Articles Posted in Chapter 7

Whether coming before a marriage begins or after a divorce, bankruptcy is all too often connected to matrimony in some way. Jacksonville, with 13% of it’s population having been divorced at least once and over 11,000 bankruptcy filings a year, there’s no surprise the two are connected.

Many couples fail to consider how bankruptcy can be effected by their co-habitation. Because qualifying for a Chapter 7 bankruptcy often requires that the couple’s combined income is less than the median income for their family size and people often marry prior to filing bankruptcy, making the an already stressful process more trying.

The first thing I do when a couple enters my office is establish if in fact both need to file. Sometimes all of the debts are in one person’s name allowing us to file one spouse and protect the other’s credit. Other times it’s more advantageous to file both jointly, taking advantage of the “two for one” filing fee and credit counseling costs. There is even the possibility that one spouse take advantage of the “clean slate” benefits of a Chapter 7 bankruptcy, while the other avails themselves of the potential reduced interest rates and principle balance reductions in a Chapter 13.

When someone files for bankruptcy a trustee is appointed by the court to hold the debtor’s unexempt property in trust for the benefit of that debtor’s creditors. That property is then either liquidated at auction or repurchased by the debtor. Because there is a cost associated with the collection and liquidation of assets, the trustee will often give a small discount to the debtor, should the debtor wish to pay for or “buy back” the unexempt property. These buy backs should be thought of as a courtesy, as they are not a right of the debtor and as such the terms are between the debtor and trustee.

In a Chapter 7, the trustee’s pay is set forth by statute and begins as a set portion of the filing fee, say $60.00 of the $299.00. From there they get a graduated percentage of the property they liquidate for the benefit of the creditors. Those percentages are set forth in 11 USC 326(a) as follows:
25% of the first $5,000;
10% of the next $50,000;
5% of the next $1,000,000; and 3% of any monies in excess of $1,000,000.

In a Chapter 13, the trustees get paid a flat rate percentage of all the money they collect for creditors. This rate varies from state to state, but in Florida it is set at 10%, however it is actually calculated by dividing the total sum by 0.9 rather than multiplying by 0.01. As this percentage includes ANY payment to a creditor, including ongoing payments on home mortgages, it is hugely advantageous if we can allow a debtor to pay for their home outside their plan so as to avoid those ongoing charges.
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They all filed bankruptcy. But what’s more interesting is that it wasn’t until after their bankruptcy that they went on to the success we know them for today.

• Henry Ford filed bankruptcy in 1901 before organizing his third, and first successful business, Ford Motor Company. With his innovation of the moving assembly-line this business grew to make a $60,000,000 annual profit by 1916.
• In 1981, after leaving the band Blue Angel, Cyndi Lauper filed for bankruptcy protection after being sued by her manager over a contract breach. Two years later she released, “Girl’s Just Want to Have Fun”, a song which reached Top 10 in over fifteen different countries and went Platinum in the United States once sales exceeded 2,000,000.

Many people wonder what effect their spouse’s prior bankruptcy will have on them and their relationship. First and foremost it is important to remember that these people are not, “deadbeats”. Unexpected illnesses, job losses and underwater mortgages are all common reasons for filing bankruptcy. With 46% of Jacksonville homes under water, there are at least half a million Jacksonville residents with a good reason to file bankruptcy.

It is also important to consider how long ago their bankruptcy filing occurred. A bankruptcy stays on a debtor’s credit history for ten years, but is only supposed to have an effect for seven. If your fiancé filed for bankruptcy several years ago, the bankruptcy may have no effect on your new credit relationship at all. However, if the bankruptcy was recent, it is possible that it could effect your ability to purchase a home as a couple with a prime rate mortgage.

While it’s not something most people want to think about, your spouse’s prior bankruptcy may limit your own options were you needing to file a bankruptcy. 11 U.S.C. 727 prevents a debtor from getting a discharge in Chapter 7 if they had a previous discharge in a case that commenced within eight years of filing the new petition. Or, in the case of Chapter 13, a case that commenced six years before the date of filing the new petition unless they paid 100% of the claims in the old case or paid at least 70% of the claims in that case and proposed it in good faith with best efforts.