The MLG Blog

Common terms used in Bankruptcy

October 12, 2009

Basic Bankruptcy Definitions

Bankruptcy Estate
When a debtor files bankruptcy all of their assets become a part of the bankruptcy estate
It can be thought of as a pot containing all of your assets
Some assets, such as ERISA retirement plans (IRA’s, 401(k)’s etc.) are not part of the bankruptcy estate, these are called exclusions
Some assets can be taken out of the pot through the exemptions

The trustee is in charge of administering the bankruptcy estate and ensuring that creditors are paid when possible
The trustee is not your advocate or on your side, they are on the creditors side

When the bankruptcy process is over the debtor receives a discharge of their personal obligation on certain debts and they are no longer obligated to pay them
When a loan is made and property is promised as collateral for the loan two obligations are usually created. 1) A personal obligation to repay the loan. It is because of this personal obligation that creditors can sue you to obtain a judgment. This judgment can be used to levy on your bank accounts and wages and you are forced to pay them out of these assets 2) A creditor’s right in the asset is created. It is because of this right that a creditor can take back the asset if you fail to pay the loan
The discharge does not cut off the creditor’s rights that are attached to the asset, it only gets rid of the debtor’s personal obligation to repay the loan
Bankruptcy law allows a debtor to keep assets that have a loan on them (car, house etc…) under certain circumstances through a reaffirmation agreement
Certain debts generally cannot be discharged and you will have to pay them

  • Most taxes
  • Student Loans
  • Child Support, Alimony
  • Court fines and restitution

Reaffirmation of debt
If you can afford to keep assets that have a loan on them you can opt to continue paying the debt and keep the asset
Most commonly this applies to homes and cars
The debtor promises to continue paying the debt
CAUTION: If you reaffirm a debt and cannot or do not continue to stay current on that loan the creditor can obtain a judgment against you and/or repossess the asset. Reaffirmation agreements should only be made when the debtor is certain that they will be able to make all of the payments on the loan*

An asset that is not part of the bankruptcy estate due to law
These assets are disclosed to the bankruptcy court but you do not need to exempt them, and you will generally be able to keep them through the bankruptcy process
Examples include ERISA retirement plans (401k, IRA) as mentioned above

Assets that can be removed from the bankruptcy estate and kept through the bankruptcy process
The dollar limits for exemptions refer to the equity you have in an asset
For example let’s say that the exemption amount on a car is $3000. If you owe $1000 on the car and it is worth $5000 you have $4000 in equity.
Since you have $4000 in equity and the exemption amount is only $3000 you have a few options

  • 1) Pay the trustee the amount over the exemption limit, here that is $1000
  • 2) Since you don’t likely have $1000 you can surrender the car. It will be sold and if it is sold for more than what is owed on it ($1000) you will receive that money from the trustee in cash
  • 3) Reaffirm the debt and keep paying your loan throughout the bankruptcy process
    The most common examples are; Homestead Automobile Household Furnishings Tools used in a trade or business Jewelry Health Aids Veterans Benefits Alimony, child support

Means Test
The means test for chapter 7 purposes is a calculation of your annual income based on the previous 6 months of paychecks received
The means test compares your income to that of a standard income set by the Federal Government


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