Bankruptcy Overview

Important Disclaimer. The bankruptcy laws are extensive and complicated. The information provided on this website is designed to provide basic information regarding the current bankruptcy laws and does not constitute legal advice. Please call 801-305-3702 to speak with a Utah bankruptcy lawyer to discuss the specifics of your situation.

WHAT FILING BANKRUPTCY CAN DO:

  • Eliminate the legal duty to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
  • Stop foreclosure or repossession of a car or other property so you can catch up on missed payments. (In most cases, you will still need to choose between continuing to make payments or giving the property back.)
  • Stop wage attachments, debt collection harassment, and similar creditor actions.
  • Restore or prevent termination of utility service.
  • Allow you to challenge creditors who have committed fraud or who are otherwise trying to collect more money than you really owe.
  • Allow you to restructure or modify certain debts.

WHAT FILING BANKRUPTCY CAN’T DO:

  • Eliminate certain obligations to secured creditors. A secured creditor is a creditor that can take something (called collateral) if the debt is not paid as agreed. Common examples are car loans and home mortgages. However, you can force secured creditors to take payments over time in the bankruptcy process, and bankruptcy can eliminate your obligation to pay more money if your property has been taken.
  • Discharge certain debts singled out by the bankruptcy law for special treatment, such as child support, alimony, certain other debts related to divorce, most student loans, court restitution orders, criminal fines, and some taxes.
  • Protect co-signers on your debts. If a relative or friend has co-signed a loan, and you discharge the loan in bankruptcy, the co-signer may still have to repay all or part of the loan.
  • Discharge debts that arise after bankruptcy has been filed.

This section highlights some important points of bankruptcy law. You can read the full text of the federal bankruptcy laws or visit with a Utah bankruptcy attorney today. Click on any of the topics below to jump to that section.

Relief from Creditors

Immediately when you file bankruptcy you get protection in the form of a court order called the automatic stay (see U.S. Code 11, Section 362). The automatic stay protects you from all collections actions. Creditors cannot call you, attempt to repossess any property, or take any other action.

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Property & Assets

You must list all of your property and debts when you file bankruptcy, regardless of whether you are filing Chapter 7 or Chapter 13. Filing bankruptcy does not generally wipe out or get rid of mortgages or liens against your property; if you want to keep a car, truck, home or business equipment that serves as collateral for a loan, you need to keep paying on the debt. As long as you stay current on the loan, you get to keep the property.

In a Chapter 7 bankruptcy case, all of a debtor’s non-exempt property becomes the property of the bankruptcy estate and may be sold by the bankruptcy trustee. The sale proceeds are then distributed among the debtor’s creditors. Though some of your property may be sold under a Chapter 7 bankruptcy, every state has exemptions that protect certain kinds of property.

In a Chapter 13 bankruptcy case, debtors are generally permitted to retain all of their assets as long as they stay current on their plan payments.


Exempt Property

Under federal and state exemption laws, certain assets are protected from collection by creditors and from a bankruptcy trustee in a Chapter 7 case. In addition, exempt property is relevant in formulating a Chapter 13 plan and calculating the required return to your unsecured creditors. Below is a brief summary of the most commonly claimed exemptions allowed under the Utah Exemptions Act.


Exemptions with dollar amounts:

  • Homes: Individuals can claim a homestead exemption in their primary residence in the amount of $20,000. Secondary residences have a $5,000 exemption. The homestead exemption is applied to home equity, the fair market value of the property minus the amounts of all outstanding mortgages and loans against the property.
  • Vehicles: Each individual is entitled to a $2,500 exemption for one motor vehicle. If you are filing jointly with your spouse and you share one vehicle, you can each assert the vehicle exemption against the same vehicle. If the equity in the vehicle you share is not more than $5,000, it would be protected from bankruptcy. The vehicle exemption is applicable to motorcycles if the motorcycle is your primary means of transportation.
  • Household furniture: sofas, chairs, and related furnishings reasonably necessary for one household, up to $500 ($1,000 per couple)
  • Dining and kitchen tables and chairs reasonably necessary for one household: up to $500 ($1,000 per couple)
  • Animals, books, and musical instruments, if reasonably held for the personal use of the individual or his dependents: up to $500 ($1,000 per couple)
  • Heirlooms or other items of sentimental value: up to $500 ($1,000 per couple)
  • Tools of the trade: Up to $3,500 value of tools, equipment, professional books, and other implements of a trade or profession.

An individual is entitled to exemption of the following property, generally without regard to value.

