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“Asset” and “No Asset” Closed-Business Chapter 7 Cases

When the sole proprietor of a just-closed business files a personal Chapter 7 bankruptcy case, the trustee may or may not have assets to liquidate and distribute to the creditors. If NOT, the case will more likely be finished faster. But if the trustee DOES collect some assets, the extra time may be worth it for the former business owner.  

If you’ve closed down your business and as a result are now personally liable on large debts that you cannot pay, you may well be wondering whether bankruptcy is your best option. Assuming that you qualify for a Chapter 7 “straight bankruptcy,” one important issue to consider is whether your case would likely be an “asset” or “no asset” one.  An “asset case” is one in which the Chapter 7 trustee collects assets from you to sell, and then distribute their proceeds to your creditors. A “no asset case” is one in which the trustee does not collect any assets from you because your assets are either protected by “exemptions” or are not worth the trustee’s efforts and expense to collect.

Generally a “no asset case” is simpler and quicker than an “asset case,” although not necessarily better. It’s simpler because it avoids the entire liquidation and distribution process. A simple “no asset case” can be completed about three months after it is filed (assuming other kinds of complication do not arise).  In contrast, it takes at least a number of additional months for a trustee to take possession of an asset, sell it in a fair and open manner with notice to all interested parties, give creditors the opportunity to file claims on the sale proceeds, object to any inappropriate claims, and then distribute the funds to the creditors.  Some assets—especially intangible ones such as a debtor’s disputed claims against a third party—can take several years for the trustee to negotiate and/or litigate in order to convert it into cash, with the bankruptcy case kept open throughout this time.

In spite of this seeming disadvantage, an “asset case” can be better for a former business owner in certain circumstances.

First, a business owner may decide to close down a business and file a bankruptcy quickly afterwards to hand over to the trustee the headaches of collecting and liquidating the remaining assets and paying the creditors in a fair and legally appropriate way. After fighting for a long time to try to save a business, the owner may well be emotionally spent and in no position to try to negotiate work-out terms with all the creditors. There is unlikely sufficient money available to pay an attorney to do this. And if there are relatively few assets compared to the amount of debts—the usual situation—it’s likely that after all that effort the former owner will still owe an impossible amount of debt.

And second, that former business owner may want his or her assets to go through the Chapter 7 liquidation process if the debts that the trustee will likely pay first are ones that the former business owner especially wants to be paid. The trustee pays creditors according to a legal list of priorities. Without going here into the details of that long priorities list, at the top of the list are child and spousal support arrearages. Also high on the list are certain employee wage, commission, and benefits claims, as well as certain tax claims. He or she may well feel a special responsibility to take care of the ex-spouse and children, former employees, and taxes. And the fact that he or she would likely continue being personally liable on these obligations after the bankruptcy is over undoubtedly adds some motivation.

A “no asset” personal Chapter 7 case can be a relatively quick and efficient way for a former sole proprietor to put the closed business legally into the past. While an “asset” case can take somewhat longer, it can help pay some of the special creditors you want to be paid anyway.

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Keeping It Simple in a Closed-Business Chapter 7 Case

Using a Chapter 7 case to clean up after closing down your business will be easy or not depending largely on three factors: business assets, taxes, and other nondischargeable debts. These three will usually also determine if you should be in a Chapter 7 case or instead in a Chapter 13 one.

Once you’ve closed down your business and decided to file bankruptcy, you may have a strong gut feeling about choosing the Chapter 7 option. After what you’ve been through, you just want a fresh, clean start. If you’d put years of blood, sweat and tears into trying to get your business to succeed, and then finally had to throw in the towel after resisting doing so for so long, at this point you likely feel like it’s time to put all that behind you. The last thing you likely feel like doing is dragging things along for the next three to five years that a Chapter 13 case usually lasts.

And you may well be ABLE to file a Chapter 7 case. The “means test” largely determines whether, given your income and expenses, you can file a Chapter 7 case. In my last blog I told you that you can avoid the “means test” altogether if more than half of your debts are business debts instead of consumer debts. But even if that does not apply to you, the “means test” will still not likely stand in your way, especially if you just closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income.

