CHAPTER 7 BANKRUPTCY IS LIQUIDATING BANKRUPTCY
Chapter 7 Bankruptcy is commonly known as liquidating bankruptcy. Almost all of an individual’s debts are eliminated in Chapter 7 bankruptcy; however, if individuals have unprotected assets, they become property of the bankruptcy estate upon initiating a Chapter 7 case and can be collected and sold by the Bankruptcy Trustee to pay an individual’s creditors. Exempt assets explained in detail in a later chapter of this handbook, are protected in bankruptcy and may not be taken or sold by the Bankruptcy Trustee.
NO ONE COMES TO YOUR HOME IF YOU FILE BANKRUPTCY.
In the vast majority of cases, no one ever comes to your home to inspect and take your assets if you file bankruptcy. This could happen however, if a Trustee has knowledge that an individual is attempting to conceal assets. If an individual’s assets are not exempt (protected) the Trustee would generally request assets be delivered to a location designated by the Trustee.
YOUR PERSONAL ASSETS ARE PROTECTED IN BANKRUPTCY.
Individuals generally do not lose assets in Chapter 7 Bankruptcy. In the majority of consumer Chapter 7 bankruptcy cases, most assets owned by individuals are exempt from execution (i.e. protected) under applicable State and Federal laws. (See Utah Exemptions Act enumerating assets protected in bankruptcy and from creditors, summarized at the end of this Handbook section). Further, if individuals have significant non-exempt assets, they would usually file Chapter 11 or 13 to preserve their assets and avoid Chapter 7. Another common scenario is an individual’s assets have insufficient value to enable the Trustee to sell them and make a distribution to creditors. The Trustee would simply abandon all of an individual’s assets back to them.
CHAPTER 7 DISCHARGE
In most cases, individuals file Chapter 7 and retain possession and ownership of their property. In Chapter 7, Debtors receive a discharge which eliminates almost all unsecured debt including credit card debt, medical bills, and other similar debt where collateral has not been pledged. The discharge also includes the remaining balances on debts secured by vehicles, real or personal property or other assets surrendered to Debtor’s secured creditors. The discharge typically does not include student loans, domestic support obligations, certain taxes and other debts.
REAFFIRM SECURED DEBT TO RETAIN SECURE ASSETS
Individuals have the option of retaining possession of assets securing a Creditor’s claim such as a vehicle or other collateral, provided the individual agrees to continue paying the debt secured by the asset the individual desires to keep. An attorney will assist you in preparing a reaffirmation agreement to enable you to keep and continue to pay for a secured asset.
PROPERTY YOU CAN KEEP IN BANKRUPTCY
In a Chapter 7 Bankruptcy Case, all of a Debtor’s non-exempt property becomes the property of the bankruptcy estate at the time of filing and may be sold by the bankruptcy trustee. The sale proceeds are then distributed among the Debtor’s creditors.
In a Chapter 13 Bankruptcy Case, Debtors are generally permitted to retain all of their assets.
WHAT IS EXEMPT PROPERTY?
Exempt property is protected property. Under Federal and State exemption laws, certain assets are protected from collection by Creditors and from a Bankruptcy Trustee in a Chapter 7 case. In addition, exempt property is relevant in formulating a Chapter 13 Plan and calculating the required return to unsecured Creditors.
WHICH EXEMPTIONS APPLY TO YOUR CASE?
An initial inquiry for all individuals contemplating bankruptcy is “Which State’s exemptions apply to my case?” Exemptions which apply to a Debtor’s case are based on the law of the State where the debtor was domiciled for the 730 days (2 years) prior to the date of filing the bankruptcy case. If you did not reside in a single State during the two years prior to filing, the exemptions are determined by the State where you were domiciled for the majority of the 180 days that preceded the 730-day period. Section 522(b). Section 522(b) also provides that if the effect of the domiciliary requirement is to render the debtor ineligible for any exemption, the Federal exemptions would apply.
WHAT PROPERTY IS EXEMPT IN UTAH?
The Utah Exemptions Act is set forth at Utah Code, Title 78, Chapter 23. The following is a brief summary of the most commonly claimed exemptions in this Statute. Please refer to the statute for a detailed analysis of the exemption(s) you seek to claim.
