Chapter 7 Bankruptcy

For an Orlando Chapter 7 bankruptcy, a permanent resident of Florida can file bankruptcy in a Florida bankruptcy court. Florida has three bankruptcy districts (Southern District, Middle District, and Northern District), and each of Florida’s counties is assigned to one of the three bankruptcy districts. You must file bankruptcy in the district and division where you reside. The Middle District has three separate divisions: Jacksonville, Orlando, and Tampa/Fort Meyers.  To file in the Orlando Division, you must be a resident of Brevard, Lake, Orange, Osceola, Seminole, or Volusia County.

An important concept in both Chapter 7 and Chapter 13 bankruptcy is “exemptions” or “exempt property.” When you file a Chapter 7 bankruptcy, the Chapter 7 Trustee takes control of your “non-exempt” property and sells it for the benefit of your unsecured creditors. The Trustee cannot take your exempt property, and you may keep all of your exempt property regardless of its value and amount. What property is “exempt” and what property is “non-exempt” depends on the exemption laws of the applicable state. Each state has its own exemptions for bankruptcy purposes. Florida has liberal bankruptcy exemptions for some assets, including an unlimited homestead exemption (in most cases) but has limited exemptions for other assets. Only Florida residents are eligible for Florida exemptions.

Just because you are a Florida resident when you file for bankruptcy does not mean you are entitled to Florida exemptions in bankruptcy. Therefore, before you file bankruptcy you and your bankruptcy attorney must ascertain which state laws will determine your exempt assets. The state exemption law applicable to your bankruptcy is determined by the state in which you have been domiciled for the 730 days (two years) immediately preceding your filing date. If you have not been a permanent resident of Florida for the two-year period immediately preceding your bankruptcy, then your bankruptcy exemptions will be those allowed by the state in which you were domiciled for 180 days immediately preceding the two year period, or the state in which you were domiciled for the longer portion of such 180-day period.

Otherwise stated, a person filing bankruptcy in Florida today is eligible for the property exemptions he could have claimed if he had filed two years ago. If this person was a Florida resident two years ago he claims Florida exemptions today; if two years ago he was a resident of a different state then he is entitled to the exemptions of the state of his prior residence (or federal exemptions if that state has residency requirements for use of its exemptions).

Consider a person who sells his residence in Georgia for $100,000 and moves to Florida in January. In March of that year he purchases a Florida homestead for $100,000. The person gets a Florida drivers license and registers to vote in Florida. In March of the following year, 14 months after becoming a Florida resident, the same person loses his job and files bankruptcy. Under the new bankruptcy law, Georgia’s relatively limited exemption laws would apply to this bankruptcy, and the debtor would not have the benefit of Florida’s homestead protection.

In reality, the laws about bankruptcy exemptions are much more complicated than the example above. For example, some debtors will not qualify for the exemptions of any state and must use federal bankruptcy exemptions. Before you file bankruptcy in Florida you and your bankruptcy attorney should discuss where you have resided during the past few years and whether Florida bankruptcy exemptions would apply in your case. In some cases, the state where you moved from will provide better bankruptcy exemptions than will Florida law.

Terms and Definitions

Bankruptcy gives you a fresh start.

Means Test: The means test is a complex formula established by Congress to determine who may be eligible to file Chapter 7 bankruptcy. Debtors under their state’s median income and debtors whose debts are primarily not consumer debts are exempt from means test qualification.  If your gross household income is above median income, you will need to complete and “pass” the means test in order to file Chapter 7 bankruptcy.

Secured or Unsecured Debts. The bankruptcy petition asks you to list secured debts separately from unsecured debts. Unsecured debts include personal loans and credit cards issued by banks, such as Visa, MasterCard, American Express, or Discover, and other credit cards used to purchase consumable items. Vehicle leases, medical bills, and personal loans are also unsecured debts. Secured debts include those debts where the creditor has a security interest in your property to guarantee payment. Examples of secured debts include mortgages, car loans, loans from finance companies (usually secured by household items), furniture, computers or electronics. If you purchased store goods using a store credit card, such as a card from Rooms to Go, Best Buy, etc., the store probably has a security interest in certain items purchased, which makes the store a secured creditor.

Secured Property. After filing a Chapter 7 bankruptcy, you will have to choose to either reaffirm or redeem the secured debt or surrender the secured property to the creditors.  You are entitled to keep any secured property as long as you continue to pay the loan for that property in a timely manner. If, however, you elect to surrender secured property, the secured creditor may not thereafter recover any money from you personally on that debt. Some mortgage companies recently have required borrowers to sign cross-collateralization agreements by which the mortgage borrowers pledge bank accounts and other financial instruments to secure their mortgage. A cross-collateralization clause allows the mortgage lender to take money in your financial accounts to pay delinquent mortgage payments. If you are unsure whether you pledged financial accounts to your mortgage lender, you should review the papers you signed when you got your mortgage and/or when you opened your account. You may want to move your money to a new bank before defaulting on a mortgage loan.