But usually the question is not whether you are able to file a Chapter 7 case, but rather whether doing so is really better for you than a Chapter 13 one.

Many factors can come into play, but the following three seem to come up all the time:

1. Business assets: There are two kinds of Chapter 7 cases: “no asset” and “asset.” In the former, the Chapter 7 trustee decides—usually quite quickly—that none of your assets (which technically belong to your “bankruptcy estate”) are worth taking and selling to pay creditors. Either all those assets are “exempt” from the reach of the trustee, or are not worth enough for the trustee to bother. But with a recently closed business, there are more likely to be assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, you will want to discuss with your attorney where the anticipated proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that is in your best interest compared to what would happen to those assets in a Chapter 13 case.

2. Taxes: Just about every closed-business bankruptcy seems to involve tax debts. Although some taxes CAN be discharged in a Chapter 7 case, most cannot. Chapter 13 is often a better way to deal with taxes. This will depend on the precise kind of tax—personal income tax, employee withholding tax, sales tax—and on a series of other factors such as when the tax became due, whether a tax return was filed, if so when, and whether a tax lien was recorded.

3. Other nondischargeable debts: Bankruptcies involving former businesses seem to get more than the usual amount of creditor challenges to the discharge of debts. These challenges are usually based on allegations that the business owner acted in some fraudulent fashion against a former business partner, a business landlord. or some other major creditor.  Such litigation, often started or at least threatened before the bankruptcy is filed, can turn an otherwise simple bankruptcy case into a long and expensive battle, regardless whether your case is a Chapter 7 or 13. But depending on the nature of the anticipated allegations, Chapter 13 may give you certain legal and tactical advantages over Chapter 7.

I’ll expand on these three one at a time in my next three blogs. From them you will be able to get a much better idea whether your business bankruptcy case should be in a Chapter 7 or not, and if so whether it will likely be relatively simple or not.

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The Rigid “Means Test” Makes the Timing of Your Bankruptcy Filing Critical

Waiting just one day to file your Chapter 7 bankruptcy case can make qualifying for it much easier—or much harder!

How could such a small delay make such a big difference?

One of the main goals behind the huge amendment to the bankruptcy law in 2005 was to force more people to pay a portion of their debts through Chapter 13 payment plans instead of writing them off in a Chapter 7 “straight bankruptcy.” And the primary tool that is supposed to accomplish this is the means test. The rationale behind this test was that instead of allowing judges to make judgment calls about who was or was not abusing the bankruptcy system, a rigid financial test would ferret out who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case.

But in real life rigid rules can have unintended consequences. An experienced and conscientious lawyer will work to turn these consequences to your advantage, and avoid their disadvantages. Here’s an idea how this plays out with the means test.

In my last blog I explained the first part of the means test, which essentially compares the income you received during the six FULL CALENDAR months before filing bankruptcy to a standard median income amount for your state and your family size. If your income is at or under the applicable median income, then you get to file a Chapter 7 case (except in very unusual circumstances, which I’m not going to get into here). If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. And there’s a risk that you will be forced to go through a Chapter 13 payment plan.  So you can see that having income below the median income amount makes your case much simpler and less risky.

But how can filing the case a day earlier or later matter so much? Because of the means test’s fixation on those six prior full calendar months. And because the means test includes ALL income during that precise period (other than social security).  Virtually all money that comes into your hands during that period is counted, not just taxable income. 

So imagine that you received some irregular chunk of money, say an income tax refund, a few catch-up child support payments, or an insurance settlement or reimbursement.  Not a huge amount, say $3,000, received on July 15 of last year. Your only other income is from your job, where make a $42,000 salary, or $3,500 gross per month. Let’s say that the median annual income for your state and family size is $43,000.

