- What property can I keep?
- How does filing for bankruptcy protect me from creditors?
- What happens at the ''meeting of creditors''?
- How are my debts resolved?
- What happens to my property that has a lien or mortgage on it?
- What debts are not discharged in bankruptcy?
- What is "Reaffirmation"?
- I know someone who went through bankruptcy, but still lives in an expensive house. How can that happen?
- If I file for bankruptcy, will my electric service be disconnected?
- What is all the talk about ''means testing'' under the October 2005 rules?
- Are there other forms of bankruptcy I should know about?
- Where can I find more information about how the Bankruptcy Court works?
Thanks to William Sandstead, an experienced bankruptcy attorney with offices in Portland, for his help in developing this information.
The steps we have outlined in "Filing: Getting Started" may help you to get your case into the bankruptcy court. But that is only the beginning. This information is not intended to cover everything you should know in order to get the best outcome. (That is why should get a lawyer, if you can.) But these questions and answers may help you to better understand some basics about the process.
What property can I keep?
In Maine you are allowed to keep certain property that cannot be claimed by your unsecured creditors. This is called ''exempt'' or ''protected'' property. If a married couple files a joint case, these exemptions are doubled. Here is a list of ''exempt,'' or protected, property:
- Equity in your home, up to $47,500. This exemption increases to $95,000 if you have a minor dependant who lives with you, or if you or your dependant is at least 60 years old or disabled. (If you don't use all of this exemption on a home, you can apply it to a burial plot. See also the "spill over" rule at (7) below.)
- Your equity interest up to $5000 in one motor vehicle.
- Your equity interest, up to $200 in value for any particular item, in household furnishings, goods, appliances.
- Clothes, books, animals, crops, or musical instruments (same $200 limit per item)
- Your equity interest, not to exceed $750 in value, in jewelry held primarily for you or for your children's personal use. Your interest in a wedding ring or an engagement ring is also exempt.
- Your equity interest, not to exceed $5,000 in value, in any implements, professional books, or tools of your trade.
- Your equity interest, not to exceed $6,000 of any unused homestead exemption, in household goods described in (3) and (4), tools of the trade, etc., described in (6), and personal injury awards (12)(d).
- Wood stoves, one cooking stove, food, farm equipment, and one commercial fishing boat, not exceeding 5 tons burden.
- An interest, not to exceed $4,000 (with one technical exception), in any accrued dividend or interest under, or any loan value of, any unmatured life insurance contract you own under which you or your children are insured.
- Professionally prescribed health aids for you or your children.
- Your right to social security, unemployment, and all other public assistance benefits; federal earned income credit and child tax credit; veteran's benefits; disability, illness, or unemployment benefits; alimony, support, or separate maintenance to the extent reasonably necessary to support you or your children; a stock bonus, pension, profit shares, annuity, or a similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary to support you and your children (with some technical exceptions). The new bankruptcy law also exempts up to $1,000,000 in an individual retirement account, or similar plan. (This renders the pre-existing Maine exemption of up to $15,000--or the amount needed to support you and any dependent, whichever is greater--pretty much obsolete.)
- Your right to receive, or property traceable to, certain court awards and payments:
a) An award under a crime victim's reparation law;
b) A payment for the wrongful death of your spouse, to the extent reasonably necessary to support you or your children;
c) A payment under a life insurance contract that insured the life of your spouse, to the extent reasonably necessary to support you or your children;
d) A payment, not to exceed $12,500, on account of personal bodily injury, not including pain and suffering or compensation for actual monetary loss, to you or your spouse; or
e) A payment for loss of your or your spouse's future earnings, to the extent reasonably necessary to support you and your children.
- Other property worth not more than $400. (Referred to as the ''wildcard exemption.'')
- If you have not lived in Maine for the past two years, these exemptions may not apply to you. You may be required to use exemptions that apply in the state where you came from.
- You can lose some of your homestead exemption if you invest a lot of money in your house with the intent of sheltering that money from creditors in bankruptcy.
- Income from Social Security continues to be exempt after you receive it. While most other types of benefits cannot be intercepted by creditors, they can count as available assets after you get them. So if you get a lump-sum of benefits other than Social Security or SSI, it may become available to creditors.
How does filing for bankruptcy protect me from creditors?
During the bankruptcy process, your assets are somewhat protected. For example, your filing stops all collection actions against you. Also, a court judgment handed down before you filed for bankruptcy cannot be enforced against your property.
This is called an "automatic stay." But this protection is not absolute. New rules, effective October 2005, create several exceptions to the old ''automatic stay'' rules. Here are some examples:
- New rules state that you must take certain actions within 45 days of the first meeting of creditors, to protect any property in which a creditor has a ''purchase money security interest'' (like a mortgage or secured car loan). Otherwise the automatic stay will end.