  • one clothes washer and dryer
  • one refrigerator
  • one freezer
  • one stove
  • one microwave oven
  • one sewing machine
  • all carpets in use
  • provisions sufficient for 12 months for your family
  • all clothes for every individual dependent, not including jewelry or furs
  • all beds and bedding for every individual or dependent
  • personal injury settlements, judgments, etc. accruing as a result of bodily injury of the individual, to the extent the proceeds are compensatory.
  • 401K, IRA and other retirement benefits EXCEPT amounts contributed or benefits accrued by or on behalf of a debtor within one year before the debtor files for bankruptcy
  • a burial plot
  • health aids reasonably necessary to enable the individual or dependent to work or sustain health

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Filing Individually or Jointly

If both a husband and wife have a lot of debt, it makes sense and saves money for them to both file, but it is not a requirement under the law. However, in many situations, there is no good reason at all for the second spouse to file. In these situations, just one spouse can file and leave the other spouse completely out of it.

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Taxes

Tax debts are generally non-dischargeable in bankruptcy. Below is an overview of tax options under both Chapter 7 and Chapter 13.

Chapter 13 Benefits

  • The IRS is forced to accept an installment agreement as part of the repayment plan. The plan must provide for full payment of all tax claims entitled to priority under the bankruptcy code unless the IRS agrees to different treatment.
  • Interest stops accruing on unsecured tax obligations. If the IRS has not filed a Notice of Federal Tax Lien (NFTL) against a debtor’s assets, interest stops accruing on the unpaid tax liability. If the IRS HAS filed a NFTL, the tax obligation is secured by the lien, and interest must be paid on the tax debt to the extent of the value of the underlying collateral.
  • Tax penalties cease to accrue.
  • Tax penalties are treated the same as all other unsecured; if the repayment plan provides for only partial payment to unsecured creditors, the debtor would also be permitted to partially repay tax penalties.

Chapter 7 Options

Certain tax liabilities may be discharged in bankruptcy if four conditions are met:

  • The debtor did not file a fraudulent return or attempt to evade paying taxes;
  • The liability is for a tax return filed at least two years before the bankruptcy case was initiated;
  • The tax return was due at least three years before the bankruptcy filing date;
  • The taxes were assessed at least 240 days before the bankruptcy filing.

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Time Limits

If you previously filed a Chapter 7 and received a discharge, you need to wait 4 years since the filing date to be able to file a Chapter 13, and 8 years to file another Chapter 7. If you previously filed a Chapter 13 bankruptcy, you must wait 6 years to file a Chapter 7.

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Required Documents & Information

Filing bankruptcy is not just a casual thing and there is a lot of information that must be gathered before you can file. Below is an overview of the information you need to provide. For more information, download our bankruptcy worksheet or talk to one of our bankruptcy attorneys today.


What does it take to get your case ready to file?

Generally, Utah Bankruptcy Law requires:

  • a list of all of your debts (you must list all creditors),
  • a list of all your assets,
  • some back-ground information about you,
  • all of your pay stubs for the past 7 months (contact your employer if you don’t have your pay stubs), and
  • tax returns for the past 4 years (contact the IRS at 1-800-908-9946 to obtain a free transcript of federal taxes; Utah state tax records are available at $6 per year by calling 801-297-6227 ).

The critical issue in preparing to file your case is accurate and complete information. Who do you owe, and what is their address and account number? What do you own? You must disclose everything or you could be denied bankruptcy relief.

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Foreclosure & Repossession

What is Foreclosure?

Foreclosure is the process whereby a mortgage holder “repossesses” the collateral for their loan. If you borrowed money to purchase your home (or took out a second mortgage) you gave the lender a security interest in your house or land. This became the collateral for the loan. When the loan goes into default (usually by lack of payment) the lender forecloses, or eliminates your ownership interest in the property. They do this so that they can sell the property to someone else and recover some or all of what is owed on the loan.

Understanding Utah Foreclosure Law

Generally, to foreclose on a loan, the creditor says that there is some type of default, generally that the debtor is behind in the payments. Once the loan is in default, the creditor records a Notice of Default with the county recorder and a copy of the Notice of Default is sent to the owners of the property. The owner of the property now has 90 days to cure the default (called the Redemption Period). If the default is not cured within the 90 day redemption period, the lender sets a date to sell the property. The creditor posts a notice of sale and advertises the property once per week for at least 3 weeks then sells the property.

How Bankruptcy Can Help

Filing a Chapter 7 or 13 bankruptcy will stop the repossession process immediately. Even if a creditor is standing in the driveway ready to take your car or home, once you have filed bankruptcy they cannot take your property.

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Garnishments

If a creditor has received a judgment against you, they are allowed to take money directly out of your paycheck or bank account. This procedure is called garnishment. Under Utah law, a creditor can take up to 25% of your take-home pay or all of the money in your checking and/or savings account. However, if you file a Chapter 13 or a Chapter 7, you can stop the creditor from continuing to take your money or prevent them from even starting. Filing bankruptcy puts a “wall” between you and your creditors called the automatic stay. The automatic stay prevents the commencement or continuation of any type of collection, including garnishments.