So now we’re getting close to the end of January, your Chapter 7 bankruptcy paperwork is ready to file, and you’re anxious to get it filed so that you get protection from your aggressive creditors. BUT, if your case is filed on or before January 31, then the last six full calendar month period will be from July 1 through December 31 of last year, which includes that $3,000 extra money you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus that $3,000 totals $24,000 received during that 6-month period. Multiply that by 2 to make that an annual amount, and that equals $48,000, higher than the $42,000 median income. So you’d have failed the income portion of the means test.

But if you just wait to file until February 1, then the applicable 6-month period jumps forward by 1 full month to the period from August 1 of last year through January 31 of this year. Now that new period does NOT include the $3,000 you received in mid-July. So now your income during the 6-month period is $21,000, multiplied by 2 is $42,000. So now you’re under the $43,000 median income amount. You’ve passed the income portion of the means test, and you get to skip the awkward and risky expenses part of the means test. So you’re much more likely to breeze through your Chapter 7 case. Hooray!

Last thing: what if that $3,000 chunk of money was not conveniently received almost 6 months ago, but rather only a 2 or 3 months ago, and you’re desperate to file your case? You need to stop a garnishment or foreclosure and simply can’t wait another few months to file. Well if you file now, then you will be over the median income, and will need to go through the expenses part of the means test. You may still be saved there, or there may even be other ways of qualifying for Chapter 7. More about those in my next blog or two. But if you are concerned about this now, please call to set up a consultation with me right away. This blog should make clear that careful pre-bankruptcy planning is critical. The sooner we start, the more likely time will be on your side.

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Stepping Over the “Means Test” Hurdle Without Breaking Your Stride

Are you among the large majority of people whose income easily qualifies them for Chapter 7 “straight bankruptcy”? You can find out right here and now.

As you’ve likely heard, a few years ago Congress passed a major set of changes to the bankruptcy laws intended to make it harder for some people to file Chapter 7.  The idea was that those who have the means to pay a meaningful amount of their debt to their creditors in a three-to-five-year Chapter 13 payment plan ought to do so. So they shouldn’t be able to just write off all their debts in a Chapter 7 case. At least that’s the theory behind the means test.

In practice, for many people it’s quite an easy hurdle to step right over.  Most people who want to file a straight bankruptcy can still do so.

The means test is truly an odd one. It has two parts. The income part—the one I’m addressing here today—is relatively easy to figure out.

But the second part, involving living expenses, is one of the most complicated formulas imaginable. This law was worded so poorly that more than six years after it became effective there’s still a lot of debate about how it’s supposed to work. Fortunately, most people don’t need to get to that part of the test, and we won’t here.

That’s because if you pass the income part of the test, you can totally skip the expenses part.

So, the income part of the means test compares your income to a published “median income” for a household of your size in your state. If your income is no more than that median, then right away you’ve passed the test—you get to file a Chapter 7 case.

But even this easy part of the test has its quirkiness.

1. It is NOT based on your taxable income for the previous calendar year, or anything that simple. Instead it is based on the precise amount of income you received during the six full calendar months before your case is filed. So, for example, if your case is filed on January 25, 2012, we look at every dollar you received during the six-month period from July 1 through December 31, 2011. Then take that six-month total and divide it by six to come up with a monthly average.

2.The income included for this purpose is not just your “taxable income,” but rather every bit of income you’ve gotten from all sources during that period of time, including irregular ones like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. The exception: exclude all social security income.

Then multiply your six-month average monthly income by 12 to come up with your annual income. The last step is to compare that amount to the median income for your state and your size of family. You can find that median income in the table that you can access through this website. (This median income information gets updated every few months, so make sure you’re using the current table.)

If your income, as calculated in this precise way, is no more than the median income applicable to your state and family size, then you can file a Chapter 7 case. Congratulations—you’ve cleared the means test hurdle!

If your income is MORE than the applicable median amount, don’t despair. You may well still be able to file a Chapter 7 case. More on that in my next blog.  

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In a Chapter 7 Case, “The Only Thing We Have to Fear is Fear Itself”

There’s a lot you can do to help make your “straight bankruptcy” Chapter 7 case a straightforward one, but one thing you can’t control is your creditors’ reactions to it. You know that creditors can sometimes try to prevent you from discharging (legally writing off) your debts, so naturally you worry about this. Here’s why you shouldn’t worry.

