Chapter 7 Bankruptcy – Kansas
A. Types of debt
There are two kinds of debt – secured and unsecured. Secured debts are those kinds of loans with collateral pledged on them, for example, car loans and house loans. Most loans from finance companies, such as HFC, Beneficial and American General, are usually also secured. In addition, some credit cards can be secured. For example, jewelry store credit cards (Helzberg’s, Kay Jeweler’s) and electronic store credit cards (Radio Shack, Best Buy) usually claim a security interest in items purchased on the cards. Most other kinds of debt are unsecured. Examples are medical bills, VISA and Mastercard-type credit cards, utility bills, personal loans, rent and phone bills.
B. What Happens to Debt
Provided you qualify (over 90% of people we meet with do), Chapter 7 generally “wipes out” unsecured debt, and gives you four options on secured debt. All your unsecured credit card debt and medical bills will go away, and the creditors can never try to collect it again.
However, some types of unsecured debt are generally not dischargeable (dischargeable means wiped out) in bankruptcy:
- Taxes (unless more than 3 years old & returns filed on time);
- Student loans (unless extreme hardship – must be totally & permanently disabled);
- Child support;
- Debts you were ordered to pay in a divorce decree (that your ex-spouse was also liable on);
- Court fines and penalties;
- NSF checks.
There are some other unusual kinds of debt that are not dischargeable. At your free consultation, your Kansas bankruptcy attorney will be able to tell you if there are any of your debts that may fall into this category.
In Chapter 7, you have four options for the treatment of secured debt:
1. Surrender the secured property and wipe out the debt.
Example: Suppose you have a car that is worth $3,000, and you owe $5,000 on it. Outside of bankruptcy, if you give back the car, the lender will sue you for the $2,000 difference between what the car is worth and what you still owe (this is called a “deficiency”). If you file bankruptcy, they cannot do that. Even if they already have a judgment, it will still be wiped out.
2. If you wish to keep the property, you can enter into a special agreement with the lender, called a reaffirmation agreement. This is true whether you are current on the payments or not. If you do so, you and the lender must both sign a “new promise to pay”-type agreement which is subject to approval by the Bankruptcy Court. You must catch up on the payments within 45 days after your meeting of creditors, and then continue to make the rest of the payments on time. However, if you later default on this agreement, the lender can not only take back the secured property, but can sue you for any deficiency.
Example: Suppose, in the above car example, that you were behind on the payments, and signed a reaffirmation. You would have usually 45 days after court to catch up on the payments, and would keep the car. Later, if you quit making the payments, the lender could repossess the car and sue you for the $2,000 difference just as though you had never filed for bankruptcy.
3. If you are current on the payments, and wish to keep the property, you may be able to do so without signing a reaffirmation agreement. Under the Bankruptcy Code, if you do not sign a reaffirmation agreement, you are no longer protected by the Bankruptcy Court. However, we live in the wonderful “Land of Oz,” which has its own laws protecting consumers. As a rule, a creditor can only repossess secured property (such as a car) if there is either a default in the payments or an “impairment of the collateral” (putting the creditor in a position where they are not adequately protected against loss). There is a recent Kansas Supreme Court decision that sheds light on the second part. The Court held that the filing of a bankruptcy, in and of itself, an impairment of collateral. However, certain other factors, such as a poor payment history, or most importantly, lack of equity in the property (meaning it is worth less than you owe on it) may result in the lender being justified in claiming impairment to collateral. We believe that any creditor who repossesses a car prior to having a court determine, after an evidentiary hearing, that the collateral is impaired, is taking a high risk and could be sued for wrongful repossession. However, we cannot guarantee that the lender will not repossess the property in the absence of a reaffirmation agreement.
If you choose this option, and later, you default on the payments, the lender can repossess the property, but cannot sue you for the deficiency. We realize this is complicated, but remember that this is just a short “thumbnail” description. When you come in for your free initial consultation, if you are considering Chapter 7, an experienced Kansas bankruptcy attorney will explain it to you in more detail.
4. If you are not current on the payments, and wish to keep the property, you can make a cash settlement offer which is based on the value of the secured property. This is called redemption.
Example: Suppose you have a Best Buy account with a balance of $3,000, and the only secured property on it is a three-year-old refrigerator worth only $300. It doesn’t make sense to keep making payments on $3,000 to keep a $300 refrigerator. So, in this case, you would pay Best Buy $300 cash, keep the refrigerator, and wipe out the remaining $2,700 on the account. However, both sides must agree on the value, or else the Court will have to hold a hearing to determine the fair market value.
C. Exempt Property
There is certain property you are allowed to keep in bankruptcy, and the Court will not and cannot take it. This is called exempt property:
- Your house, if your equity (value of house minus amount owed) is less than $125,000 & you have lived in it for more than 40 months.*
- One vehicle per person (two for a married couple), with a value of up to $20,000 each*;
- Furnishings, equipment and supplies, including food, fuel and clothing, reasonably necessary for one year;
- $1000 worth of jewelry per person* (typically based on what you could sell it for now, not what you paid for it);
- $7,500 worth of tools that are used in your job or business* (again, typically based on what you could sell it for now, not what you paid for it);
- 401(k)s, IRAs or any other tax-qualified pension benefits, regardless of the value;
- Social Security (retirement or disability), veterans benefits;
- Life insurance cash value and proceeds from life insurance (but not inheritances);
- Workers compensation benefits (but not other personal injury money);
- Unemployment compensation and any public assistance benefits; and
- Burial plots (one each – which we think ought to be enough).
* Provided that if you owe money on any of these items, you are willing to continue making the payments. The exception is tools and household goods – we may be able to file a motion to wipe out the lien on those, while still letting you keep the property. If you have a loan secured by these kinds of items, please advise the attorney during your appointment.
As you can see, by the time you take back what you are allowed to keep, there is usually nothing left for the Court to take (most of us only have one house).
There are certain kinds of property that are not exempt, and you could lose them:
- Cash and money in bank accounts (so, on the date of filing, you should make sure that your bank accounts do not have more than $100 in them);
- Tax refunds. If you are expecting a large refund back, let the attorney know immediately, as there may be ways of protecting it; and
- Anything else not listed in the exempt property list above.
If you have questions on whether an item of property you have may be non-exempt, you can ask the attorney at your appointment.
When Chapter 7 is Better
Chapter 7 is usually a better choice when:
- Most of your debts are unsecured, and you would not have a problem making your house and car payments if the credit cards, medical bills and other unsecured debt were wiped out;
- If you are current on your payments on the secured debt;
- If you have no non-dischargeable debts such as taxes or student loans; and
- If you are able to come up with the attorney fees and the filing fee in advance.
Disclaimer: Cloon Legal Services, is a Debt Relief law firm as defined by 11 U.S.C. 528. We help people file for Kansas Bankruptcy Relief under the Bankruptcy Code. The information contained on this website is not to be construed as legal advice. It is not intended to solicit or form an attorney-client relationship. We do not guarantee any result and prior results do not guarantee a similar outcome. This is an attorney advertisement and this website is for informational purposes only.