Bankruptcy is a legal proceeding that allows a business or an individual to resolve some of their debts with their creditors. It may provide the debtor with a fresh financial start while still allowing their creditors to establish rights on certain claims.
Usually, a creditor is not permitted to collect on a debt amount once a bankruptcy is filed. The creditor is required to wait until after the bankruptcy is complete before they resume any collection efforts.
The bankruptcy court will issue what is called an automatic stay for this purpose. The reasoning behind this stay is that in a bankruptcy, debt payment terms are commonly re-evaluated and reorganized during the process.
A bankruptcy is often considered a last resort for an individual or business that is struggling to meet their financial obligations. The bankruptcy process often allows a debtor to restructure their debt agreements, reduce the amount of debt they owe, and, in some cases, eliminate part of their debt.
There are several issues an individual or business should consider prior to filing for bankruptcy. One of the main considerations is that there are certain debts that cannot be discharged in a bankruptcy.
What are the Different Types of Bankruptcy?
There are different types of bankruptcy that are available, depending on what the individual wants to do with their property. For an individual that is filing for consumer bankruptcy, there are two main options, Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is also known as a liquidation bankruptcy. In this bankruptcy, the debtor will sell, or liquidate, their property in order to satisfy their debts. Not all of their property is liquidated, as there are some exemptions.
A Chapter 13 bankruptcy is known as a reorganization bankruptcy. This type of bankruptcy allows the debtor to use alternative options to re-arrange their finances so they can afford their payments.
In a Chapter 13 filing, a debtor’s debts are not discharged. Instead, they keep their property and agree to a payment plan. This type of bankruptcy is often used by individuals with higher incomes who wish to keep their property.
What Debts cannot be Discharged in Bankruptcy?
A non-dischargeable debt is a debt that is not forgiven during a bankruptcy proceeding. There are three general categories of non-dischargeable debts, including:
- Debts that are not discharged unless the debtor can successfully argue that they should be;
- Debts that are not discharged only when a creditor successfully argues that they should not be; and
- Debts that are non-dischargeable.
From these categories, an individual can determine which category their debt falls under. There are debts that will not be discharged, known as non-dischargeable debts. These include:
- Student loans;
- Federal, state, and local taxes;
- Any money borrowed on a credit card to pay taxes;
- Fines or penalties for breaking the law;
- Child support or alimony;
- Personal injury debts arising out of a drunk driving vehicle accident;
- Debts arising out of tax-advantaged retirement plans and;
- Condo or cooperative housing fee debts.
It is important to note that a creditor may be able to create a non-dischargeable debt if they can convince the court why the debtor should still owe it. A creditor must request that the bankruptcy court determine whether the debt is dischargeable or not. If the creditor fails to raise the issue of dischargeability issue or if the creditor raises the issue but the court determines the debt is dischargeable, the debt will be discharged.
These types of debts may include credit card purchases for luxury goods, cash advances, and debts obtained by fraud or false pretenses. For example, an individual may not be able to discharge a debt they incurred due to injuring another individual or another individual’s property.
What are Bankruptcy Exemptions?
Bankruptcy exemptions permit the debtor to keep certain property or assets even after they file for bankruptcy. These exemptions are defined by statute. Any exempt property cannot be seized or sold in order to satisfy the debts of the individual filing for bankruptcy.
Any debtor who files for bankruptcy may file for bankruptcy exemptions. Exemptions are available in both Chapter 7 and Chapter 13 bankruptcies.
Exemption limits apply to equity a debtor has in their property and the amount of equity that is exempt. Equity is the difference between the fair market value and the unpaid balance of the property. For example, a house valued at $200,000 with a loan of $150,000 has an equity value of $50,000. If the homestead exemption in the state is $50,000 or greater, the debtor would be exempt from liquidating, or selling, the $50,000 in equity in their home to pay off their debts.
There are other factors that may affect exemption limits. For example, marriage may permit couples in some states to double their exemption limit amounts. Filing with a head of household status or having a certain number of dependents may increase certain exemption amounts.
The exemptions the debtor may claim vary from state to state. There are also federally-created exemptions. Some states permit the debtor to choose between federal and state exemptions and some states require the debtor to use the state exemptions. It is important to note that the debtor may only choose the exemptions from one statute.
What are Bankruptcy Exemptions in Virginia?
Virginia is one of the states that only permits the debtor to use the state bankruptcy exemptions. The figures listed below may be higher for married couples. The Virginia bankruptcy exemptions include:
- Homestead, or the equity in the dwelling used as a residence:
- Up to $5,000 plus $500 for each dependent;
- Up to $10,000 if the debtor is 65 or older;
- Up to $15,000 if the debtor is a surviving spouse or minor;
- Automobile equity:
- Up to $6,000 in vehicles;
- Personal property:
- Up to $5,000 in household furnishings;
- Up to $5,000 in family portraits and heirlooms;
- Up to $3,000 in firearms;
- Up to $1,000 in clothing;
- Engagement and wedding rings;
- Family Bible;
- Household pets;
- Health aids;
- Up to $5,000 in a burial contract or a burial plot;
- Tools of the trade:
- Up to $10,000 in trade implements;
- Horses or mules with gear;
- A wagon or cart;
- One $3,000 tractor;
- Other farming equipment for agricultural work as a householder;
- Military equipment;
- Wages and cash:
- Accident or illness benefits;
- Cooperative life insurance benefits;
- Group life insurance benefits, policies, and proceeds;
- Fraternal benefit society benefits;
- Burial society benefits;
- Industrial sickness benefits;
- Pensions and retirement:
- Tax exempt retirement accounts;
- City, county, and town employee pensions;
- State employee and judicial pensions;
- Some ERISA benefits;
- Public benefits:
- Worker’s compensation;
- Unemployment compensation;
- Public assistance;
- Crime victim’s compensation;
- Alimony and child support:
- All spousal support;
- All child support;
- Personal injury or wrongful death settlements or awards;
- Health or medical savings accounts;
- Prepaid tuition contracts;
- Trusts for continuing care;
- Property of a business partnership;
- Wildcard exemption, or an exemption for personal property of the debtor’s choosing:
- Any portion of an unused homestead exemption; and
- Up to $10,000 in case or property for a disabled veteran.
Do I Need a Bankruptcy Lawyer?
Yes, it is essential to have the assistance of an experienced Virginia bankruptcy lawyer for any bankruptcy issues you are facing in Virginia. As noted above, there are different types of bankruptcy and many exemptions available.
An attorney can review your financial situation, determine which type of bankruptcy best suits your needs, and represent you during any court proceedings. Your attorney can help you keep your exempt property and expedite your bankruptcy by avoiding common filing errors.