Let’s first be clear that I’m not talking here about the kinds of debts that simply can’t be discharged, and don’t require any creditor objection for that to happen—for example, back child and spousal support, many taxes, and criminal fines. Instead I’m talking about the right of any creditor to object to the discharge of its debt, under certain limited circumstances.

You might figure that if your creditors have ANY chance to object to the discharge of their debts, it would jump at the chance to do so. Or at least enough of them would object to cause you trouble. But that is NOT what happens. Most Chapter 7 cases go through with NO creditor objections at all. Well, why not?

1. The legal grounds for creditors’ objections are quite narrow. They need to have evidence that the debt was incurred through your fraud or misrepresentation, arose out of a theft or embezzlement, as a result of your intentional injury to a person’s body or property, or was related to other similar bad acts. So creditors don’t object to the discharge of their debts simply because most of the time no such facts exist.

2. Even within such narrow grounds, relatively common situations such as bounced checks or the use of credit not long before filing bankruptcy can be seen as fraudulent, so creditors can object to these kinds of debts. But even in these situations, creditors often do not bother to object because they decide it’s not worth “throwing good money after bad”—spending more money for their staff time and attorney fees in the hopes of first getting a bankruptcy judge to agree with them, AND then still needing to get you to repay the debt.

3. One of the reasons why sensible creditors decide not to object even when they think they might have the legal grounds to do so is that they risk being ordered to pay your attorney’s fees to defend against their objection. That can happen if the judge thinks that “the position of the creditor was not substantially justified.” So creditors risk not only paying for their own costs to object, but also paying for your costs in fighting the objection.

So that’s why most creditors just write off the debt and move on.

But there ARE two exceptions.

1. Leverage: If a creditor thinks it has a decent case against you—such as with a string of bounced checks or a debt incurred shortly before the bankruptcy was filed—it may well object to the discharge of the debt knowing that YOU can’t or don’t want to pay attorney fees in fighting it, EVEN if you have a decent defense. So they’ll raise the issue in the hopes of forcing you to enter into a settlement quickly.

2. Axe to grind: If you have someone you owe money to who is simply very mad at you, so that your bankruptcy filing really aggravated him or her, then this creditor might be looking for an excuse to hurt you back. Ex-spouses and ex-business partners are the most common. Irrational anger by those types, not reined in by the financial realities, probably causes the messiest objections.

To reduce any anxiety you have about any of this, talk it over thoroughly with your attorney. If you have any concern about how you incurred any of your debts, or if someone has threatened you with any trouble if file bankruptcy, lay it all out. Often, your fear will not be justified. And if there are potential problems, being up-front about it may enable your attorney help reduce the risks.

A final bit of good news: creditors have a very limited time to raise objections: generally 60 days after the Meeting of Creditors. So, if whatever assurances given by your attorney still doesn’t stop you from worrying in the meantime, you’ll at least know that you can stop worrying after that date.

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When Chapter 7s Are Not So Simple

The goal of most Chapter 7 cases is to get in and get out—file the petition, go to a simple 10-minute hearing with your attorney a month later, and two months later get your debts written off. Mission accomplished, end of story. And usually that’s how it goes. So when it doesn’t go that way, why not?

Four main kinds of problems can happen:

1. Income:  Under the “means test,” If you made or received too much money in the 6 full calendar months before your Chapter 7 case is filed, you can be disqualified from Chapter 7. As a result you can be forced instead into a 3-to-5 year Chapter 13 case, or have your case be dismissed altogether—thrown out of court. These results can sometimes be avoided by careful timing of your case filing, or by making changed to your income beforehand, or if necessary by a proactive filing under Chapter 13. Or sometimes it’s worth fighting to stay in Chapter 7 by showing that it is not an “abuse” to do so.

