Column: Filing for Chapter 7 Bankruptcy in Florida: When you just need to get a fresh start

The Capital One, Visa, Mastercard, American Express and Wal-Mart cards in your wallet can be empowering. Want a new set of rims or a sound system for the ride?  ust charge it. Want to take a trip to the birthplace of your ancestors?

Put it on the card. But all of that credit power can lead to a severe hole in the old checking account — especially if a person loses his or her job, a spouse elects to move on and takes everything including the kitchen sink, or a major medical emergency piles on unexpected costs. And once a person falls behind on card payments, car payments, home loan payments, or whatever, the phone calls and letters start pouring in. At times like that, we don’t want to “get away” to some exotic vacation location, instead people want to get a fresh start. We want to put those discretionary mistakes behind us and start over, with a budget and with the ability to make monthly ends meet. Filing for bankruptcy can give that fresh start and wipe out certain debts that will never have to be repaid.

There are three main types of bankruptcy cases referred to by their Bankruptcy Code Chapter. I will discuss each of these in a series of articles, starting with this article on the basic requirements for filing under Chapter 7 of the Bankruptcy Code.

A Chapter 7 bankruptcy is often referred to as a “liquidating bankruptcy” and is the most common type of case. In order to have certain debts discharged, the debtor “liquidates” his or her non-exempt assets by turning them over to a bankruptcy trustee. Exempt assets are things that a “debtor” can keep when filing bankruptcy, such as a certain amount of clothes, furniture, and cash on hand. Non-exempt assets are assets that a debtor must give to the trustee. In bankruptcy law, the term “debtor” refers to the person filing bankruptcy.
For an individual residing in Northwest Florida, a bankruptcy case is initiated by filing a petition with the federal Bankruptcy Court for the Northern District of Florida. Prior to filing, the debtor must complete a credit counseling course and obtain a certificate of completion. Additionally, the debtor must pass a “means test” which analyzes the debtor’s financial situation using a complicated matrix.

This matrix considers income and the debtor’s ability to pay his or her debts. The means test primarily applies to situations where the debtor is struggling with credit cards, car debt or mortgage payments. A debtor who is primarily in debt from obligations stemming from a failed business may be exempt from the means test. The means test also evaluates whether or not the debtor has the financial means to make payments on the debt in a repayment plan. If the debtor does not have sufficient income to pay your monthly debts, he or she is eligible to file a Chapter 7 petition. If the debtor does have sufficient income to pay his or her debts, the debtor may still qualify for a Chapter 7 filing if he or she is able to demonstrate a special circumstance such as a lost job or medical condition.

Florida has been traditionally viewed as a “safe haven” state based on the Florida Constitution’s homestead exemption for one hundred sixty acres of contiguous land and improvements for property located outside of a municipality, and one-half acre of contiguous land located within a municipality, regardless of its value. This exemption is popularly known as the “mansion exemption” because it was (mis)used by some rather wealthy people who moved to Florida and paid cash for some very expensive properties just prior to petitioning for Chapter 7 bankruptcy. In response, Congress limited homestead exemptions based on state law to $125,000 for property acquired within 1215 days before the commencement of the bankruptcy case. Additionally, the debtor must be a resident of the state for at least 730 days. Thus, before a debtor can take full advantage of Florida’s “mansion loophole,” the debtor must be a resident of Florida for at least two years (730 days) and own the homestead for at least 40 months (1215 days).

In addition to the homestead exemption, Florida law exempts pensions, 401K plans, tax-deferred retirement plans, social security income, college investments plans, health savings accounts, hurricane savings accounts, the cash value of insurance policies, $1000 of equity in an automobile, and $1000 in furniture, clothes, tools, and estimated property on hand.  Additionally, a debtor may choose to reaffirm certain secured obligations in order to retain certain secured assets. When a debtor reaffirms a debt, it will not be discharged in bankruptcy.

Any non-exempt property and assets will be included in the bankruptcy estate. The Chapter 7 Trustee may take such property and assets and, following a sale, distribute funds to the non-secured creditors. The debtor has the opportunity to keep non-exempt property if he or she can negotiate a “buy-back” agreement with the Trustee. The trustee then sells the assets and distributes the proceeds to creditors based on certain priorities established in the Bankruptcy Code. Following a Chapter 7 bankruptcy proceeding, the debtor emerges without any further obligation for the debts which are discharged.

There is no shame in filing for bankruptcy. Credit card companies fill mailboxes with offers of easy credit knowing full well that a certain percentage of those easy loans will never be repaid. Those easy loans can quickly mount up and become an unbearable and unbeatable burden.  Bankruptcy laws are designed to allow overextended debtors to get a fresh start. If things go right, a debtor can emerge from bankruptcy with a home, car, furniture, tools, and clothes — and without the crushing burden of unserviceable debts. Sometimes a fresh start is all a person needs to get things going in the right direction.

Bill Martin is an attorney whose practice focuses in bankruptcy, real estate, construction, uniform commercial code, contract, and commercial litigation, including breach of contract, employment law and securities fraud. He graduated from the Florida State University College of Law in 1998 and then clerked for the Honorable Lacey Collier, Federal District Court Judge, Northern District of Florida. From 2000-2006 he practiced securities litigation in New York City, NY at Skadden, Arps, Slate, Meagher & Flom LLP. He is currently Of Counsel to the newly formed firm of Keefe, Anchors, Gordon, & Moyle, P.A. with offices in Fort Walton Beach, Destin, Defuniak Springs, and Tallahassee.