HOMESTEAD EXEMPTION – The Homestead laws in the State of Utah are presently very favorable to Debtors. Individuals can claim a homestead exemption in their primary residence in the amount of $30,000 per person, and $5,000 per person if the property is not the primary residence of the individual. The homestead exemption is applied to home equity. Home equity is computed by deducting from the fair market value of the real property, the amounts of all outstanding mortgages and loans against such real property.
EXAMPLE: Your home is worth $100,000.00 and you have a first mortgage against your home in the amount of $40,000.00, and a home equity line of credit with a balance of $20,000.00. You, therefore, have $40,000.00 of equity in your home. If you are an individual debtor, your equity would not be fully exempt, and a Chapter 7 Bankruptcy Trustee could sell your property and distribute the sale proceeds among your Creditors. In this case, you should file Chapter 13. If you are filing jointly with your spouse and your spouse is named on the deed as the joint owner, the full $40,000.00 equity in your home would be exempt and you may file Chapter 7 without losing your home.
The full text of the Utah homestead exemption law is set forth at Utah Code Section 78b 5-503 AND 504.
Each individual is entitled to an exemption for one motor vehicle not exceeding $3,000 in value. If you are filing jointly with your spouse and you share one vehicle, you can each assert the vehicle exemption against the same vehicle. If the equity in the vehicle you share is not more than $6,000.00, it would be protected from bankruptcy. The vehicle exemption is applicable to motorcycles if the motorcycle is your primary means of transportation. (Also see UCA Section 78B-5-506(3).)
PROPERTY EXEMPT FROM EXECUTION
FOLLOWING IS THE EXACT TEXT FROM UTAH CODE SECTION 78B-5-505
“PROPERTY EXEMPT FROM EXECUTION” – (Exemptions with dollar limitations are set forth at Utah Code 78B-5-506 listed at the end of this section.)
|(2)||The exemptions in Subsections (1)(a)(xi), (xii), and (xiii) do not apply to proceeds and avails of any matured or un-matured life insurance contract assigned or pledged as collateral for repayment of a loan or other legal obligation.|
|(3)||Disability benefits, as described in Subsection (1)(a)(iii)(A), and veterans benefits, as described in Subsection (1)(a)(v), may be garnished on behalf of a child victim if the person receiving the benefits has been convicted of a felony sex offense against a child and ordered by the convicting court to pay restitution to the victim. The exemption from execution under this section shall be reinstated upon payment of the restitution in full.|
|(4)||Exemptions under this section do not limit items that may be claimed as exempt under Section 78B-5-506.|
EXEMPTIONS WITH DOLLAR LIMITATIONS
78B-5-506. VALUE OF EXEMPT PROPERTY — EXEMPTION OF IMPLEMENTS, PROFESSIONAL BOOKS, TOOLS, AND MOTOR VEHICLES.
|(1)||An individual is entitled to an exemption of the following property up to an aggregate value of items in each subsection of $1,000:
|(2)||An individual is entitled to an exemption, not exceeding $5,000 in aggregate value, of implements, professional books, or tools of the individual’s trade, including motor vehicles to which no other exemption has been applied, and that are actually used by the individual in the individual’s principal business, trade, or profession.|
|(4)||This section does not affect property exempt under Section 78B-5-505.|
Amended by Chapter 212, 2015 General Session
EVALUATING YOUR EXEMPT PROPERTY
APPLYING THE NUMEROUS EXEMPTIONS PERMITTED UNDER STATE AND/OR FEDERAL LAW TO YOUR SPECIFIC ASSETS CAN BE QUITE COMPLEX, MANY NUANCES AND EXCEPTIONS. YOU WOULD BE SAFER TO HAVE A BANKRUPTCY PROFESSIONAL ASSIST YOU IN THIS REGARD.
NO INFORMATION OR MATERIALS CONTAINED HEREIN ARE INTENDED TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS, ESPECIALLY AS TO ANY INDIVIDUAL’S PERSONAL SITUATION. THE INFORMATION CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH UTAH BANKRUPTCY PROFESSIONALS OR ANY OF ITS ATTORNEYS.
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