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Credit Counseling & Financial Management Course

All individuals who file bankruptcy must participate in a credit counseling session (about one hour). The clerk of the bankruptcy court maintains a list of approved credit counseling agencies that are authorized to offer the required pre-bankruptcy credit counseling in the State of Utah. Most of these agencies offer online counseling and charge between $30 and $50.

In addition to credit counseling, all debtors must complete a financial management instructional course within 180 days AFTER they initiate their bankruptcy case. Unless debtors participate in such a course, their debts will not be discharged (eliminated) in bankruptcy. The clerk also has a list of approved financial management instructional courses.

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Means Testing

Individuals with enough income to file Chapter 13 may be ineligible to file Chapter 7. The purpose of the Means Test is to evaluate whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments to creditors under a Chapter 13 Plan.

Current Monthly Income

The first step in determining eligibility to file Chapter 7 is to figure out your current monthly income, your average monthly income from all sources during the 6-month period prior to the date of commencement of the case. This includes income from both spouses (even if the other spouse is not filing for bankruptcy) unless the spouses are legally separated or living separately.

State Median Income

Multiply your current monthly income by 12 and compare it to the median income for your state. You can find median income tables, by state and family size, at the website of the United States Trustee. If your current monthly income is less than or equal to the median, you are eligible to file Chapter 7.

Means Test

If your current monthly income is greater than the median, you must pass the Means Test in order to file Chapter 7 bankruptcy. Subtract the following expenses from your current monthly income:

  • Secured debt (such as car loans or house mortgages), due over five years, divided by 60;
  • Mortgage or vehicle arrearages to be cured in a Chapter 13 plan, divided by 60;
  • Priority debts (such as taxes, child support, alimony), divided by 60;
  • Allowed expenses permitted by the IRS in its financial analysis standards;
  • Other actual expenses as permitted by the IRS;
  • Health insurance, disability insurance, and health savings account;
  • Charitable contributions up to 15% of the debtor’s income;
  • 5% allowance for food and clothing (requires court approval);
  • Actual monthly costs of caring for an elderly, ill or disabled family member, even if not a dependent;
  • Chapter 13 administrative expenses not to exceed 10%;
  • Up to $1,500 annually ($125 per month) per child under 18 for public or private school expenses;
  • Additional costs for utility expenses.

If your total income, after subtracting the above items, is less than $100, you pass the Means Test and you will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $167, you have flunked the Means Test and you will be prohibited from filing Chapter 7 (but not Chapter 13). If your remaining monthly disposable income is between $100 and $167 and is sufficient to pay more than 25% of your unsecured, nonpriority debts (credit card bills, student loans, medical bills, etc.) over a five-year period, you flunk the Means Test. If not, you pass the Means Test and Chapter 7 is an option.

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Vehicle Loans – Chapter 7 Options

Keeping your vehicle

You cannot eliminate the debt against your vehicle and maintain possession of it because creditors who finance automobiles generally retain title to the vehicle until it is paid in full. If you want to keep a vehicle you are in the process of paying for, you must take the following steps:

  1. File a statement of intention within 30 days of filing bankruptcy. This document states your intent to surrender, redeem, or reaffirm a debt secured by their vehicle.
  2. Perform your intentions. You must surrender, redeem or enter into a reaffirmation agreement within 30 days after the first meeting of creditors. The automatic stay terminates at this time, so if you have not made other arrangements, the car creditor can repossess your vehicle.
    • Surrender. You can choose to give the car back to the lender and have the debt discharged.
    • Redeem. In bankruptcy, you have the right to purchase your vehicle from a car creditor for the retail price for property of similar age and condition. The creditor does not have to finance this purchase, but you may be able to borrow funds from certain lending institutions that provide financing to individuals in bankruptcy (but their interest rates tend to be high, about 21%).
    • Reaffirmation. You can execute a new agreement with a car creditor where you agree in writing to continue to make payments. As part of the reaffirmation agreement, the creditor may agree to reduce the balance owed, reduce the interest rate, or bring you current if you are behind in payments. Under the revised bankruptcy code, an extensive set of disclosures are required for any reaffirmation agreement and you will be required to demonstrate that you have sufficient income available to pay the debt.

Getting rid of your vehicle & the debt against it

If you owe more money on your vehicle than it is worth, you can rid yourself of the vehicle and the debt against it by surrendering the vehicle to the creditor. If you desire to surrender your vehicle back to the creditor, your must do so within 45 days of the initial bankruptcy hearing. A creditor can force an earlier surrender of the vehicle by obtaining court permission to repossess it.