- Another rule requires you to file a ''statement of intent'' [Form B-8] within 30 days of filing, and to take additional steps within 30 days of the first date set for a meeting of creditors, in order to continue the automatic stay against any secured creditor or lessor (such as on a leased car).
As to secured debts, the law requires you to do one of the following:
- reaffirm the debt
- redeem the property, or
- surrender the property
This is why you are required to file the Form B-8 "Statement of Intent." In reality, some debtors chose to repay certain secured debts informally. Often secured creditors will go along with this, as long as you keep paying; they would rather have your money than repossess your property. However, once the "automatic stay" has ended, a secured creditor has the option to go ahead and reposses your property. As of this writing, it is unclear how aggressive secured creditors will be in asserting their rights under this new law.
What happens at the ''meeting of creditors''?
Within 40 days of your filing, you must attend a meeting with the trustee. The court clerk will set up this meeting and notify you of the time and place. Creditors may attend this meeting. You are required to attend (with your lawyer, if you have one). The trustee will question you about your property and finances. Creditors may also question you. You will be under oath; you must be completely truthful and cooperative in answering the questions.
How are my debts resolved?
Generally speaking, the trustee must recover all of your assets not exempt by law (see above) and sell them. Then he must distribute any resulting money to your creditors. If no one objects to your discharge, you will be relieved of your remaining debts.
What happens to my property that has a lien or mortgage on it?
Bankruptcy will not discharge a valid secured interest such as a mortgage or a lien on your property. (It probably will not stop a foreclosure, unless you go through a Chapter 13 bankruptcy; see a lawyer.) If a creditor has a mortgage or lien on any property, such as a house, car or furniture, the trustee will decide whether the property is worth more than the amount of the mortgage or lien. Any value over that amount is called your "equity" in the property. If the trustee decides that you have some equity in the property, the trustee will sell the property. The trustee will then pay the creditor (lien holder) the value of that mortgage or lien. Any amounts remaining after paying off the lien holder will be used to pay off other creditors, unless those amounts are exempt (see list above).
If the trustee decides that you have no equity in the property, the trustee may decide to do nothing with the property and will ''abandon'' it back to the debtor. In that case, the lien holder may decide to foreclose upon, or repossess, the property. This will involve a separate legal action in another court. If that happens and your debt is more than the amount the lien holder can get by selling your property, then the remaining portion of your debt (called a ''deficiency'') to that creditor will be discharged as part of your bankruptcy. [I don't understand the timing on all of this; if the repossession and sale happens after the discharge, how does the bankruptcy court incorporate this as part of the discharge. Ask Will again.]
What debts are not discharged in bankruptcy?
Certain debts will not be discharged in bankruptcy. Some of the rules are complicated. Here is a simplified list of the types of debts that are not dischargeable:
- Some tax debts;
- Money, property or services you have received by false pretenses or fraud;
- Debts you did not list with the Bankruptcy Court, unless the creditor had notice or actual knowledge of your filing;
- Debts for fraud, embezzlement, larceny or defalcation (misconduct) in a fiduciary capacity;
- Spousal support (alimony) and child support;
- Willful and malicious injury by you to the person or property of another;
- Fines, penalties or forfeitures payable to and for the benefit of a governmental unit;
- Educational loans. (Exception: if payment of the debt would impose an ''undue hardship'' on you and your children);
NOTE: If you fall within the exception, you need an affirmative ruling from the Court that the loan was discharged. Otherwise, the creditor will assume that you still owe this debt.
- Debts you owe for the death or personal injury of another because you operated a motor vehicle while intoxicated;
- Debts that could have been listed in a prior bankruptcy;
- Certain restitution owed to the federal government; or
- Other obligations arising from a divorce or separation, under certain circumstances.
If there is a question of whether a debt is covered by this list, the creditor may ask the Court to make a specific finding on that debt. If the Court agrees, after a hearing, that the debt is not dischargeable, it will give a judgment in favor of the creditor. That judgment is legally enforceable against you, even though your other debts are discharged. When it is obvious that a certain debt is not dischargeable (such as child support owed under a court order), the creditor does not have to take any action to make the debt stand. Such a debt will be automatically exempted from the discharge.
Normally, any money you earn after filing the petition is yours to keep. However, if you inherit or are given any property within six months after you filed your petition, that property must be turned over to the trustee. For example, your rich uncle dies within the 6 month period after you file for bankruptcy. When his estate is settled and you receive money, that money will be claimed by the trustee. The trustee may also require you to turn over any tax refunds from prior years.
What is "Reaffirmation"?
