How Do You Determine If Bankruptcy Is A Viable Option For Your Client?
In determining whether bankruptcy is a viable option for a client, the first step is to review their assets and determine whether any of them are exempt from creditors. Typically, the first asset addressed is the home. I will determine the value of the home, the first and/or second mortgage balance or home equity loan balance, and whether there are any outstanding real estate taxes. If the client owns a condo, I will ask whether they owe any outstanding maintenance fees.
Next, I will conduct a financial analysis of their home. A single individual can claim an exemption of up to $25,150, and a husband and wife can claim an exemption of up to $50,300. We don’t typically get too concerned about automobiles because there’s usually no equity in automobiles, but they do have an exemption of up to $4,000. In addition to identifying these main types of nonexempt equity, I will determine whether they have any personal injury cases, which have an exemption of $25,150. There is also a large exemption for other types of assets, such as household furniture and household property, but we don’t usually need to address that.
If a client has assets that don’t have any nonexempt equity, then it would be best to file for Chapter 7 bankruptcy because it would not require the repayment of any debt. There are income level restrictions on eligibility for Chapter 7 bankruptcy, but it’s typically not an issue. However, if a client has a house with nonexempt equity, then they’re probably going to have to file for Chapter 13 bankruptcy, which involves the repayment of a portion of their debt over a three to five-year period. The portion they must repay is determined by the amount of the nonexempt equity. Another reason a client may need to file for Chapter 13 bankruptcy as opposed to Chapter 7 bankruptcy is if they’re behind on their mortgage. Chapter 13 bankruptcy allows for mortgage arrears to be paid over the course of five years.
In the first discussions with a client who needs to file for bankruptcy, it will be helpful to have their tax return for the previous year and proof of income or a profit and loss statement for the preceding six months. Eventually, their income will be verified with a bank statement.
What Do I Need To Do Before I File For Bankruptcy?
Prior to filing for bankruptcy, a client should meet with me so that I can complete a financial analysis and determine whether they need to file for Chapter 7 or Chapter 13 bankruptcy. We typically run a bankruptcy credit report, which provides all of the information that needs to be incorporated into their bankruptcy petition.
I will need to see their tax returns for the preceding two years, proof of income for the preceding 60 days, a list of their creditors, any documentation they’ve received from debt collectors, and retirement account statements so that we can ensure the account is exempt. I will also need to see documentation of any life insurance policies which have a cash value, since there is an exemption of up to $13,000. In addition, the client should bring a copy of their homeowner’s insurance declaration page, a copy of their car insurance declaration page, statements for any car loans or leases, and a copy of their driver’s license so we can ensure that the name on their license matches the name on the petition.
If the client owes any money to the IRS, then they may need to bring a statement showing the amount owed. If they own a home, then I would need proof of the value of that home (this can usually be obtained with a simple search on Zillow). If there is a question as to whether or not they have nonexempt equity, then we may want to consider an appraisal. We will obtain Blue Book values for any vehicles they own just to make sure there is no nonexempt equity.
Will I Have To Pay Income Taxes On Debt That Was Discharged Through Bankruptcy?
According to IRS regulations, income taxes are not owed on debts that are discharged through bankruptcy.
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