Bankruptcy has advantages and pitfalls

There are two main approaches to personal bankruptcy. Chapter 7 bankruptcy is the far more radical — most of your assets, including your car and home, will be liquidated, but in exchange, you’ll be free of all unsecured debts, including medical bills and credit cards (child support payments, student loans and back taxes cannot be forgiven, however). Chapter 13 bankruptcy brings its own pain, but represents a surer bet for keeping your home. In Chapter 13, your debts are reorganized and subjected to a three- to five-year repayment plan, with payments typically made directly from your paycheck. Once you successfully complete your plan, you may be released from any remaining unsecured debts.

Whichever route you go, Utah law requires you to receive credit counseling from an agency approved by the U.S. Trustee in Utah within the six-month period before you file. You will also have to complete a debtor education course before the state will discharge your bankruptcy.

Qualifying for bankruptcy, and bankruptcy exemptions

Fillmore Spencer LLC helps you determine whether you qualify for either Chapter 7 or Chapter 13 bankruptcy. Essentially, your current monthly income after expenses is compared against the median Utah monthly income.

We also help you with bankruptcy exemptions. Every state permits you to omit exempt property from the bankruptcy process. For your residence, Utah homestead law permits you to apply a $20,000-per-person exemption on any equity you own in your primary residence.

Let’s say you are a couple applying for bankruptcy and your home is valued at $200,000, of which $100,000 is paid off. Of that $100,000 in equity, you could exempt $40,000 from the reach of the bankruptcy trustee. The remaining $60,000 in equity could be used to pay off your creditors. If you file Chapter 7, this is what will most surely happen. But if you file Chapter 13, the trustee may decide there’s no need to liquidate your home to pay off your creditors — your reorganized repayment plan might be able to satisfy all parties.

There are exemptions for your car, kitchen appliances, tools of your trade and other items, including family heirlooms, too. An experienced Provo lawyer at Fillmore Spencer LLC will make sure you do not overlook any options.

Bankruptcy as a defense against foreclosure

Many times, people pay down their debts by borrowing against the value of their home. But, provided you have kept current on your payments for your mortgage and other home-secured debts, bankruptcy may be a better way to go.

Borrow against your home and you tie up your equity in the home, often at a high interest rate and correspondingly higher payments that you may not be able to make over the life of the loan. Once you fall behind on your home payments, the bank could foreclose on your home.

But as long as the equity in your home is close to the Utah exemption for a primary residence — $20,000 for a filing individual, $40,000 for a filing couple — and there is no equity available for the bankruptcy trustee, Chapter 7 bankruptcy might be preferable. The trustee would gain nothing by selling your home, while you would get debt relief from your unsecured obligations.

If you have a healthy dose of equity remaining in your home after the exemption, Chapter 7 will not be the way to go. In that case, consolidation of your debts through Chapter 13 may work.