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

Question 1

Fair Credit Reporting Act | General Provisions

Answer 1

REPORT-related

Question 2

Truth in Lending Act | General Provisions

Answer 2

CONTRACT-related

Question 3

Bankruptcy Act | General Provisions

Answer 3

Remains on credit report for 10 years

Question 4

Chapter 7 | General Provisions

Answer 4

Liquidation; must wait 8 years to refile

Question 5

Chapter 13 | General Provisions

Answer 5

Wage-earner (repayment) plan

Question 6

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

Answer 6

• 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.

Question 7

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

Answer 7

Chapter 7 or Chapter 13.

Question 8

Chapter 7 bankruptcy

Answer 8

• 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.

Question 9

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

Answer 9

State law generally applies.

Question 10

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

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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

Answer 12

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

Question 13

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

Answer 13

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

Question 14

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

Answer 14

Only if repaying them would create an undue hardship.

Question 15

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

Answer 15

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.

Question 16

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

Answer 16

No.

Question 17

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

Answer 17

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

Question 18

Chapter 13 bankruptcy

Answer 18

• 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.

Question 19

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

Answer 19

• 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.

Question 20

Who is Chapter 13 bankruptcy available to?

Answer 20

Who is Chapter 13 bankruptcy available to?

Question 21

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

Answer 21

• 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.

Question 22

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

Answer 22

Generally, no.

Question 23

Bankruptcy Act of 2005 | Provisions

Answer 23

• 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.

Question 24

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

Answer 24

• $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.

Question 25

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

Answer 25

An unlimited amount of rollover IRA assets

Question 26

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

Answer 26

* 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.

Question 27

Bankruptcy Abuse Prevention and Consumer Act of 2005

Answer 27

* 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

Question 28

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?

Answer 28

* 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.

Question 29

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

Answer 29

* 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.

Question 30

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

Answer 30

Eight years (previously six).

Question 31

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

Answer 31

* 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.

Question 32

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

Answer 32

* federal Civil Service retirement benefits, * railroad pensions, and * veterans’ benefits.

Question 33

Generally, what debts and obligations are not dischargeable?

Answer 33

* income taxes, * student loans, * child support for alimony.

Question 34

Chapter 11 bankruptcy

Answer 34

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

Question 35

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

Answer 35

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

Question 36

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

Answer 36

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)

Question 37

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

Answer 37

Yes.

Question 38

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

Answer 38

40 months.

Question 39

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

Answer 39

* Home equity retention may be limited to $125,000 | * State limits can vary substantially.

Question 40

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

Answer 40

* 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.

Question 41

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

Answer 41

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

Question 42

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

Answer 42

Child support and family maintenance responsibilities.