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cfp® | fp511 > LO 7.2.1: Explain the types of bankruptcy and how the Bankruptcy Act of 2005 applies to each type. > Flashcards

LO 7.2.1: Explain the types of bankruptcy and how the Bankruptcy Act of 2005 applies to each type. Flashcards

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1
Q

Fair Credit Reporting Act | General Provisions

A

REPORT-related

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2
Q

Truth in Lending Act | General Provisions

A

CONTRACT-related

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3
Q

Bankruptcy Act | General Provisions

A

Remains on credit report for 10 years

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4
Q

Chapter 7 | General Provisions

A

Liquidation; must wait 8 years to refile

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5
Q

Chapter 13 | General Provisions

A

Wage-earner (repayment) plan

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6
Q

Why is it important to educate clients on their credit scores and how they are calculated?

A
  • Can make a substantial difference in the cost of credit over their lifetimes.
  • Many employers use credit scores when evaluating prospective employees, which can impact a client’s job search and even their income.
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7
Q

What are the two forms of bankruptcy an individual may declare?

A

Chapter 7 or Chapter 13.

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8
Q

Chapter 7 bankruptcy

A
  • The individual is permitted to keep certain assets, but all others are relinquished to satisfy the costs of bankruptcy and the claims of creditors.
  • If these protected assets have been pledged to secure a specific debt, then they may be seized legally by the creditor.
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9
Q

Chapter 7 bankruptcy | What happens if state law is different from federal law with regard to property retention?

A

State law generally applies.

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10
Q

Chapter 7 bankruptcy | What payments are the debtor not required to give up?

A

Social security benefits, pension benefits, unemployment comp, and alimony.

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11
Q

Chapter 7 bankruptcy | What do states provide for life insurance and annuities?

A

Retention by the debtor of all or a portion of the cash values.

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12
Q

Chapter 7 bankruptcy | What happens upon completion of Chapter 7 bankruptcy proceedings?

A

Most debts are discharged completely — the debtor is no longer responsible for their repayment.

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13
Q

Chapter 7 bankruptcy | Are all debts discharged after Chapter 7 proceedings are complete?

A

No, certain debts cannot be discharged. Student loans and unpaid taxes can only be discharged in extremely rare situations.

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14
Q

Chapter 7 bankruptcy | What would be the case for education loans to be discharged?

A

Only if repaying them would create an undue hardship.

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15
Q

Chapter 7 bankruptcy | What happens to tax liens after proceedings?

A

Remain in place, but it’s possible for unpaid taxes to be discharged if proper returns have been filed and the tax became due more than 3 years prior to filing to bankruptcy.

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16
Q

Chapter 7 bankruptcy | Are child support, alimony debts, and 401(k) loans dischargeable through bankruptcy?

A

No.

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17
Q

Chapter 7 bankruptcy | Why aren’t 401(k) loans dischargeable?

A

A person cannot discharge a debt to themselves (a person who borrows against their 401(k) is both the borrower and lien holder).

18
Q

Chapter 13 bankruptcy

A
  • A plan created under which the debtor will repay outstanding debts within a specified time period—normally 3-5 years.
  • Amount owed is reduced so payments will be manageable.
19
Q

Is Chapter 7 or Chapter 13 bankruptcy more favorable for creditors?

A
  • Chapter 13 because they receive at least some portion of what is owed them.
  • Under Chapter 7, there is no assurance that creditors will receive anything.
20
Q

Who is Chapter 13 bankruptcy available to?

A

Who is Chapter 13 bankruptcy available to?

21
Q

Chapter 13 bankruptcy | What is the creditor prohibited from doing?

A
  • Creditor may not collect additional sums as long as repayment takes place in accordance with established plan.
  • Creditor also may not harass the debtor regarding payment.
22
Q

Chapter 13 bankruptcy | Is the debtor required to relinquish assets to discharge debts?

A

Generally, no.

23
Q

Bankruptcy Act of 2005 | Provisions

A
  • Individuals who have the ability to pay their debts (as defined in the act) are required to file under Ch. 13 of the Federal Bankruptcy Code. (vs. Ch. 7, having debts cancelled entirely).
  • Consumer use of Ch. 7 filing is limited to the liquidation of credit card bills or loans that are not secured by a house or other asset.
  • Debtors who want to file for Ch. 7 are required to submit to credit counseling before doing so.
  • Lenders are required to provide consumer info about the financial dangers of only min pmts on credit cards.
24
Q

Bankruptcy Act of 2005 | How much protection in assets did the act provide in 2005?