2. Assets:  In Chapter 7, if you have an asset which is not “exempt” (protected), the Chapter 7 trustee will be entitled to take and sell that asset, and pay the proceeds to the creditors. You might be happy to surrender a particular asset you don’t need in return for the discharge of your debts, in particular if the trustee is going use the proceeds in part to pay a debt that you want paid, such as a child support arrearage or an income tax obligation. But instead you may not want to surrender that asset, either because you think it is worth less than the trustee thinks or you believe it fits within an exemption. Or you may simply want to pay off the trustee for the privilege of keeping that asset. In all these “asset” scenarios, there are complications not present in an undisputed “no asset” case.

3. Creditor Challenges to Discharge if a Debt:  Creditors have the limited right to raise objections to the discharge of their individual debts, on grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. In most circumstances the creditor must raise such objections within about three months of the filing of your Chapter 7 case. So once that deadline passes you no longer need to worry about this, as long as that creditor got appropriate notice of your case.

4. Trustee Challenges to Discharge of Any Debts:  If you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the hearing with the trustee, or if you fail to cooperate with the trustee’s investigation of your financial circumstances, you could possibly lose the ability to discharge any of your debts. The bankruptcy system is still largely, believe it or not, an honor system—it relies on the honesty and accuracy of debtors (and, perhaps to a lesser extent, of creditors). So the system is quite harsh towards those who abuse the system by trying to hide the ball.

To repeat: most of the time, Chapter 7s are straightforward. No surprises. That’s especially true if you have been completely honest and thorough with your attorney during your meetings and through the information and documents you’ve provided. In Chapter 7 cases for my clients, my job is to have those cases run smoothly. I do that by carefully reviewing my clients’ circumstances to make sure that there is nothing troublesome, and if there is, to address it in advance in the best way possible. That way we will have a smooth case, or at least my clients will know in advance the risks involved. So, be honest and thorough with your attorney, to greatly up the odds of having a simple Chapter 7 case.

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A Simple Chapter 13 Case

If you have debts that can’t be written off (“discharged”) in a Chapter 7 “straight bankruptcy,” such as back child support or recent income taxes, Chapter 13 can be a much better alternative.

 In my last blog I wrote about the discharge of debts under Chapter 7. I ended by saying that if you have debts that can’t be discharged in Chapter 7, “Chapter 13 is often a decent way to keep those under control.” Here’s how.

The best way to show this is with an example. So let’s say you owe $6,000 in IRS debt for 2009 and 2010, $4,000 in back child support, $15,000 in credit cards, and $3,000 in medical bills. You had lost your job in 2009, tried to run a business during 2009 and 2010 that made a little money but not enough to pay its taxes and to make all your support payments. Then you got a new job a few months ago that pays less than the one you’d lost in 2009, but at least you now make enough to pay your ongoing taxes and support, and your living expenses. However, you’re left with only about $400 left over to pay ALL of your debts. That would not be enough to pay the minimums on just the credit cards, much less anything on the rest of the debts.

A Chapter 7 case would discharge the $12,000 in credit cards and the $3,000 in medical bills, but would leave you with $6,000 owed to the IRS and $4,000 in back support—so you’d still be $10,000 in debt. Although the IRS would likely be willing to accept payments of $400 per month, the problem is that the state support enforcement agency is about to garnish your wages for the back support, trashing any possible arrangement with the IRS. Also, you’re still in the probationary period at your new job and the last thing you want is for the payroll office to get a garnishment order for back child support. Filing Chapter 7 would not stop that kind of garnishment.

But Chapter 13 would. So you file a Chapter 13 case, keep up your ongoing regular child support payments, and put together a plan to pay to the Chapter 13 trustee $400 per month for 36 months. During that period of time neither the IRS, nor the support agency, nor your ex-spouse—nor any of your other creditors—would be able to take any action against you or any of your assets. That is they couldn’t as long as you consistently made your $400 payments, and kept current on your ongoing tax and support obligations. Over those three years you’d pay to the trustee $14,400 ($400 X 36 months), which would pay all the $4,000 of back support and the $6,000 in taxes—usually without any additional interest or penalties from the date of the filing of your Chapter 13 case. The Chapter 13 trustee would also get paid, usually about 5-to-10% of what you’re paying into the plan, as would any attorney fees you did not pay to your attorney at the beginning of your case.  If there is still any money left over (not likely very much in this example), that gets divided pro rata among the credit card and medical debts. After the 36 months of payments, any remaining balances on those debts are discharged, leaving you owing nothing to any of your creditors, and current on your taxes and support payments.

