Delaware Bankruptcy Exemptions and Law

Most Americans are terrified by the thought of bankruptcy, even if they are deep in debt and see no way out. While things may be going badly, they believe that filing for bankruptcy will just make a bad situation worse and cause them to lose what little they still have. This is not true.

How Can Bankruptcy Help?

If you are drowning in debt, bankruptcy is intended to provide you with a lifeline that protects you from your creditors and their collections agencies while you either pay off your debt or get rid of it entirely. The state of Delaware also has special rules for bankruptcy filers that allow you to protect some of your property from creditors so you can use it to move on with your life after bankruptcy. Many debtors are able to keep most of their property.

Delaware Bankruptcy Law

While all of the U.S. Bankruptcy Courts are governed by the U.S. Bankruptcy Code, each state is allowed to implement its own rules regarding which property filers can protect. Delaware has enacted its own laws governing this “exempt" property that can't be taken away from you during bankruptcy. There are also federal exemptions provided for in the Bankruptcy Code, but you must use the state rules if you file in Delaware. More on this below. First, let's cover some basics on filing for bankruptcy in Delaware.

Can I File for Bankruptcy in Delaware?

In most cases, you can file for bankruptcy in Delaware if you have resided there more than anywhere else for the previous six months. But to take advantage of the state's bankruptcy exemptions, you must have resided there for two years prior to filing.

To file under Chapter 7, you will need to show that you meet Delaware's income requirements under one of two means tests. Under the first means test, you qualify to file in the state if your income is below the state median the size of your household. According to U.S. Census data, Delaware's median income by household size was:

• 1 person: $61,395
• 2 people: $77,853
• 3 people: 91,369
• 4 or more people: $107,204

If your household income is higher than Delaware's median, you may still qualify to file under Chapter 7 if you can show that you have little disposable income after you have paid your monthly bills.

What Are the Types of Personal Bankruptcy?

Nearly all personal bankruptcies are filed under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Filing under either chapter will stop creditor harassment and home and auto repossessions, but they each provide a different mechanism for relieving you of your debt burden. Additionally, the chapter you choose to file under will likely govern how much debt you can get rid of and what property you will be allowed to keep.

Chapter 7 Bankruptcy

When most people think of bankruptcy, they are thinking about Chapter 7 bankruptcy. Chapter 7 is called the "liquidation" bankruptcy and people believe all of their property will be turned over to a bankruptcy trustee who will sell it to repay creditors. While that perception is somewhat accurate, it leaves out one key factor: Delaware's bankruptcy exemptions.

Delaware's exemptions allow most bankruptcy filers to keep the majority of their property when they file in the state. In fact, many of those who file for Chapter 7 can keep all of their property.

In return for giving up your nonexempt property, at the end of a Chapter 7 case, you will be free from any debt that is not specifically sheltered from discharge under the Bankruptcy Code. Those priority debts that cannot be discharged include such things as unpaid child and spousal support obligations.

Since individuals who file under Chapter 7 will often rid themselves of all of their debt while keeping a significant amount of their property, Congress has put rules in place to ensure that those who could otherwise pay their bills don't file under the chapter. As a result, you will need to pass a means test to show that your income is below a specified level to file under Chapter 7.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy lets those who have a steady income reorganize their debts so that they are paid off in installments over three to five years. The payments are made under a Chapter 13 plan that must be approved by the court and you will need to show that you have enough income to make the required payments under the plan. In addition to forcing your creditors to accept, the court can also require creditors to reduce the amounts you owe them.

The Protection of the Automatic Stay

While you may have never heard of the automatic bankruptcy stay, it is a powerful tool that will protect you from your creditors and force them to participate in the bankruptcy process. The stay is automatically issued by the Bankruptcy Court when you file for bankruptcy under any chapter, including Chapters 7 and 13.

The stay stops creditors from contacting you directly for any reason and stops most collection activities, wage garnishment, repossessions, and court litigation. It also forces creditors to participate in your bankruptcy case by giving them no other alternative for collecting what you owe them.

If a creditor that has been notified of your bankruptcy violates the stay and contacts you directly, the judge can impose penalties and even force the creditor to pay the attorneys' fees stemming from their violation.

Secured vs. Unsecured Debt

The term “debt" is usually thrown around generically, but nearly all debt falls into one of two categories: secured and unsecured. While in most situations how your debt is categorized makes little difference in whether you pay it or not, it will actually have a significant impact on your bankruptcy case. That is because the type of debt you have will play a role in how much you can eliminate through bankruptcy and how much property you can keep. Both types of debt receive different treatment in Chapter 7 and 13 bankruptcies.

Unsecured Debt

Almost everyone who files for bankruptcy in the U.S. has at least some unsecured debt. Unsecured debt is debt you owe to an individual or organization that has no right to seize your property if you fail to pay them. This is also the type of debt most often eliminated in bankruptcy. There are many types of unsecured debt, but the most common in bankruptcy are credit card debt, unpaid hospital bills, unpaid court judgments, and some tax obligations.

Secured Debt

Secured debt describes those situations where you owe money to a person or organization that has the right to seize or repossess your property if you fail to pay them. Secured debt is often created when you sign a loan contract where you offer up some of your property as collateral to ensure payment. The most common types of secured debt include mortgages, auto loans, and boat loans.

What Happens to Unsecured Debt in a Chapter 7 Case?

