IS there a constitutional right to file for bankruptcy?
Yes, there is. The United States Constitution adopted 250 years ago provides for the creation of bankruptcy courts and the power to administer them. Our founding fathers believed that people should be given a chance to have a fresh start in life to become productive again without accumulated debt. Before the adoption of the Constitution, we followed the concept of having debtor jails as that was the practice in England. Debtors who could not pay their debts were jailed until they paid their debts. Thus, if you lived in before the adoption of the constitution and defaulted on your credit card debt, you would end up in jail, just like a criminal.
However, with the adoption of the United States Constitution on September 17, 1787 at Independence Hall in Philadelphia, forging a new government for the United States, debtors who can’t pay their debts do not have to go to prison. Instead, they can start life anew without accumulated debt, making them productive again, while being able to keep most if not all of their assets. Our founding fathers believed that allowing debtors to get rid of debt would be beneficial to society.
How many kinds of bankruptcies are there? Chapter 7 of the bankruptcy code gives debtors a new start by discharging most of the accumulated debt. Chapter 13 of the bankruptcy code gives debtors a financial reorganization by allowing partial payment of the accumulated debt. Chapter 13 is sometimes called the “wage earner reorganization plan” because the payment plan is funded by the debtor’s regular wages or business income. There are also the options of Chapter 11 and Chapter 12. There is also the urban legend of Chapter 20. This is doing Chapter 13 after Chapter 7 in certain circumstances.
Can you keep your assets if you file for bankruptcy?
Yes, debtors are able to keep most if not all of their assets while getting rid of their debt by claiming “exemptions.” “Exemptions” keep an asset out of the bankruptcy estate and out of the jurisdiction of the bankruptcy trustee.
For example, the homestead exemption in CA under 704.730 of the CA code of civil procedure is $75,000, $100,000, and $175,000 of home equity depending on the applicable circumstances of the debtor. So, if you are a senior at 65, and your house, which has a current fair market value of $600,000 has a mortgage balance of $425,000, your homestead equity of $175,000 us fully exempt. You get to keep your house in Chapter 7.
For instance, you owe $100,000 of credit cards. You can file Chapter 7 to get rid of the $100,000 of credit cards while you “exempt “ your house, i.e. you keep your house even as you get rid of your $100,000 of credit cards. You also keep your retirement account of $200,000 by exempting it. Let’s say your 401k is $350,000, can you still exempt it? Sure you can. Even if you had a 401K or IRA or another kind of ERISA qualified retirement account like 403 or whatever of $1.0M, you can exempt the entire $1.0M, exempt your $600,000 house, while discharging your $100,000 of credit cards.
Is there a minimum debt required for Chapter 7? No. There is no minimum debt required. Owing $1,000 or $1 billion, it doesn’t make any difference. So, you can owe $1 billion of credit cards and other debts and have these wiped out, while you keep your $1.0M of 401K? Absolutely.
How often can you file for Chapter 7?
Every eight years.
Can you keep your cars in bankruptcy? Absolutely. Let’s say you have a car loan of $25,000 on your 2013 Tesla-S, and a lease on your 2017 M-Benz c-300, and you want to keep both of them even as you file for Chapter 7 to discharge $50,000 of credit cards and other debts. You have to continue the monthly payments on the Tesla and the M-Benz as before bankruptcy filing. You don’t get the cars for free. Most of the time, you can just continue payments. Sometimes, the creditor will require that you sign a “reaffirmation” agreement.
This means that you recognize that the car loan or car lease survives the bankruptcy.
If you don’t want to keep the car, you can surrender the car and you will not owe the voluntary return deficiency. For example, you return the Tesla. Creditor sells the Tesla for $15,000. Without the bankruptcy, you will still owe Elon Musk, $10,000 of return deficiency. With the bankruptcy, you owe Musk zero.
How fast can you rebuild credit after bankruptcy? Pretty fast. Right after bankruptcy, you can walk into a Toyota car dealer and buy a new car. However, the interest on the car loan will be higher. You might end up with 10% instead of 4% with good credit. And, there are creditors who specialize in providing credit cards to people who have just finished bankruptcy. After two years, you can get a mortgage loan to buy a house but your interest will be higher. After two years, your credit score will be about 600 to 620. After three to five years, your credit score will be about 650 to 700, depending on how you handle new credit. Between six to seven years, your credit score will be about 730 to 750. On the 10th year from filing bankruptcy, there is no more record of your bankruptcy filing in any credit report. You’re back to over 800 or perfect credit.
Are income taxes dischargeable in bankruptcy? Yes, they are provided you meet qualifying factors. For instance, the tax owed must be at least three years old. An assessment must have been made at least 260 days ago and there is no fraud involved. For instance, you owe the IRS $300,000 of income taxes for 2014. Chapter 7 will discharge the $300,000 and you won’t owe the IRS anymore provided all qualifying factors for discharge are met.
Who are famous now successful individuals who have filed for Chapter 7?
Walt Disney filed Chapter 7 twice. Now Disney business is global and worth many billions of dollars. Disney has theme parks in China, Japan, France, etc. Milton Hershey filed for Chapter 7. Now Hershey Chocolates is probably the biggest global chocolate business that exists worth many billions.
Will you be the next Walt Disney or Milton Hershey if you file for bankruptcy?
Who knows, maybe? But surely, if you don’t get rid of your accumulated debt now, you won’t ever become productive again. You will remain a debt slave forever. As you know, being a slave will get you nowhere in life because slaves can’t do much for themselves. Slaves work for their masters.
Whatever you become, debt slave, free man, and wildly successful entrepreneur, that’s really up to you. Decide and choose a productive life again or remain a debt slave until you die.
If you need debt relief, call to set an appointment. I will analyze your case personally. You won’t regret it.
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Disclaimer: None of the foregoing is considered legal advice. Each case is different.
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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.