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Show Legal Lines Bankruptcy explained to debtors, creditors By TAMARA J. HAUGE Editor's Note: The following column is by Salt Lake City attorney Tamara Hauge, who submits columns to the Clipper on domestic legal issues. Tamara participates weekly in the KALL radio program "Legal Eagles," answering questions. She is also legal counsel for Parents for Fairness in Family Law, a divorce reform group, and is associated with Utah Parents for Children's Rights. She can be reached at 942-8008, and her address is Box 1355, Sandy, UT, 84091-1355. Flashy Fletcher owes the bank a million dollars for a loan he took out to develop a new product: straight jackets for psychotic dogs. The product didn't quite catch on, and he took out bankruptcy bank-ruptcy because he couldn't pay off the million dollar loan. Yet he still drives his famous flashy 1987 Firebird, lives in his new flashy foothill residence, and has the use of all his credit cards. Is this legal? The following description of what happens when an individual files bankruptcy will help you to decide whether Fletcher has defrauded his creditors or not. What happens to an individual's property when he or she files ' bankruptcy? That depends on whether a Chapter 13 or a Chapter Chap-ter 7 is filed. A Chapter 13 allows a debtor to keep all of his or her property while paying off his or her debts over a certain extended ex-tended period of time. This plan allows a debtor more time to pay off debts, and also allows a debtor to pay off only a percentage percen-tage of the debts. For example, he may propose to pay all creditors 75 percent of what he owes each one. A Chapter 7 allows a debtor to be discharged from all debts (with certain exceptions such as child support, alimony, student loans and property received in connection with fraud) but the debtor can only retain certain items of his property all the rest is given to the secured creditors who have a security interest in the property or to the trustee who will then distribute it to the unsecured creditors. The property which the debtor can retain after filing a Chapter 7 bankruptcy is spelled out both in Federal and state law. Under Federal law, a debtor can retain $7,000 worth of equity in his or her residence and a certain amount of equity in his or her clothing, jewelry, household goods, automobile, and tools. If the debtor does not own a home the $7,000 can be used as a catch all towards any type of property the debtor chooses. This property is called exempt property. If a creditor has a security interest in an item of the debtor's property for example in the debtor's motor boat, the creditor is entitled to receive his collateral back from the debtor. This property does not go to the trustee. If the property is exempt, however, the secured creditor can not recover the property. There is one other way that the debtor taking out bankruptcy can retain property which is collateral for a secured loan the debtor does this by reaffirming the loan. The debtor signs a document in which she agrees to maintain the loan payments in spite of the bankruptcy. In this way a debtor in a Chapter 7 bankruptcy can pick and choose among his debts. He can bankrupt bank-rupt some or all of the debts which he owes at the time he files bankruptcy. For example, a young man rented a snowmobile for the day and accidentally totaled the machine. He was sued for thousands of dollars which he could not pay. He took out bankruptcy and bankrupted the snowmobile debt, but reaffirmed reaf-firmed all his other loans his car loan, and the Penney's credit card debt for his stereo. He was able to maintain his car, his credit with Penney's while still bankrupting the burdensome snowmobile debt. Returning to our original question, can Flashy Fletcher legally legal-ly keep his flashy home, car and credit cards, and still bankrupt his million dollar bank loan? If Fletcher's equity in his home and car are low enough to be exempt, then he can continue to own and use those items they do not go back to the secured creditors credi-tors who have a security interest in them, nor do they go to the bankruptcy trustee to pay off the debts. Many newer cars and homes have no equity because the debtor owes more than the property is worth. If the home were older it would be more likely that Fletcher would have built up a higher equity, and anything over $7,000 worth of equity would be claimed by the mortgage holder. If Fletcher can reaffirm his credit card debts, he can continue to use the cards. This depends on the willingness of the credit card companies to allow Fletcher to reaffirm; they can say no if they want to. Finally, it should be remembered that Fletcher may look flashy driving his expensive car and living in his expensive home, but if he is to continue to own those items, he must continue to pay those flashy high payments if he chooses to keep and reaffirm those debts. If he fails to make his payments those creditors can recover their collateral and sue Fletcher in spite of the bankruptcy. |