Bankruptcy Basics in Delaware
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Most bankruptcies are filed as Chapter 7 bankruptcies, which are often referred to as liquidations or straight bankruptcies.
In a chapter 7 bankruptcy, you can keep certain assets (exempt assets) and discharge all of your unsecured debts. You can also keep secured assets, like your home and car, if they fits within the exemptions.
Exempt Assets in Delaware
In Delaware there are two basic exemptions:
1. Homestead Exemption
There is a homestead exemption for up to $50,000 worth of equity in your home. Therefore, if your home is worth $300,000 and you owe $250,000 on a combination of first mortgage, second mortgage, home equity loan, or line of credit secured by the home, you have less than $50,000 in equity and can keep the home as exempt property, without that ownership causing you to have to pay anything to your unsecured creditors. You do have to continue to pay the mortgage payments in order to keep your home, and continue to pay vehicle payments to keep your car or other secured property. If you are married and filing by yourself (discharging one spouse’s debts), you can exempt any amount of equity in your home if it is owned by husband and wife (held as tenants by the entirities).
2. Personal Property Exemption
The second major exemption is a $25,000 exemption for an individual or $50,000 exemption for a married couple for their personal property (everything other than your home). This second exemption can also be used for investment property (real estate). However, the homestead exemption can only be used for your home or residence. This exemptions enables you to keep your car, furniture, household items and other personal property.
There is also a head of household exemption, and clothing, retirement accounts, and some other property are also exempt. If you have assets that total more than the exemptions, and you want to keep that property, you may qualify to file a Chapter 13 bankruptcy, which involves a payment plan to pay part or all of the debts.
Status of Secured Debt Payments
You need to be current on your secured debts, like your home mortgage and vehicle loans in order to file a chapter 7. If you are behind on those payments, the arrears can be paid in a Chapter 13 Plan, if you qualify for a Chapter 13.
Unsecured Debts are Discharged Under Chapter 7 Bankruptcy
Unsecured debts (debts where there is no collateral that secures the debt) can be totally discharged in a Chapter 7 bankruptcy. Common examples of these debts are credit cards, and loans. Most debts to the government, such as taxes, and debts for student loans are not dischargeable.
Income and Living Expense Requirements for Chapter 7
For a chapter 7, your living expenses, not including payments on the unsecured debts that will be discharged, should be about equal to, or exceed your income. If you have money left over (disposable income) after paying your living expenses, you may be required to file a Chapter 13 bankruptcy.
If you need to file a Chapter 13 bankruptcy, you will have to show that you are able to make the required monthly payments for three to five years. If you have non-exempt assets (assets in addition to the exemptions allowed), are behind on payments for secured debts that you want to keep, or have disposable income (money left over after paying your living expenses), you can file a Chapter 13 bankruptcy to keep your assets. In a Chapter 13 bankruptcy you may only have to pay on your secured debts, or you may be required to pay part or all of your unsecured debts. Even if you have to pay the full amount of your unsecured debts, you do not pay any interest on most unsecured debts. However, the trustee (the person appointed by the court to administer your case) takes a 10% commission on your chapter 13 payments.
In a chapter 13 bankruptcy:
- You may be able to discharge (eliminate your liability for) unsecured debts, like credit cards and personal loans.
- You may be able to lower the interest rate that you pay on secured debts, other than your home.
- You can stop a foreclosure on your home, the repossession of your car, or other executions on property to collect debts.
- You may be able to “cram down” the debt on your vehicle. If you owe more that the current retail value of the vehicle, and you have had the loan for more than 910 days (about 2 ½ years), you may be able to pay what the car is worth rather than the total amount that you owe.
For Homeowners that are "Under Water"
If your home is worth less than the amount that you owe on your first mortgage, you may be able to "strip off", or remove the second mortgage or other junior debt, and not have to pay that debt.
When you are in financial trouble, unable to pay your debts on time, or so far in debt that you are unable to repay all of your debts, you should talk to a bankruptcy attorney and find out your options. You may need to evaluate your financial situation, for example:
- Depending on your income and how many people you support, one measure of your debt situation may be: that if your debts are almost as much as you make in one year, you may be unable to repay the debts. A single mother making $10 per hour may be in over her head, if her debts are about one half of her annual net income. Some people are unable to repay any debt.
- Another way to examine your situation is to list all of your living expenses (mortgage, rent, utilities, food, clothing, medical, child care, gas, transportation, car payments, insurance, etc.) and compare it to your net income. There may be nothing left to pay on your debts. "Robbing Peter to pay Paul" doesn’t work for long.
In bankruptcy, you may be able to keep everything that you own and eliminate all or part of your debts. If you need a fresh start, bankruptcy may be the answer. Whether you have been ill, become disabled, had your hours cut, lost your job, had a car repossessed, had a foreclosure, had a business fail, or suffered some other financial distress, don’t become a slave to your debts. You deserve a chance for financial stability.
- This article is provided for informational purposes only. If you need help with a bankruptcy question, click here to consult with James Creed or a Bankruptcy Lawyer near you.