Many misconceptions about filing bankruptcy circulate throughout Michigan. It is a legal process best handled by an experienced bankruptcy attorney—yet it is also one of those area of legal practice about which everyone has an opinion.
If you let your sister-in-law, church pastor, best friend, or uncle know that you are considering filing for Chapter 7 or Chapter 13 bankruptcy, they will, without fail, offer a few thoughts. Usually unsolicited. However, you might be tempted to mind the advice given.
This is probably a mistake.
Michigan bankruptcy is a highly particularized area of legal practice. Your real estate lawyer is not a bankruptcy expert. Your personal injury attorney is not a bankruptcy expert. Your tax lawyer is not a bankruptcy expert. All hold the same law degree that an attorney who is a bankruptcy specialist holds, it’s true. But bankruptcy practice requires years of focused practice, study, and, especially, practical experience.
There isn’t any reason to think your mother or nephew is qualified to give advice on the subject.
Nevertheless, people listen to loved ones. Thus, common misconceptions abound.
This Article is intended to clear up a few of the common misconceptions about filing bankruptcy that continue to bounce around the Detroit area.
It’s Too Late to File if a Creditor Has a Judgment or Is Garnishing Me
This is a common misconception that is genuinely harmful.
The filing of a Chapter 7 or Chapter 13 bankruptcy case in Michigan will activate a Federal legal injunction known as the Automatic Stay against Collections. A common misconception is that it is too late to file a bankruptcy if a creditor has a Judgment or has levied a bank account or is garnishing your wages. It is also a misconception that you cannot file if you are current on your bills and that you need to be delinquent on your debt.
A bankruptcy case can be filed at anytime in the collection process and there is no requirement that you be delinquent on your debt or that if a creditor has obtained a State Court Judgment against you that it is too late.
The Automatic Stay prohibits any creditor from engaging in collections activity while the bankruptcy process is pending. It expires only when your bankruptcy case is either unsuccessful and dismissed or when your discharge successfully entered.
Once your discharge of debt Order is entered, the Automatic Stay is replaced with the permanent, life-long “Discharge Injunction.”
Both injunctions apply to debts owed as a result of a Michigan state court judgement. Both injunctions require that creditors immediately cease any garnishment underway in execution of a money judgment.
Bankruptcy is a Federal legal process. It supersedes Michigan’s and other state law-based judgments and garnishment orders. (It even discharges other Federal debts, such as old tax debt or SBA loans, except where fraud has occurred.)
Thus, not only is it not too late to file bankruptcy if you have a judgment against you or are being garnished but you probably should consider speaking to a Michigan bankruptcy attorney immediately if this is the case.
You Can Only File Bankruptcy Once, or Every 7 Years
This common misconception about bankruptcy is also off-base.
First, you can file bankruptcy as many times as is allowed by the US Bankruptcy Code. The Code is the Federal statute regulating the bankruptcy process in the United States.
Does the Code say that you can only every 7 years? Or that 7 years is the minimum number of years that must elapse before you can file a second or third (or fourth or fifth …) bankruptcy?
It does not.
The Bankruptcy Code says different things, in fact, depending upon whether your most recent bankruptcy filing was a Chapter 7 or a Chapter 13.
If YOU HAVE RECEIVED DISCHARGE IN A PRIOR CHAPTER 7 BANKRUPTCY
- If your prior bankruptcy was a Chapter 7 bankruptcy, you can file another Chapter 7 after 8 years (+ 1 day) has elapsed from the date you filed your prior Chapter 7. (Not the date you received your discharge, but the filing date of the prior Chapter 7). This assumes that the prior case was Discharged by Order of the Bankruptcy Court. If your prior case was dismissed for whatever reason, the 8 year waiting period does not apply.
- If your prior bankruptcy was a Chapter 7, you can file a subsequent Chapter 13 bankruptcy 4 years + 1 day from the date of filing of the prior Chapter 7.
If YOU HAVE RECEIVED DISCHARGE IN A PRIOR CHAPTER 13 BANKRUPTCY
- If your prior bankruptcy filing was a Chapter 13, you can file a subsequent Chapter 13 bankruptcy 2 years + 1 day from the date of the prior Chapter 13 filing. However, this means that you can file and get a discharge from your Chapter 13 after that amount of time. It is possible to file a Chapter 13 earlier without a right to a discharge to enforce the Automatic Stay upon your creditors and propose a 100% repayment plan for as long as 5 years.
- If your prior bankruptcy was a Chapter 13, you can file a subsequent Chapter 7 bankruptcy case 6 years + 1 day from the prior filing date.
In other words, the rules are more relaxed for prior Chapter 13 filings than for Chapter 7 filings.
So where does the “7 years” idea come from? Hard to say. Maybe it’s because a liquidation bankruptcy is called Chapter 7. Prior to the last major bankruptcy legislation in 2005, the wait between Chapter 7 filings was 6 years, as opposed to the 8 years required now. Likely, people are conflating the rules regarding repeat bankruptcy filing with old (and also wrong) rules regarding the length of time that a bankruptcy will continue to be reported on your credit reports.
