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Arkansas Bankruptcy Exemptions and Law
Many Arkansas families are on the edge financially. These families should at least consider filing bankruptcy because in many cases, this federal debt relief program is the only way to ensure a better future. Yet mostly because of bankruptcy-phobia, these families hesitate to file.
This fear is understandable but unnecessary. There are a lot of misconceptions about what happens in bankruptcy. Hopefully, this page will take away some of that fear by providing answers to some commonly asked questions about bankruptcy in Arkansas. Asset protection in bankruptcy is one of the biggest concerns that people have.
The United States is a partnership between federal and state governments. Marriage and family laws are one example. The federal government makes some laws in this area, and so do states like Arkansas.
Bankruptcy is an even better example of this partnership. The federal Bankruptcy Code establishes many laws in this area. Furthermore, federal courts, instead of state courts, control bankruptcy procedures. Individual states, like Arkansas, make other bankruptcy laws. Most state bankruptcy laws involve property exemptions.
Even if they are not familiar with the label, most people are familiar with bankruptcy's automatic stay. Section 362 of the Bankruptcy Code immediately stops most creditor adverse actions, such as:
- Creditor harassment,
- Wage garnishment, and
Additionally, bankruptcy discharges unsecured debts. Both these words have specific meanings in this context.
“Discharge" means the judge eliminates the legal obligation to repay a debt. But the collateral consequences remain. Assume John owes tuition money to State U, which is holding his transcript. The financial obligation is dischargeable. But State U may continue withholding John's transcript. A bankruptcy lawyer must deal with the transcript issue separately.
“Unsecured" means the debtor simply promised to pay. Examples include school tuition, credit cards, payday loans, and medical bills. Some unsecured debts, mostly back taxes and student loans, are only dischargeable in certain situations. Other unsecured debts, mostly criminal court fines alimony, and child support, are not dischargeable at all.
Types of Bankruptcy
The general procedure is the same in all forms of consumer bankruptcy. The specific procedure varies in different chapters.
- Chapter 7 is designed for people with crippling unsecured debts. Medical bills are the leading cause of Chapter 7 filings in Arkansas. Usually, these judges discharge most unsecured debts after a few months.
- Chapter 13 is designed for people with delinquent secured debts. Past-due mortgage payments are a good example. Chapter 13 gives these debtors up to five years to erase this delinquency. The trustee essentially places your family on an allowance for this period of time. Most or all of your disposable monthly income goes to debt retirement.
A “Chapter 20" bankruptcy, which combines elements of Chapter 7 and Chapter 13, is available in some jurisdictions. A bankruptcy lawyer can let you know if a Chapter 20 is right for you.
Bankruptcy law provides a fresh start to debtors who are honest but unfortunate. Most people are eligible for this fresh start, through Chapter 7 and/or Chapter 13.
The means test is the biggest qualification for Chapter 7 debtors. You are eligible to file if your household's annual income is below average for that area. This amount fluctuates and it varies in specific areas. It's usually more expensive to live in Little Rock than in other parts of the state. Typically, the amount is about $68,000 for a family of four.
Chapter 13 debtors must meet debt ceiling qualifications. Their secured debts cannot exceed $1.3 million and their unsecured debts cannot exceed $400,000. These amounts vary slightly as well.
Furthermore, all debtors must meet certain filing qualifications. You must have lived in Arkansas for at least six months. Additionally, you must take a pre-filing debt counseling course. Finally, you must take a post-filing debt management course. These brief and inexpensive classes are usually available online.
These unwritten rules vary in different jurisdictions. Only an experienced Arkansas bankruptcy lawyer knows about such informal requirements.
These qualifications center on the monthly income and expense schedules that are part of a bankruptcy petition. Chapter 7 bankruptcy debtors normally must show a marginally positive cash flow. If not, the trustee might scrutinize the paperwork even more closely. Chapter 13 bankruptcy debtors, on the other hand, normally must show substantial disposable income. Otherwise, the trustee might question their ability to make a monthly debt consolidation payment.
Furthermore, you have a duty to cooperate with the trustee. Some courts are very strict on this point. A judge could dismiss your case because you are late for a meeting. Other courts are more lenient. For example, they might overlook a few late payments, as long as you never go more than about fifteen days delinquent. Of course, it is never a good idea to go late on a payment if it can be avoided, as that could put your bankruptcy in serious jeopardy.
Most people work very hard to acquire things like homes, motor vehicles, and retirement accounts. If you have debt problems, creditors could seize these assets and sell them to pay off your debts. In some cases, creditors do not even need a court order to do these things.
Bankruptcy exempts (protects) some of your property. The aforementioned automatic stay is part of this protection. Additionally, some assets are permanently exempt under state or federal law. Generally, only luxury items, like private planes and vacation homes, are nonexempt.
Arkansas is one of the few states which allows you to choose between federal and state bankruptcy exemptions. You must pick one or the other. You cannot cherry-pick items from each list.
These exemptions are found in the Bankruptcy Code, which is in Title 11 of the U.S. Code. The major exemptions are:
- Homestead exemption: Up to $25,150 of home equity is exempt. So, if you have less equity than that, the bankruptcy trustee cannot seize your home. Most people who have lived in the same home for less than ten years have very little home equity. The bank applies most of the money they pay to amortized interest.
- Motor vehicle: Federal law protects up to $4,000 in vehicle equity. Most people have almost no equity in new cars. And, most used cars have almost no value. You may use the entire exemption on one vehicle or spread it out over several vehicles.
- Personal property: Items in this category include appliances, furniture, clothes, and other household goods ($13,400), jewelry ($1,700), tools of the trade ($2,525), medical devices (unlimited amount), and life insurance payments or dividends ($13,400). These values are subject to some special rules, which are outlined below.
- Public benefits: Social Security, VA disability, unemployment, and other government benefits are fully exempt regardless of their amount. To preserve this exemption, it's best to put this money into a separate account. Always speak to a lawyer before you move money.
- Retirement accounts: IRAs, 401(k)s, 529 plans, and other tax-deferred accounts are exempt as well. The amount is a bit uncertain. The Bankruptcy Code contains some limits. But the Supreme Court recently implied that these accounts are 100% exempt regardless of value.
- Wildcard: You may protect up to $13,900 in otherwise nonexempt property. This property could be cahs in a bank account or any other tangible real or personal property.
An item's bankruptcy value is not the same as its fair market value. You must list the item's as-is cash value on Schedule A or Schedule B.
As one example, if Ramon's house needs foundation work, a home investor would probably only pay pennies on the dollar for the property. That offer arguably establishes the home's as-is cash value. Complex issues like this should be left to your Arkansas bankruptcy attorney.
The Arkansas state exemptions are available as well. These exemptions protect:
- House (unlimited amount for single-family homes, $800 in equity for condominiums or trailers)
- 75% of your current wages
- Car ($1,200 in equity)
- Personal property ($200)
- Tools of the trade ($750)
- Jewelry (one item)
- Life insurance ($20,000)
- Government benefits (unlimited)
- Retirement account (unlimited)
- Wildcard ($200)
Some of these amounts increase if a married couple files jointly. An attorney can further maximize these exemptions, perhaps by placing items in a trust.
Connect With a Dedicated Attorney
To get a fresh start and protect your property, reach out to an experienced Arkansas bankruptcy lawyer today. After-hours, virtual, and home visits are available.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.