Keeping a paid-for vehicle

If have a significant amount of equity in your vehicle or if your vehicle is fully paid for, you may still file a Chapter 7 and retain value of $2,500.00 per individual (or $5,000.00 per couple). If your equity exceeds exempt values, you may be able to file a Chapter 13 case, restructure your debt, and retain your vehicle. You could also attempt to arrange to purchase non-exempt equity from the bankruptcy trustee assigned to your case at the time of filing.

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Vehicle Loans – Chapter 13 Options

Cram Down

If a debtor acquired their vehicle more than 910 days (2 ½ years or 30 months) before initiating their bankruptcy case, the debtor is required to repay the debt under a Chapter 13 Plan ONLY to the extent of the value of the underlying collateral. For example, if the debtor owes $12,000 against their vehicle, yet the actual value of the vehicle is only $8,000, in a Chapter 13 case, the car loan lien is stripped down to $8,000 and the debtor must fully repay only $8,000 against their vehicle over the life of the Chapter 13 plan (three to five years).

If the debtor acquired a vehicle less than 910 days before filing bankruptcy, the debt cannot be modified unless the car creditor consents to or accepts such a modification.


Reduce Interest Rates

Based on a 2004 U.S. Supreme Court case, Till v. SCS Credit Corp., the interest rate on secured debt (including a vehicle loan) paid through a Chapter 13 plan may be significantly reduced. The interest factor contemplated in the Till decision is prime plus some increment designed to reflect the risk of the new loan.


Savings under Chapter 13

In a Chapter 13 case, almost all of a debtor’s debts are consolidated and paid through the Chapter 13 Plan in one single monthly payment. Very often, the amount of this payment is less than the monthly installment the debtor was previously paying on their vehicle alone.

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Home Equity Options – Chapter 13

Stop Foreclosure

The filing of a Chapter 13 case stops foreclosure procedures immediately and debtors are permitted to catch up on all delinquent payments on mortgages and home equity loans against their primary residence over a three to five year period. If the debtor remains current on all payments and makes payments in a timely manner, the creditor on a home loan is required to accept repayment of all mortgage arrearages through a Chapter 13 plan.

Second Mortgage Lien Stripping

If you have two mortgages against your home, you can remove the second mortgage if your home is worth less than you owe on the first mortgage. Because there is insufficient value in your home to secure the junior lien holder, the debt to the junior lienholder will be treated as a general unsecured claim under your Chapter 13 plan.

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Home Equity Options – Chapter 7

The current homestead exemption for a primary residence is $20,000 per individual ($40,000 per couple). Debtors with equity exceeding $20,000 per individual or $40,000 per couple should consider filing Chapter 13 to resolve their financial difficulties and keep their home.

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Student Loans

Student loans are not dischargeable under any chapter of the bankruptcy code unless a debtor can demonstrate that the student loan represents an undue hardship (which is very difficult).

Under Chapter 13 bankruptcy, student loan debt is paid the same percentage as the individual’s other unsecured debt (about 10-20 cents on the dollar). Upon completion of the Chapter 13 plan, however, the debtor must make arrangements to re-pay the balance of the student loan, if any amount remains unpaid.

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Misc.

Non-dischargeable Debts

As a general rule, unless your debt is one listed below, it will be discharged by the bankruptcy.

  • Child support or alimony debts
  • Taxes or fines owed to the government
  • Most student loans
  • Debts involving fraud, embezzlement, larceny
  • Debts incurred by driving under the influence causing personal injury
  • Debts incurred for luxury goods or cash taken immediately before bankruptcy from a credit card.

Credit Reports

The law states that a bankruptcy, either Chapter 7 or 13, can be listed on your credit report for up to 10 years. However, many Credit Bureaus list a Chapter 13 for only 7 years. Either way, a bankruptcy will negatively affect your credit. However, if you are considering bankruptcy, your credit is probably poor or about to become so, and your credit begins to restore after a few years. Many filers are able to buy a house a few years after filing for bankruptcy.

Preferred creditor payments

Bankruptcy law prohibits preferring one creditor over another and payments to regular creditors within 90 days of filing bankruptcy, and to relatives or business associates within one year of filing bankruptcy are considered preferential payments. Debtors must disclose in their bankruptcy schedules payments to any single creditor adding up to more than $600 within 90 days before filing bankruptcy. Debtors must also disclose payments of $600 or more to “insiders,” including relatives and business associates, within one year before filing bankruptcy. The bankruptcy trustee can recover any preferential payments made and divide the proceeds equally among your other creditors.

Avoid Fraud

Transferring assets into some else’s name prior to filing bankruptcy to protect the assets from being taken by the bankruptcy trustee is fraud on creditors and can result in a debtor’s discharge being denied. In addition, the bankruptcy trustee can take back the assets from the person to whom they were transferred.

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