A
  • $1,000,000, and this amount is adjusted every 3 years.
  • $1,362,800 as of April 1, 2019 of originally established IRAs protected from credit claims.
  • Next adjustment is in 2022.
25
Q

Bankruptcy Act of 2005 | What type of account ownership is protected from creditor claims?

A

An unlimited amount of rollover IRA assets

26
Q

Bankruptcy Act of 2005 | How should ERISA-protected company retirement plan accounts be treated?

A
  • To ensure full protection, any retirement assets held in an ERISA-protected company retirement plan should generally remain there.
  • ERISA has been around since 1974 and there are numerous rulings to protect retirement assets held in a plan covered by ERISA.
  • The protection for IRA was just established in 2005.
27
Q

Bankruptcy Abuse Prevention and Consumer Act of 2005

A
  • Went into effect October 17, 2005
  • Comprehensive changes to the bankruptcy code
  • Makes filing for bankruptcy less desirable than previously
  • Biased towards Ch. 13 rather than Ch. 7
28
Q

Bankruptcy Abuse Prevention and Consumer Act of 2005 | What is the rule of thumb regarding whether an individual files for Ch. 7 or Ch. 13 bankruptcy?

A
  • Income over the last 6 months is above the state median, Ch. 7 will not be an option.
  • Can at least $100 a month to creditors, and it seems possible for $10,000 in payments over a five-year period, the judge will probably not allow Ch. 7 filing.
29
Q

Bankruptcy Abuse Prevention and Consumer Act of 2005 | What do they have to do before filing?

A
  • First receive a briefing form an approved budget and counseling (nonprofit only) service.
  • Complete an approved personal financial management instructional course, which they must pay for themselves.
30
Q

Bankruptcy Abuse Prevention and Consumer Act of 2005 | After filing under Chapter 7, how long must an individual wait before filing again?

A

Eight years (previously six).

31
Q

Bankruptcy Abuse Prevention and Consumer Act of 2005 | What are the State exemptions for claims under Chapter 7?

A
  • homestead/primary residence,
  • limited amount of personal property
  • pension and retirement plan rights (ERISA plans),
  • existing cash value of any life insurance policies,
  • proceeds of any annuity contracts,
  • disability income benefits, and
  • property that is held as tenants by the entirety.
32
Q

Bankruptcy Abuse Prevention and Consumer Act of 2005 | What are the Federal law exemptions for claims under Chapter 7?

A
  • federal Civil Service retirement benefits,
  • railroad pensions, and
  • veterans’ benefits.
33
Q

Generally, what debts and obligations are not dischargeable?

A
  • income taxes,
  • student loans,
  • child support for alimony.
34
Q

Chapter 11 bankruptcy

A
  • Also known as reorganization
  • Filed by a voluntary or involuntary petition
  • Automatic stay and entry or order for relief provisions will apply.
35
Q

Who is eligible to file for Chapter 11, and what are the exceptions?

A
  • Applies to any individual, business, or corporate debtor who is eligible for Ch. 7 liquidation
  • Except stockbrokers, commodities brokers, and railroads.
36
Q

What property cannot be included as property in the bankruptcy filing?

A

Certain retirement assets (qualified pension, IRA, Roth IRA, profit sharing, stock bonus plan, annuity, deferred compensation plan for state and local gov’ts and tax-exempt orgs, and trusts)

37
Q

Do retirement plan assets in excess of $1MM have to be included in the bankruptcy filing?

A

Yes.

38
Q

How long must an owner have lived in a house for it to be exempt by the unlimited homestead provision?

A

40 months.

39
Q

What happens if an owner residency in their homestead is less than 40 months (state exemption for claims)?

A
  • Home equity retention may be limited to $125,000

* State limits can vary substantially.

40
Q

Can funds held in education savings accounts in the event of bankruptcy filing?

A
  • Yes.
  • Dollar limits apply depending on when the contributions were made — a $5,000 limit per beneficiary may be applied to deposits made between 1-2 years prior to filing for bankruptcy.
41
Q

In Chapter 13 filing, what does the law include a detailed methodology for determining?

A

How much of an individual’s income can be used for normal living costs, the remainder must be used to pay off creditors.

42
Q

What is given priority in determining creditors’ claims and repayment schedules in Chapter 13 filings?

A

Child support and family maintenance responsibilities.

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