White Paper: Bankruptcy

Bankruptcy basics

What is bankruptcy?

Bankruptcy is a proceeding created by federal law in which a person can seek relief from his or her debts. 11 U.S.C. §§ 101-1330. The person seeking such relief is called the debtor. 11 U.S.C. § 101(13). The entity that the debtor owes money to is called the creditor. There are usually many creditors in a bankruptcy case. Secured creditors generally have a security interest in or lien on property belonging to the debtor, such as a car, furniture or house. Unsecured creditors do not have a lien or interest in property that belongs to the debtor. Types of unsecured creditors include collection agencies, most credit card companies, and agencies dealing with medical bills.

Bankruptcy is a complex federal proceeding. A bankruptcy judge oversees the proceeding and the Office of the United States Trustee has responsibility for the oversight of the process and appoints a case trustee. 11 U.S.C. §§ 703, 1302. Generally, a case trustee represents the interests of unsecured creditors.

Anyone who would like to file for bankruptcy may want to consult with an attorney before beginning the process. Bankruptcy is an effective solution for many debtors, but may not be the right solution for every financial problem. Bankruptcy has serious and long-range consequences, thus an individual should consider his or her options carefully before filing for bankruptcy.

How does a debtor start a bankruptcy?

To begin a bankruptcy, a debtor files a document in federal court called the petition, and pays a filing fee. 11 U.S.C. §§ 101(42), 301 - 304. The debtor cannot obtain a waiver of the filing fee, though it can be paid in installments.

In addition, the debtor is required to file bankruptcy schedules that detail assets, debts, income, expenses, and other important information. The debtor is required to attend a meeting where the trustee and creditors may inquire about the information contained in the bankruptcy schedules. The debtor may also be required to appear in court or attend court hearings.

What type relief is available to the debtor?

There are several types of bankruptcy available to a debtor. The most commonly used for individuals are a Chapter 7 or a Chapter 13 bankruptcy.

What is a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is often called a "straight" bankruptcy or a "liquidation" bankruptcy. Generally, any person residing or domiciled in the United States can file a Chapter 7 bankruptcy. §109(a). Chapter 7 is the simplest type of bankruptcy available to a debtor. A Chapter 7 bankruptcy generally lasts about 4 months from filing the petition to the granting of the discharge.

Exempt and nonexempt assets

A debtor has two types of assets in a bankruptcy proceeding:

1. those that are exempt from the bankruptcy proceeding, and
2. those that are not exempt from the proceeding.

Generally a debtor gets to keep those assets that are considered exempt. Assets that are not considered exempt are called nonexempt assets. Nonexempt assets are converted to cash and distributed to creditors by the case trustee. 11 U.S.C. §§521, 542, 543.

The process of determining what property is exempt from the bankruptcy proceeding is complex. Washington State law exempts certain property from the claims of creditors.

For a list of Washington exemptions, please see below. Federal law also sets forth a list of broad exemptions that can be used instead of the Washington State Law exemptions. 11 U.S.C. §522. Often only a portion of the goods or property of debtor are exempt. Examples of exempt assets are:

• certain household goods;
• clothing;
• jewelry (up to a set amount);
• certain disability, retirement, and other types of public benefits;
• a portion of the debtor's home depending on the amount of the debt owed on the home;
• part of an interest owned in a motor vehicle;
• and tools of a person uses for their trade.

Discharge

At the end of the Chapter 7 bankruptcy proceeding the debtor receives a discharge from his or her debts that remain unpaid after the sale of the nonexempt assets. A discharge means that the debtor no longer has to pay the remaining debts listed in the bankruptcy schedules (with certain exceptions). . 11 U.S.C. §727. Once the debts are discharged the debtor has a fresh start. Some debts are not dischargeable. These can include, but are not limited to: spousal maintenance and child support, certain taxes, claims of creditors not notified of the bankruptcy, fines, and most student loans. Debts, which arose from theft, misrepresentation or fraud, are non-dischargeable, as are some debts were incurred right before the debtor files for bankruptcy. 11 U.S.C. § 523. Also, secured debts on collateral like cars and a house will survive the bankruptcy if the debtor keeps the collateral.

What is a Chapter 13 bankruptcy?

This type of bankruptcy is often called "reorganization" or a "wage earner plan". To qualify for a Chapter 13 bankruptcy preceding a debtor must have a regular source of income and debts below a certain amount 11 § U.S.C. 109(e). In a Chapter 13 proceeding the debtor proposes a bankruptcy plan to the court that sets aside a certain portion of the debtor's disposable income to pay his or her creditors. 11 U.S.C. § 1325. This plan is carried out under the supervision of the court. Chapter 13 proceedings are often helpful in mortgage foreclosure situations where the debtor wants to keep his or her house and needs time to catch up on payments in default. Chapter 13 is also helpful in situations where the debtor has significant traffic tickets and fines and has had his or her driver's license suspended.

