Many financial experts and analysts have frequently made the case that the no-asset bankruptcy cost should be very low cost, such that most consumers can get bankruptcy cheap and affordable chapter 7. A major reason often advanced by such experts, especially in times of harsh economic conditions and rising cost of bankruptcy such as today, who make the case that the cost of routine bankruptcy ought to be a cheap, low-cost affair, is rooted in the argument that an overwhelming majority of personal bankruptcy cases, particularly the Chapter 7 types, are simply "no asset" or "minimum asset" cases. This is defined as a bankruptcy case of the type where the debtor who owes the debts literally has or owns absolutely NOTHING - no money or property of the type, or worth or value that the creditors can possibly claim or seize from the debtor under the law, if the debtor does not pay them (quite apart from the fact that the debtor lacks any with which to pay the lawyer's hefty fees).
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The basic argument of these bankruptcy experts and professionals, including law professors, lawyers, court trustees and judge, who make this point, is that such no-asset cases are routine, simple and straightforward in character, in that they require nothing complex but only simple routine paperwork by the debtor or an assistant to prepare the debtor's bankruptcy case for the court and to do the processing of the case. And secondly, that in such cases the creditors generally offer no contest or challenge to the case once they become duly aware that a debtor's bankruptcy petition is in fact a no-asset case because they stand to gain or collect nothing any way by doing so. Hence, they generally argue, the no-asset bankruptcy cost should be very little, cheap and most affordable Furthermore, the same argument is used by those who say that such cases really don't need the services of a lawyer in handling them since, they say, that such bankruptcy cases are generally too simple, elementary and largely clerical for one to undertake.
THE BASIC TYPES OF BANKRUPTCY CASES
There are, of course, basically two types of PERSONAL bankruptcy cases provided for under the U.S. Bankruptcy Code - the Chapter 7 and Chapter 13 types. These designations derive from the names of the chapters of the Code that describe them. A brief description of each of these:
CHAPTER 7. Often called "liquidation" bankruptcy, this type of bankruptcy primarily contemplates an orderly, court-supervised procedure by which a court-appointed "trustee" takes over the assets of the debtor's estate (to the extent that he or she has any, if at all), "liquidates" or reduces them to cash, and makes distributions of such recovered funds to creditors. The debtor is allowed to retain certain "exempt property" that will allow him the bare necessities to enable the debtor to live on even after bankruptcy. In practice, however, there is usually little or no nonexempt property left in most chapter 7 cases, and hence, there is generally NO actual "liquidation" of the debtor's assets in the average case. These cases are called "no-asset cases."
CHAPTER 13. This is often called the "adjustment of Debts" bankruptcy for an individual with a regular income. This type of bankruptcy is designed for an individual debtor who has a regular source of income. Chapter 13 is usually preferred to chapter 7 by debtors who have some valuable asset that they need to keep, such as a house, because this type of bankruptcy enables the debtor to propose a "plan" to repay creditors their debts over time - usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief because they do not meet the "means test" requirements. Basically, in a Chapter 13 case, the debtor works up a "repayment plan" approved by the court by which he or she then repays the debt, in part or in whole.
What property may you keep in bankruptcy?
In Chapter 7 cases, which is the one that typically involves limited or no assets, the overwhelming majority of debtors who file them keep all of their property. (The basic principle of the Bankruptcy Code or law, aims to give the debtor a fresh start, not to punish).
The following property may be exempt under Section 522 of the U.S. Bankruptcy Code (11 USC 522):
a. Home up to $17,425.00 in equity;
b. Disability or unemployment benefits;
c. Life insurance policy with loan value up to $9300.00;
d, Alimony and child support;
e. Most pensions and some IRAs (401 K plans are also protected and under New Jersey law do not even become part of the bankruptcy estate. Evans v. Evans, 2001 WL 1711048 [N.J. Super. Ch.]. IRAs that qualify are also excluded from the bankruptcy estate. Yuhas v. Orr, 104 F.3d 612 [1997]);
f. Personal items such as clothes, appliances, books, furniture, household goods, and musical instruments up to $450.00 per item, not to exceed a total of $9300.00;
g. Jewelry up to $1150.00;
h. Motor vehicles up to $2775.00;
i. Personal injury recoveries to $17,425;
j. Additional personal injury recoveries if in compensation for loss of future earnings. In the Matter of R. Scotti, 245 B.R. 17 (2000);
k. Other payments in compensation for loss of future earnings;
l. Workers' compensation benefits. Evans v. Casarow, 29 B.R. 336 (1983);
m. Wrongful death recoveries for an individual you depend on;
n. Public benefits including unemployment, social security, public assistance, veteran's benefits, and crime victim's compensation;
o. Tools of trade up to $1750.00;
p. "Wild card" exemption up to $9,650.00 of any property. It can be used only to the extent that a home is not exempted. For instance, say a debtor owns no real property and has a car worth $10,000 and a diamond ring of equivalent value. The ring or the car (any item or items providing totaling to value of NOT more than $9,650.00) may be retained, but not both.
After You File in a No-Asset Case
Here's the way it works. Basically, once you file bankruptcy, a court-appointed officer called a trustee, will be assigned to your case. The trustee will first review your assets and determine whether they fall under the category called "exempt" or "nonexempt." Nonexempt assets (if and when they are owned by a debtor) are the type that will be sold and the proceeds used to pay your creditors. While exempt assets, on the other hand, are the type that will remain yours.
Hence, if your case has nonexempt assets, your creditors are allowed to file a claim for distribution, and may have such assets distributed to them by the case trustee. However, if on the other hand the trustee determines that all your assets are exempt, then he'll file a "no asset" report with the court.
As a rule, most Chapter 7 bankruptcy cases are no asset cases.
Why Chapter 7 Cases are Ripe for Low-Cost or Do-It-Yourself Bankruptcy
In effect, what this means is that when you have a no-asset case - which means the kind of case of which some 80-90 percent of the Chapter 7 bankruptcy cases are comprised - all that's basically needed is for the case trustee to make his/her determination that it is a no-asset case, and for him/her to file his "no asset" report with the court. And the case is almost practically done since practically no creditor is likely to challenge it or to file any claims against the debtor's case or his being discharged from the debt obligations. The debtor (meaning usually the lawyer he shall have hired to handle his case) only has to complete the usual litany of routine forms and documents and to "file" them with the bankruptcy court for processing. And that's just about all! In other words, the case is just simply a relatively simple clerical matter involving basically a mere completion of simple routine forms and submitting them to the local bankruptcy court.!
Hence, according to analysts who have studied the bankruptcy system and are of this view, in light of the apparent simplicity involved in doing such operations, the lawyers' no-asset bankruptcy cost should be very low, and should be such that consumers can get bankruptcy cheap and affordable chapter 7.
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