But wrong is wrong. It’s a common misconception about filing bankruptcy, wherever the idea originated.
You Will Lose Your House (Or Cannot File If You Own a House)
There are many common misconceptions about filing bankruptcy as a homeowner.
These bankruptcy misconceptions range from a certainty of losing one’s home in bankruptcy to an inability to file at all when a home is owned—or even, worse, that there is no danger at all to your homeownership if you file bankruptcy.
All of these common misconceptions about filing bankruptcy are wrong, for different reasons.
What is very true is that you should never attempt to file a bankruptcy on your own, without the assistance of an experienced bankruptcy attorney, if you do own real estate.
It is possible to lose your home in Chapter 7 bankruptcy. What is untrue is that it is certain you will lose your home in Chapter 7.
The devil is in the details.
A Chapter 7 bankruptcy is a “liquidation” bankruptcy. That is, in exchange for the benefit of having all of your debt discharged (with a few exceptions) without any repayment requirement, you may be required, in some case, to give up some property.
When you file bankruptcy (either sort), you automatically create something known as the Bankruptcy Estate. This “Estate” contains all of your property, both personal and real estate.
You must, in your bankruptcy petition, list everything you and what it is worth. These assets are the assets of your Bankruptcy Estate.
Upon filing, a Chapter 7 or Chapter 13 Trustee is assigned to your case to “administer” the bankruptcy estate.
In Chapter 7 bankruptcy, this means that the Trustee is empowered to seize all assets of the Bankruptcy Estate in order to sell them off and distribute the resulting sale proceeds to your creditors. This is the only means by which creditors are repaid in Chapter 7 bankruptcy.
However, most people who file Chapter 7 don’t lose any property at all.
This is because the Bankruptcy Code allows you to exempt (remove) various assets from the Bankruptcy Estate, up to certain dollar values.
There are different exemptions for different types of property. And different value caps for different types of property.
For real estate that is your primary residence, there is a “homestead” exemption allow you to exempt approximately $24,000 worth of equity value from your Bankruptcy Estate.
Thus, if you have a home worth $30,000 in fair market (appraised) value and you have a $20,000 mortgage lien against it, you have $10,000 in equity. This small amount of equity can be exempted from the Bankruptcy Estate by applying the homestead exemption to it in your petition.
The Chapter 7 Trustee will not be able to take your home and sell it off.
However, if you have anywhere near $24,000 in equity, it is possible that you will lose your home in Chapter 7 bankruptcy. You simply must consult an experienced Detroit bankruptcy lawyer before filing a Chapter 7 bankruptcy.
There is NO exemption for vacation property, investment or rental property, or any other real estate that is not your primary residence.
Alternatively, property is never liquidated in a Chapter 13 bankruptcy.
If you can’t exempt real estate in a Chapter 13, it will make your monthly Chapter 13 plan payment more expensive—but you won’t lose your home.
Further, Michigan law provides an additional exemption known as the “Tenancy by Entireties” exemption available in very select cases (only). This exemption, when it works, will protect 100% of a home’s equity—regardless of the home’s value. A good bankruptcy lawyer is required to analyze the applicability of this exemption.
With this understanding in mind, you can see why the other home-related common misconceptions are wrong.
Another common misconception is that you will never be able to buy a house after filing a bankruptcy case. This is simply not true.
Bottom line: You need a bankruptcy lawyer if you’re a homeowner. No matter what your uncle thinks. That bankruptcy lawyer will help you to find the right, properly experienced home appraiser to appraise your home for bankruptcy purposes before any bankruptcy is filed.
You Will Lose All of Your Possessions
The common misconception about filing bankruptcy is related to the one above. Just as the Bankruptcy Code provides exemptions for your homestead, it also provides exemptions for other types of property.
There are exemptions for automobile equity ($4,450 as of this writing), household goods, jewelry, retirement accounts, and more.
Is it possible that you may lose some personal property in a Chapter 7?
It is possible. Again, you need to consult with an experienced Michigan bankruptcy attorney to discuss your particular assets.
You very likely will not lose your clothes, dishware, linens, children’s toys, (typical) home electronics, and other basic necessities.
If you own antiques, art, a big gun collections, high-end jewelry, a comic book collection a 1952 Mickey Mantle baseball card or other such luxury items, however, you do run a risk filing Chapter 7.
Again, Chapter 13 bankruptcy will allow you to retain all of your possession, without risk.
You Don’t Need a Lawyer to File Bankruptcy (or Bankruptcy Is Just Form-Filling)
The most common misconception about filing bankruptcy of all is that you can do it yourself, without the assistance of a lawyer.
Sure, you can file without legal assistance. You can also represent yourself in a capital murder case.
Why would you want to?
If you thought that any of these common misconceptions about filing bankruptcy were true before reading this Article, you need to consult an experienced Detroit bankruptcy attorney before proceeding.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
Contact us now to schedule your free, initial consultation.