Nearly all of your unsecured debt will be wiped out when you file for bankruptcy under Chapter 7. This is because after the trustee has sold all of your non-exempt property, the judge will eliminate any remaining amounts you owe your unsecured creditors. Since most of those who file under Chapter 7 have few assets, they are usually able to protect nearly all of their property using Delaware's exemptions, leaving little left to pay creditors.

Secured creditors have more rights in a Chapter 7 case since the security interest they hold in the property you put up as collateral remains after you have filed for bankruptcy. The bankruptcy stay may keep them from repossessing their collateral for a time, but eventually the judge will allow them to move forward with seizing your property. This generally leaves you with three options for your secured debt in a Chapter 7 case:

• Turn the collateral over to your creditor. You will lose the property, but in most cases the remainder of the debt you owe the creditor will be eliminated.
• Keep the property and keep paying the creditor. This is sometimes possible when the equity you have in the property falls within one of Delaware's exemptions and you work out a payment agreement with the creditor.
• Pay off the loan and keep the collateral. This rarely happens in Chapter 7 cases where the person filing has few assets.

Secured and Unsecured Debt in a Chapter 13 Case

One of the primary benefits of filing for bankruptcy under Chapter 13 is that you can reorganize your secured debts to repay your creditors under the bankruptcy plan and keep the property you put up as collateral. The court will approve repayment plans that either force your creditors to accept installment payments or forgive part of what you owe them. Your home mortgage is not included in your plan and you must continue making those payments outside of bankruptcy.

Unsecured creditors generally fare better in a Chapter 13 case than in a Chapter 7 case. The primary reason for that is that the court will not allow you to file for bankruptcy under Chapter 13 unless your repayment plan offers them at least as much as they would receive in a Chapter 7 liquidation. However, since most unsecured creditors receive little to nothing in a Chapter 7 case, they may still not receive much in a Chapter 13 case.

Your Chapter 13 plan will pay your unsecured creditors with whatever disposable income you have left after paying your secured creditors. The portion of your debt that remains unpaid at the end of the plan will be discharged by the court, leaving you with no unsecured debt.

Delaware Bankruptcy Exemptions

Delaware will let you exempt a total of $25,000 of the equity you have in any property that does not fall under the homestead, retirement, or tools of the trade exemptions. Additionally, when a married couple files for bankruptcy in Delaware, both spouses can sometimes claim a complete set of exemptions, effectively doubling the exemption amount.

Homestead Exemption

Delaware provides an exemption for up to $125,000 of the equity you have in any real property or manufactured home that serves as your principal residence. This exemption amount is not doubled for married couples filing for joint bankruptcy.

Wage Exemption

You may exempt up to 85% of your wages each week.

Vehicle and Tools of the Trade Exemption

Delaware exempts up to $15,000 of the equity you have in a vehicle and/or the tools you need for your employment. In some counties, the tools of the trade exemption are much lower, with the exemption dropping to $75 for New Castle and Sussex counties and $50 for Kent County.

Wildcard Exemption

The state offers a $500 wildcard exemption that you can apply to any property you choose.

Retirement and Life Insurance Exemptions

The following are exempt from bankruptcy in Delaware:

• Payments due under a life insurance or annuity contract
• Most tax-exempt retirement plans, including 401(k)s, IRAs, and defined benefit plans
• State employee pensions
• Volunteer firefighter pensions

Public Benefits Exemptions

Delaware provides exemptions for most public benefits, including:

• Social Security
• Unemployment compensation
• Workers' compensation

Other Exemptions

• Educational savings plans

How Do I Start Bankruptcy in Delaware?

If you are planning on filing for personal bankruptcy you will need to complete a pre-bankruptcy credit counseling course that the U.S. Trustee Program has approved. The course is designed to help you assess whether filing for bankruptcy really is your best option for resolving your debt problems. When you file for bankruptcy with the court, you will be required to submit a certificate to the court showing you completed the course within 180 days of filing.

You must file for bankruptcy with the U.S. Bankruptcy Court for the District of Delaware in Wilmington. If you have hired an attorney to represent you, the attorney will file on your behalf. If you are filing without an attorney, you will start the process by downloading the correct filing forms for the court. The instructions will tell you which forms and documents need to accompany your filing.

What Does Bankruptcy Cost in Delaware?

The filing fee for a Chapter 7 bankruptcy is $338. The fee is $313 for a Chapter 13 case. If you can't afford to pay the filing fee, you can ask the court to make installment payments over 120 days. You can ask the court to waive your filing fee if you make less than 150% of the poverty line.

The cost of a bankruptcy attorney in Delaware can vary dramatically depending on the complexity of your case. However, most attorneys will charge between $1,000 and $1,500 for a Chapter 7 case. Because Chapter 13 cases are generally more complex, attorneys will usually charge more to represent you in a case filed under that chapter.

Need Help Filing for Bankruptcy in Delaware?

If you are already having trouble paying your bills, paying an additional $1,000 or more for an attorney to represent you in bankruptcy may seem like an expensive luxury when you can file on your own. But even simple bankruptcy cases involve complicated document filing requirements and the strictly enforced deadlines laid out in the Bankruptcy Code.

An experienced local bankruptcy lawyer will help guide you through the filing process, represent you in court, and negotiate with your creditors to ensure you leave bankruptcy with as many assets as you are allowed.

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.