There are occasions when individuals (and companies) find themselves in so much debt, they can no longer pay their bills and function financially. This is where bankruptcy can assist a person by relieving them of their debt burden and giving them a fresh start. The first thing to understand about bankruptcy is that is federal legal action. There is no New York State law allowing for bankruptcy. Our Founders realized that too much debt can become a problem and set forth in the U.S. Constitution as a remedy.
“The Congress shall have Power To…establish…uniform Laws on the subject of Bankruptcies throughout the United States….” ARTICLE I, SECTION 8, CLAUSE 4
Personal bankruptcies are covered primarily under two parts of the U.S. Bankruptcy Code, Chapter 7’s and Chapter 13’s.
Chapter 7 Bankruptcy: Chapter 7 liquidation, commonly referred to as straight bankruptcy, is often what people mean or think of when they use or hear the term generically. In its simplest form, Chapter 7 wipes out most, but not all of your debts and, in return, you may have to surrender some of your property. Chapter 7 doesn’t include a repayment plan. Your debts are simply eliminated forever.
To qualify for a Chapter 7 bankruptcy, you must first pass the means test. If you have too many means, i.e. income or money, you can’t declare Chapter 7 bankruptcy. Second, you must receive required credit counseling. At some point during the six months before you file for bankruptcy, you have to receive counseling and get a certificate from a court-approved nonprofit credit counselor.
Some debts cannot be discharged and will still be owed by the debtor even after the bankruptcy. Some assets are allowed to be kept by the debtor (exemptions) like a home allowance, a motor vehicle, and personal property up to certain amounts.
Some of the non-dischargeable debts are:
- Most taxes
- Debts owed to spouse (maintenance, child support, divorce property settlements)
- Student loans with rare exceptions
- Government fines, penalties, restitution
- Personal Injury judgments arising out of a DWI accident
- Debts not listed in the bankruptcy filing
The 2022 NYS Homestead Exemption for a debtor’s residence is $179,950 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $149.975 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $89,975 for the remaining counties in the state.
There are also personal property exemptions. In 2022, a debtor may keep a motor vehicle in value up to $4,825, or $11,975 if the vehicle is equipped for a disabled person. This is doubled if a married couple both file.
As of 2022, debtors can keep most household goods and clothing, and the tools that are necessary for their employment or trade up to a total of $11,975.
For the most part, debtors keep their retirement assets like their IRA, 401(k), Keogh, or other qualified retirement plans. Social Security, unemployment, disability, public assistance, workers’ compensation, or veteran’s benefits are also exempt from bankruptcy garnishment.
Chapter 13 Bankruptcy: The primary difference between a Chapter 7 and Chapter 13 is that Chapter 13 is a repayment plan. Plans can include a partial payment of debt. It freezes debt and accumulating interest but requires a plan to repay creditors that must be approved by the bankruptcy court.
There are other special kinds of bankruptcy. Chapter 11 bankruptcy is available to individuals but primarily is used for large business reorganizations. Chapter 12 bankruptcy is similar to a Chapter 13 bankruptcy, but for family farmers and family fishermen.