So that’s how a simple Chapter 13 case works.

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Audit Shows Capital One Bank Illegally Filed $24.7 Million in Claims for Debts Previously Discharged in Bankruptcy

One can understand if a major U.S. credit card company forgets that one of its customers had earlier written off that company’s debt in bankruptcy. But forgetting this very important fact for 15,500 of its customers?!?

It is bad enough that Capital One lost track that its old debts had been legally written off (“discharged”). But in each one of these 15,500 cases it didn’t bother to check if the debts were discharged, and so it actually filed documents in subsequent bankruptcy cases asserting that the debts were still legally owed. Each of these “proofs of claim” were dated and signed by a Capital One representative, with the signature right next to this statement: “Penalty for presenting fraudulent claim: Fine of up to $500,000 or imprisonment for up to 5 years, or both.” Now, I don’t think anyone is alleging that Capital One is purposely and fraudulently chasing stale debt, but they sure are being awfully negligent in their internal recordkeeping, or maybe even reckless in blindly chasing debts without bothering to find out if they are still legally owed.

This whole ugly mess was uncovered by the “U.S. Trustee.” People filing bankruptcy may hear that the U.S. Trustee is somebody who is not on your side, mostly someone who can turn your Chapter 7 case into a Chapter 13 one if you don’t follow the rules. But its watchdog role is much broader–it “protects the integrity of the bankruptcy system by overseeing case administration and litigating to enforce the bankruptcy laws.“ Obviously, a creditor filing a document in a bankruptcy case saying that it is owed money when it not is in violation of the bankruptcy laws. Doing this in 15,500 cases is majorly bashing the integrity of the bankruptcy system, and causing havoc to “case administration.”

How so? Think about it. A creditor’s proof of claim is generally considered accurate unless somebody challenges it. The creditor usually attaches some documentation, which makes the debt look authentic. The debtor usually has little incentive to spend time or money on the issue because usually that proof of claim does not change how much the debtor has to pay, instead only how the creditors will divide up the money. When Capital One gets paid on a false claim in an asset Chapter 7 case or a Chapter 13 case, that inappropriate payment reduces the trustee’s payouts to all the other creditors, the amount of reduction depending on the size of each one of the other creditors’ claims. So now in 15,500 individual cases Capital One has to give back whatever money it actually received—amounting to $2.35 million—and the trustee in each case has to precisely recalculate how much each one of the other creditors was short-changed, and then cut checks for all those other creditors in those amounts. What a huge waste of time.

What does this mean for you? As to Capital One, if it is or was one of your creditors and you are (or will be) in either a Chapter 13 case or asset Chapter 7 case, have your attorney keep a close eye on any proofs of claim this creditor files. As to creditors in general, this is good reminder that creditors sometimes file inaccurate documents—purposely or not—in bankruptcy court. Proof of claims specifically, and other documents as well (such as motions for relief from stay) need to be scrutinized carefully, not just accepted as face value. Much of the time most creditors keep decent records and file accurate documents in court. Just don’t assume all of them do all the time. Especially Capital One.

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Keeping Everything You Own in Bankruptcy

You want to know: “Can I really keep everything I own if I file bankruptcy?”

A two-part answer:

1) Yes, you can, usually, keep those possessions that are all yours (you don’t owe any money on them).  

2) Yes, you can, usually, keep those particular possessions on which you are making payments to a creditor (like your home or vehicle), IF you want to keep it them, AND are willing and able to meet certain conditions. (Hint: those conditions are usually lots better in bankruptcy than without one.)

In today’s blog I’ll get into the first part of that answer. I’ll get to the second part later.

Most people who file bankruptcy can keep what they own for two reasons: 1) exemptions and 2) Chapter 13 protections. I’m covering exemptions today.