Under a Chapter 13 bankruptcy a debtor can keep and use his or her property. At the end of a Chapter 13 proceeding, if the debtor has fully complied with the plan, the remaining debts are discharged (with some exceptions like child support, student loans and certain secured debts). A Chapter 13 plan generally lasts between 36 to 60 months, depending on the amount of debt that is being repaid in the Plan.

What other type of relief is available in bankruptcy?

Once a bankruptcy is filed a debtor obtains an automatic stay. An automatic stay stops any actions creditors may be trying to take against the debtor's property. 11 U.S.C. §§ 362. This may include stopping such actions as: evictions, garnishment, repossessions, utility shutoffs, or foreclosures.

The duration of the automatic stay varies depending on the individual circumstances of each debtor. Creditors can file a motion for relief from stay. F.R.B.P 4001(a), 9014. Creditors can seek to have the automatic stay lifted so that they may continue to take the debtor's property through eviction, repossession, garnishment, utility shut-off, or foreclosure. Only the court can grant a creditor relief from the automatic stay following a court hearing.

Washington Exemptions (Current as of 11/1/02)

Each entry lists the type of property and the amount of exemption, followed by the statute creating the exemption

• Real or personal property in which debtor resides - $40,000
  ($15,000 if personal property) (RCW 6.13.030)
  
  
• Proceeds of sale of exempt homestead for 1 year after sale - $40,000 or $15,000
  (RCW 6.13.070)
  
  
• All wearing apparel - No limit, except value of furs, jewelry
  and personal ornaments cannot exceed $1,000 (RCW 6.15.010(1))
  
  
• Private library of debtor - $1,500 (RCW 6.15.010(2))
  
  
• Family pictures and keepsakes - 100% (RCW 6.15.010(2))
  
  
• Household goods, appliances, furniture, home and yard equipment of debtor and family, provisions and fuel - @2,700 (RCW 6.15.010(3)(a))
  
  
• Other personal property of debtor and family - $1,000 with $100 limit on cash, and $100 in bank accounts and securities (RCW 6.15.010(3)(b))
  
  
• Two motor vehicles used for personal transportation - $2,500 (RCW 6.15.010(3)(c))
  
  
• Farm trucks, stock, tools, equipment, supplies and seed of farmer - $5,000 (RCW 6.15.010(4)(a))
  
  
• Library and office furniture, equipment and supplies of physician, attorney, clergyman or other professional person - $5,000 (RCW 6.15.010(4)(b))
  
  
• Tools, instruments and materials used to carry on trade for support of debtor and family - $5,000 (RCW 6.15.010(4)(c))
  
  
• Retirement benefits or accounts, pension money - 100% except liable for spousal/child support (RCW 6.15.020)
  
  
• Insurance proceeds of policies covering exempt property lost, stolen or destroyed - 100% of exemption for covered property (RCW 6.15.030)
  
  
• Disposable earnings (earnings less deductions required by law). On support enforcement 50% if supporting another spouse of dependent childm otherwise 40% - 75% or 30 times the federal minimum wage - exemption 40-50% disposable income in spousal or child support matters (RCW 6.27.150)
  
  
• Industrial insurance benefits - 100% (RCW 51.32.040)
  
  
• Unemployment compensation benefits - 100% minus amount of debts for necessaries furnished to debtor or dependents while debtor is unemployed - exemption limited by RCW 50.40.050 in cases where child support is owed (RCW 50.40.020)
  
  
• Disability insurance benefits - 100% (RCW 48.18.400)
  
  
• Proceeds and avails of life insurance policies not purchased with intent to defraud creditors - 100% (RCW 48.18.410)
  
  
• Group life insurance proceeds - 100% (RCW 48.18.420)
  
  
• Annuity contract benefits - $250 per month (RCW 48.18.430)
  
  
• Public assistance grants and payments - 100% (RCW 74.04.280 and RCW 74.08.210)
  
  
• Income or proceeds from trust for benefit of debtor created and funded by another person - 100% (RCW 6.32.250)
  
  
• Personal or family burying grounds - 100% (RCW 68.24.220)
  
  
• City employees' retirement benefits - 100% (RCW 41.28.200)
  
  
• Police and firemen's retirement benefits - 100% minus amount awarded to former spouse by decree of dissolution (RCW 41.26.053, RCW 41.20.180 and RCW 41.24.240)
  
  
• State employees' and teachers' retirement benefits - 100% minus amount awarded to former spouse by decree of dissolution (RCW 41.40.052 and RCW 41.32.052)