own becomes property of your “estate”. You are allowed to “exempt” property out of your estate (see exemptions above) to keep for yourself and your “fresh start”. If you can exempt all of your property out of your “estate”, then there is nothing left over to distribute to the unsecured creditors. If all of your property is worth more than what you are allowed to exempt, then there is property left in your estate. The value of the property left in your estate needs to be either paid for or turned over to the Trustee, who will then distribute it to the unsecured creditors.

A Chapter 13 Trustee is there to make sure that your unsecured creditors are being paid what they are entitled to be paid based on your income and your assets. They do this by scrutinizing your payment plan to make sure it is treating all your creditors properly under the bankruptcy law. You make one payment for your debts to the Trustee each month of the plan, and the Trustee distributes the money to your creditors.

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