Make no mistake: at the heart of bankruptcy is the basic principle that your debts are discharged—legally written off forever—in return for you giving all your assets to your creditors. Except you can keep any of your assets which fit within an exemption. As the saying goes, this exception swallows the rule. Most of the time, all assets are exempt and so debtors get a Chapter 7 discharge without giving anything to the trustee.

Exemptions are simply a list of the types and amounts of assets that are protected from your creditors, and thus from the Chapter 7 trustee acting for those creditors. But exemptions are anything but simple.

First, the Bankruptcy Code contains its set of federal exemptions, and each state also has its own exemptions. If you file a bankruptcy in certain states, you have a choice between using the federal exemptions and the state ones, while in other states you can only use the state exemptions. In states where you have a choice, picking which of the two exemption schemes is better for you is often not at all obvious and you need an experienced attorney to advise you.

Second, if you have moved relatively recently from another state, you may have to use the exemption rules of your prior state. Because different state’s rules can differ wildly, thousands of dollars can be at stake depending on what day your bankruptcy is filed.

Third, once you know which set of exemptions apply to you, whether any of your particular assets is covered by an exemption, and thus protected from your creditors, is often not clear. The exemption statues were often written many decades ago, use archaic language, and have a whole history of court ruling to interpret what they include. Plus the local trustees often have unwritten rules about how they interpret the exemption categories in practice. So, determining whether an asset is exempt or not is often much, much more than checking down a list of exemptions. By way of example, if you and your spouse each have one vehicle that you use for getting to work, and a third one used by your 18-year-old to get back and forth to school, will your vehicle exemption cover all three vehicles? Under what circumstances?

So navigating through exemptions can be much more complicated than it looks, and is one of the most important services provided by a bankruptcy attorney.

The fact remains that among most people who do end up filing a Chapter 7 bankruptcy case, everything they own DOES fit within the exemptions. So the bankruptcy trustee takes nothing from them.

But what if you DO own one or more assets which do not fit any of the available exemptions? How can those still be protected through a Chapter 13 case?  I cover that in my next blog.

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The Amazing but True Evolution of Bankruptcy Law

You’ve heard of debtors’ prisons. But that’s only one hideous part of the very colorful history of bankruptcy law.

American bankruptcy law was of course based on the law of England at the time of the colonies. Today’s blog tells how incredibly different pre-Revolutionary War bankruptcy laws were from current law.

  • The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry the Eighth, the one who had a habit of decapitating his former wives. Debtors were called “offenders” under this first law, essentially as perpetrators of a property crime.  The purpose of this law, and as if was expanded during the following hundred and fifty years, was not to give relief to debtors but rather to give creditors a more effective way to collect on the debts owed by their debtors.
  • Consistent with that, the law included no discharge of debts. After a bankruptcy was finished—with the assets of the “offender” seized and sold and distributed to creditors—separate creditors could still continue chasing the individual for any remaining balance.
  • Only creditors could start a bankruptcy proceeding. Creditors had to allege an “act of bankruptcy” by the debtor. Physically hiding from creditors was “an act of bankruptcy,” as was hiding assets by conveying them to others. Today’s very seldom used “involuntary bankruptcy” is a throwback to this.
  • Since credit was seen as immoral, only merchants were allowed to use credit, for whom it was seen as a necessary evil. So only merchants could become bankrupt.
  • For the following century and a half, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” for their assets, put them into pillories (those wooden structures with holes for head and hands used for public shaming), and even cut off their ears.
  • The discharge of debts was finally introduced in the early 1700s for cooperative debtors, but was given only upon consent of the creditors. Furthermore, to induce cooperation, fraudulent debtors were subject to the death penalty (although it was very seldom used).
  • Cooperative debtors received an allowance from their own assets, a bit of a foreshadowing of Chapter 13 payment plans.

This was the English bankruptcy law in effect that the U.S. Constitution was adopted, with its Bankruptcy Clause giving Congress power to “pass uniform laws on the subject of bankruptcies.” More on that and the very rocky history of U.S. bankruptcy laws in my next blog.

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