The Bankruptcy Estate: your bankruptcy estate refers to your non-exempt assets that are subject to administration by the bankruptcy trustee. Exempt assets, such as your homestead and IRA, are not part of your bankruptcy estate.

Reaffirmation Agreements. You must file a reaffirmation agreement for all secured vehicles you want to retain within 60 days of the first scheduled meeting of creditors (or 341 meeting). If you do not sign the reaffirmation agreement or redeem the property within 60 days, the automatic stay is lifted as to that property and the creditor is permitted to take all legal action allowable under the law to repossess the property, even if your payments are current. Signing a reaffirmation agreement means that you will be personally liable to pay the debts after your bankruptcy is over.

Your attorney will usually sign your reaffirmation agreement if you have sufficient disposable income at the time of the filing of your bankruptcy case to pay the secured debt. The attorney may choose not to sign your reaffirmation agreement if you have negative disposable income at the time your case is filed or if he believes there is a presumption of undue hardship. If your attorney does not “approve” reaffirmation, the bankruptcy judge will review the reaffirmation agreement and either deny or approve the agreement or schedule a hearing on reaffirmation of the agreement. The bankruptcy judge will deny reaffirmation if she believes that reaffirmation is not in your best interest for a “fresh start.”

If the reaffirmation is denied you may be able to keep your property if payments are current.  Even if the court refuses to approve your reaffirmation many creditors will let you keep your property if you maintain current payments. (A creditor usually will not provide a reaffirmation agreement if you are delinquent in your payments.)

The Automatic Stay: The automatic stay is imposed immediately upon the filing of your Chapter 7 bankruptcy and acts like a shield between you and your creditors.  The stay prohibits creditors from starting or continuing legal action against you and stops all collection efforts.

Executory Contracts. An executory contract is a technical legal term referring to a contractual agreement in which both parties are obligated to do something in consideration for a benefit (such as a car lease or a residential lease). Executory contracts do not include “at will” contracts such as an employment agreement or a personal service contracts.  Chapter 7 bankruptcy permits the debtor, or the trustee, to assume or reject an executory contract. A debtor has to decide what to do about an executory contract before the court issues a bankruptcy discharge which usually happens about 90 days after filing.

Executory contract law is complicated. Here are some of the basic things a debtor should understand about executory contracts, using a car lease as an example. If the debtor rejects the car lease, he surrenders the car to the leasing company and has no further liability. If the debtor wants to assume the lease, the debtor must make current payments at least until he exercises the assumption option. The debtor and creditor must sign the lease assumption, but the assumption does not require court action.  After assumption the debtor can keep the property as long as he makes lease payments. If the debtor subsequently defaults in lease payments, the leasing company can take back the car. Assumption of executory contract is not a reaffirmation of the lease, so the leasing company may not sue the debtor for the balance of payments due under the lease following default.

Redemption. Bankruptcy also gives you the option to “redeem” secured personal property such as furniture, computers, automobiles, or other property purchased on credit and subject to a lien in favor of the lender. Redemption means purchasing the property from the secured lender at its current fair market value considering its age and condition. When the fair market value is less than the amount due under the loan, redemption can be financially beneficial.

Student Loans. Student loans are not dischargeable unless you can show that your loan payments impose “undue hardship.” In order to eliminate your student loans under the “undue hardship exception” you must file a separate motion with the bankruptcy court, and you must appear before the bankruptcy judge with proof of your hardship. As a practical matter, it is very difficult to demonstrate undue hardship unless you are physically unable to work.  Most bankruptcy courts use the Brunner test in determining hardship.  In order to prove “undue hardship” under Brunner, you must demonstrate that “(1) the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.”

Contingent and Disputed Liabilities. Make certain you provide your attorney information about all liabilities, no matter how remote. List any claim that anyone might have against you even if the claim has not yet matured. If you are a co-debtor on a note, have personally guaranteed corporate or other debt, or are secondarily liable on a mortgage that has been assumed by a purchaser, the debt should be listed along with a brief explanation of the liability. Disputed debts and liabilities should also be listed. If you have ever had a home mortgage that was insured by a governmental agency (such as the VA), be sure to list that agency as a contingent creditor. This should be done even when someone purchased the property and assumed the mortgage since they might default and the VA could decide to pursue a claim.

Bankruptcy Discharge: The bankruptcy discharge is the legal process that wipes out your legal liability to your creditors. Creditors who have been discharged in bankruptcy can never again try to collect debts that you incurred prior to filing bankruptcy.

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