YOU’RE NOT ABLE TO GET BANKRUPT WITHOUT BEING TOO BROKE?
Among the American population, many basic understandings, misconceptions and myths, abound about bankruptcy. Yet, a fair, or at least, an accurate understanding of bankruptcy, and of its principles, as it is more specifically contained in the Bankruptcy Code, is essential for the effective management of one’s financial affairs, whether as an individual or as business.
One such misconception or MYTH, can be summed up this way: That the debtor must be flat broke to file for bankruptcy. That is, that he shall have become financially depleted of any and every valuable thing he has, and shall have been impoverished to the point that he’s totally destitute and ruined, financially. In other words, that you have to get Bankrupt in order to file bankruptcy. In fact, it is not uncommon to find not only the ordinary man or woman in the street, but also the supposedly informed who would give you an argument that bankruptcy would mean the automatic loss or seizure of everything you own-your home, car, clothing, furniture, wages, computer, every dime, etc., etc.
THIS IS ABSOLUTELY FALSE AND UNTRUE, HOWEVER!
Actually, the notion that you have to be bankrupt, that you can’t file bankruptcy without being too broke already, could not be farther from the truth! In the Bankruptcy Act of 1898 (the earlier law that was replaced by the present underlying Bankruptcy Code of 1978), the law had substituted the term “bankrupt” for “debtor.” One reason the Congress did this was as a way of helping to remove some of the social stigma involved in filing bankruptcy at that point in time. Consequently, while there may be some debtors filing bankruptcy whose financial condition may be so dire that they truly qualify to be called bankrupt, the vast majority of filers are simply debtors, but not be bankrupt or flat broke, and are not at all one.
THE BANKRUPTCY EXEMPTIONS SYSTEM & THE “FRESH START” PHILOSOPHY
Absolutely not so that you have to get bankrupt or be too broke to file bankruptcy. Rather, the truth is that the bankruptcy laws quite wisely provide for certain “exemptions” in the debtor’s assets-that is, certain essential assets or property of the debtor which the law forbids one’s creditors from ever seizing or taking away from the debtor, so that a bankrupt will still be able to continue to live a life even if he or she undertook bankruptcy.
It just so happens that the bankruptcy law is probably one of the most humane, most civilized, and most culturally advanced of all social laws around. To its credit, the Congress of the United States recognizes (or, at least, did recognize) that a debtor’s life does not automatically come to an end the minute a bankrupt walks out of the bankruptcy courtroom, but must go on even after bankruptcy. For that reason, bankruptcy is governed by a FRESH START principle of bankruptcy law: it does not seek to penalize or punish the debtor, but rather to give an honest debtor the opportunity to rehabilitate himself. There’s one principal way the bankruptcy law seeks to do this, and that is this: it makes exemptions for a minimum amount of various assets which creditors may not seize from a bankrupt debtor, thus giving such a debtor a fighting chance of rehabilitating himself after bankruptcy. Furthermore, the Congress seemingly recognized that of a person were to be permitted to file bankruptcy only when he shall have really become bankrupt or plain “flat broke,” that person would in all likelihood become a public charge because he shall have had nothing left after the bankruptcy even to live on.
Consequently, to avoid having such grave circumstances, both on the society and on the government, the Congress created as system of property ” exemptions” that allow debtors to keep a certain amount of property despite filing for bankruptcy.
HOW DOES THE BANKRUPTCY EXEMPTIONS SYSTEM WORK?
Basically, the bankruptcy law establishes two sets of exemptions – the “Federal” exemptions, and the “State” exemptions. And a debtor is allowed to choose the exempt items allowed under either one or the other category. (However, if one’s state has passed a law disallowing its residents the right to choose the Federal option, then only the exemptions under the state law may be taken. (Some 35 states or so have passed such a law).
Essentially, the system that currently operates under the last bankruptcy law of 2005, is based on one fundamental principle of the Bankruptcy Code of 1978 which had preceded it. That 1978 Code had considerably liberalized and expanded the amounts, as well as the kinds of property, a debtor may be allowed to take as exemptions. Kenneth N. Klee, a Los Angeles bankruptcy attorney who participated in the drafting of the 1978 law, put it this way: “For the first time, the law makes bankruptcy a viable alternative in those states that traditionally had low exemptions”
“Now,” added Morton B. Dicker, an attorney with the Legal Aid Society of New York, “there is a way to free yourself from your debts and still retain some of the comforts of life.”
You better believe it! Just take a look at the level of some of the exemptions in different states. Using the exemptions provided under the Federal category, for example, a debtor is permitted the following exemption – $10,125 in a debtor-occupied home, for example, $3,225 in a motor vehicle, $10,775 total in personal property (furnishings clothing, appliances, household items, books, etc) or tools used in one’s trade or profession; pension or welfare benefits, and so on and on.
While for a person filing for bankruptcy in New York who is using the State exemptions, he is permitted to have, among other things, up to $2,500 in cash, $2,400 of equity in an automobile, and unlimited funds in a qualified 401(k) plan. (For a complete list of exemptions for New York State debtors domiciled in New York, see the New York CPLR sections 5205 and 5206, New York Debtor and Creditor Law Sections 282-284, and the New York Insurance Law sections 3212-3213.)
IN SUM
The point is that you do NOT have to be or to get bankrupt to file bankruptcy. You absolutely can file bankruptcy without being too broke already, without having to lose everything you have or own – thanks to the FRESH START principle of bankruptcy! Now you know, it’s simply a big mythology for anyone to tell you that you get stripped of everything when you declare bankruptcy!
NEXT, NEED FOLLOW-UP INFORMATION?
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