Bankruptcy claims refer to formal court petitions filed by debtors who can no longer maintain their debt payments and decide to seek relief in bankruptcy court. Generally, when a person files for bankruptcy, some of their assets may be liquidated, and the proceeds from the sale of the assets are then used to pay off the person’s debts. This is the case when a person files for a Chapter 7 bankruptcy.
For individual debtors, there is also Chapter 13 bankruptcy. This allows the person to work with creditors to devise a plan for reorganizing their debt, so that as much debt as possible can be paid off and the rest discharged. There are other types of bankruptcy for business entities as well.
What Types of Issues Are Involved in Bankruptcy Claims?
Bankruptcy cases can often be complicated because they involve the person’s entire estate. Thus, a number of knotty legal issues may arise in a bankruptcy case.
One issue is whether all debts can be discharged in bankruptcy; in other words, is the debtor able to avoid paying some debt completely. There is dischargeable debt and nondischargeable debt in bankruptcy. Debts that cannot be discharged and must be paid even after bankruptcy are as follows:
Debt that can be discharged is mostly unsecured debt. The most common dischargeable, unsecured debts are:
- Credit card bills;
- Utility bills;
- Medical bills;
- Attorney’s fees;
- Personal and business loans;
- Civil court judgments;
- Income tax debt that is older than a certain number of years;
- Past due rent and other lease obligations.
Generally, most debt that is not secured by property and not made non-dischargeable by the Bankruptcy Code can be discharged. Keep in mind, however, that debt is discharged only after the debtor’s assets have been sold to pay off as much debt as possible.
In a Chapter 13 bankruptcy, the court approves a plan to repay the debts to the greatest extent possible. The goal is to pay them off in full, but if some balances cannot be paid in full because the assets in the bankruptcy estate are inadequate, the debt might then be discharged.
Generally tax debt is priority debt in all chapters of bankruptcy. This means that tax debts are the first to be paid when assets are liquidated in Chapter 7. Only income tax debt can be discharged and even income tax debt can only be discharged to a limited extent.
In a Chapter 13 bankruptcy, any tax debt incurred during the last three years cannot be discharged. It must be included and paid in full in Chapter 13 repayment plan. However, as in Chapter 7 bankruptcy, income tax debt can be discharged to a certain, very limited extent.
Another issue that arises in bankruptcy is which of the debtor’s assets must be sold to pay off debt. Assets that must be sold to pay off debt are referred to as “non-exempt property”. Assets which the debtor is allowed to keep are referred to as “exempt property”.
Whether property is exempt or non-exempt is mostly an issue in a Chapter 7 liquidation bankruptcy case. In a Chapter 7 bankruptcy claim, the debtor could be required to forfeit some of their property. This is done so that it may be sold, with the proceeds going towards paying down their debt.
Federal bankruptcy law allows each state the authority to determine which assets a debtor may keep in a bankruptcy and which must be made available to sell to raise funds to pay off debt.. A state may allow the debtor to choose between federally-created exemptions, or state-created exemptions. Or, alternatively, a state may limit a debtor to only the state-created exemptions; this is the case in Colorado, for example.
Colorado law requires debtors to use its state exemption system rather than the federal bankruptcy exemptions. Some of the more important exemptions allowed by Colorado law are listed below. Note that amounts listed may be higher for a married couple.
- Equity in a dwelling used as residence:
- Up to $75,000, up to $105,000 if the owner or their spouse or dependent is 60 years of age or older or disabled;
- Or, equity in a house trailer or motorhome, only if used as a residence, of up to $3,500, or equity in a mobile home of up to $6,000;
- Equity in an automobile, truck, motorcycle or bicycle:
- Up to $7,500 in as many as two motor vehicles or bicycles;
- $12,500 if the debtor is elderly/disabled.
- Personal property:
- Up to $3,000 in household goods, furnishings and appliances;
- Up to $2,000 in clothing;
- Up to $2,500 in jewelry;
- Up to $2,000 in a library, family pictures, and school books;
- Up to $600 in fuel;
- Professionally prescribed health aids;
- Individual or family burial sites, including mausoleum spaces.
These are some of the more important exemptions in Colorado. There are others.
A debtor can use the exemptions from only one statute, either the federal or the state, but not both. In states that provide more than one exemption statute or system, the debtor may use the exemptions from only one statute.
Some examples of federally exempt assets in Chapter 7 include, but are not be limited to:
- Essential items, such as clothing, furnishings, household goods and appliances up to a reasonable value;
- Some motor vehicles up to $3,450 in value;
- Jewelry up to $1,450 in value;
- Tools or instruments essential to a person’s trade, up to a specific amount;
- Some unpaid but earned wages;
- Pensions; and/or
- Benefits, such as social security, welfare, and unemployment if those benefits are held in a bank account.
- Income tax debt that is older than a certain number of years;
- Past due rent and other lease obligations.
Again, this is a limited list. If a person lives in a state that allows them to choose between state and federal exemptions, they would want to compare the two options in detail and consider what assets they have and want to protect.
How Are Bankruptcy Claims Resolved?
Bankruptcy claims involve court intervention when it comes to resolving disputes. For instance, a judge may order a sale of some of the debtor’s property in order to meet some of the payments. The court is also likely to monitor the borrower’s entire budget, spending habits, and expenses. The judge may also issue a money damages award if one party owes the other for financial losses. Thus, the bankruptcy judge’s discretion is often a major factor in bankruptcy claims.
In conclusion, however, in a Chapter 7 bankruptcy the debtor’s non-exempt assets are used to pay off debts to the extent possible; remaining debt is discharged, unless it is nondischargeable, and the debtor resumes responsibility for managing their financial affairs.
Do I Need a Lawyer for Help with a Bankruptcy Claim?
Filing for bankruptcy can be a major task. It can involve several challenging legal issues. It can also take some time to complete the bankruptcy process from beginning to end. You need to hire an experienced bankruptcy lawyer if you need help with a bankruptcy claim.
Your lawyer can represent you in court and can provide you with legal information to help settle your disputes or issues. Your lawyer can help you identify and hold on to as many of your exempt assets as possible. You are most likely to get the best possible outcome in your situation if you have an experienced bankruptcy lawyer representing your interests. You don’t want to risk going into bankruptcy court without a professional bankruptcy lawyer at your side.