One or more of your creditors may ask you to "reaffirm" your debt to them. This means that you would agree that a particular debt would not be discharged in bankruptcy. Reaffirmation can undo some of the benefit of filing for bankruptcy in the first place. A reaffirmation agreement is only valid if it has been filed with the Bankruptcy Court on Form B240. If you have a lawyer, she will have to certify that a reaffirmation is in your best interest. If you don't have a lawyer, you will have to ask the Court to find that the agreement is in your best interest.
If you reaffirm a debt, your creditor may allow you to keep property that might otherwise be repossessed. If you choose to, you can always pay off a discharged debt voluntarily without any court-approved agreement.
What is ''Redemption''?
If a creditor has a lien on certain types of personal property, you may, under certain circumstances, buy the property back, or "redeem" it, by paying the creditor a fair value for the property. For example, if you bought an appliance on credit, you could redeem the appliance by paying your creditor the replacement cost of your now used appliance. This ''replacement cost,'' or current value, of the appliance may be less than the amount you still owe on it. Redemption will wipe out the lien and allow you to keep the appliance. You and your creditor will have to agree on the fair value, however, or the court will have to decide what that value is. This is a complicated process. It only applies to certain types of personal property. Most likely, you would need legal help to do this. In addition, you would need enough cash on hand to buy back your property.
I know someone who went through bankruptcy but still lives in an expensive house. How can that happen?
Creditors who received little or nothing on their claims in a bankruptcy case will be unhappy to see someone driving a new car or living in an expensive house afterwards. If the debtor owned the property at the time of the bankruptcy, it may be that the property was ''exempt.'' (see list) Another explanation could be that the property was mortgaged and the trustee decided that the debtor had no equity in the property. The secured creditor may have chosen not to foreclose on the mortgage or lien if the debtor "reaffirmed" the debt. The "reaffirmed" debt is not discharged in bankruptcy. To some creditors, a debtor is a better credit risk after bankruptcy since the debtor cannot go into Chapter 7 bankruptcy again for 8 years.
If I file for bankruptcy, will my electric service be disconnected?
No. Your electric utility will be treated just like your other creditors. It cannot disconnect you because of what you owe for past service. However, once you have filed for bankruptcy, the utility can require a deposit from you for future service. The deposit can be equal to the amount you would owe for two of your highest usage months of service. The deposit will be returned to you, with interest, at the end of 12 months if you have been current on your bills during those 12 months.
What is all the talk about ''means testing'' under the October 2005 rules?
If your income is at or below Maine's ''median income,'' this new provision does not apply to you. (In 2005, the Maine median income is $64,083 for a family of 4; see chart for household of any size.) If your income is over this amount, a creditor can choose to challenge your filing and ask the court to dismiss your case. If you are in this higher income bracket, you are advised again to get a lawyer if you can.
Are there other forms of bankruptcy I should know about?
Yes. If you have regular income, through employment, retirement, disability, or child support, and believe you could pay off some or all of your debts over time (normally in five years) you can consider filing a under Chapter 13 of the law. You would file a budget and plan under which you agree to pay some portion of your future income to the trustee to pay part of your debts. If the court accepts it, you have the protection of the court while you complete your plan. Your creditors must accept whatever payment plan the court approves. At the conclusion of the plan, you receive a broader discharge than you would under Chapter 7.
You are barred from filing under Chapter 13 if you got a discharge under Chapter 7 within the last 4 years or if you concluded a prior Chapter 13 case within the last 2 years. (These waiting periods are shorter than the 8 year waiting period for Chapter 7 filings.)
Chapter 13 can cure any mortgage or property tax defaults on your home. Even if your home has been foreclosed (so long as it has not actually been sold at auction), Chapter 13 can be used to pay off the mortgage and tax arrears while you continue to pay your current mortgage and real estate taxes. If you complete the plan, the foreclosure is wiped out and you can keep a home that might otherwise be lost.
Chapter 13 requires a steady stream of income and a sincere commitment for several years and is not for everybody. If you think that filing under Chapter 13 would work for you, talk to a lawyer.
Businesses can file under Chapter 12, to ''reorganize,'' and farmers and fisherman with regular annual income can choose to ''adjust their debts'' under a Chapter 11 bankruptcy filing.
Where can I find more information about how the Bankruptcy Court works?
Here are some helpful links to more information:
On the national U.S. Bankruptcy Court website:
Bankruptcy Forms Manual (complete index, with links, to all of the official court forms)
Glossary of Bankruptcy Code terms
For more information on local practices, go to the District of Maine Bankruptcy Court pages
The U.S. Trustees Program also posts a large volume of bankruptcy-related information.
Updated January 2006