Hawaii Bankruptcy Exemptions and Law
COVID-19 Restrictions: Currently, due to COVID-19, everyone in the courthouse must submit to social distancing, masking, and symptom screening requirements. The clerk's office is open but not accepting filings. Instead, pro se debtors without bankruptcy lawyers must use a dropbox. Judges and trustees (people who oversee bankruptcies for judges) are limiting in-person meetings and hearings. Find the latest information here.
Due to the cost of living in Hawaii, many area families spend so much on basic expenses that they have little or no financial reserve. These families are especially vulnerable to high medical bills and the other financial storms that can prompt bankruptcy filings.
Lenders usually care nothing about the financial storms that borrowers face. They simply want their money. And they have the tools to obtain it. In Hawaii, many lenders can garnish wages, foreclose on property, and take other adverse actions without obtaining court orders.
With apologies to Bob Dylan, bankruptcy offers shelter from the storm. Bankruptcy stops the aforementioned adverse actions dead in their tracks. Furthermore, a bankruptcy attorney can maximize Hawaii's property exemptions so creditors cannot liquidate your assets (take your property). This combination is the essence of the fresh start that the Bankruptcy Code guarantees.
Many of our laws are a combination of state and federal rules. For example, we pay federal and state income taxes. Similarly, Hawaii's bankruptcy courts use a combination of the federal Bankruptcy Code and the Hawaii Revised Statutes. The Bankruptcy Code controls most or all aspects of consumer bankruptcy in the Aloha State. Property exemptions, which are outlined below, are the major exception.
The Automatic Stay
As soon as debtors file their voluntary petitions, the automatic stay applies. Similar relief may be available elsewhere. But it is limited, and there are many strings attached. Only bankruptcy — and Section 362 of the Bankruptcy Code — automatically stops things like:
- Wage garnishment
- Collections lawsuits
- Creditor harassment
It's extremely difficult for creditors to bypass the automatic stay. Typically, you must somehow threaten the collateral (e.g. “I'm going to drive my car off a cliff"). The number of delinquent payments is usually irrelevant. As a result, the automatic stay is almost ironclad with regard to unsecured debts.
Unsecured Debts and the Debt Discharge
Unsecured debts are obligations that involve only an oral or written promise to pay. There is no security or collateral. Examples of unsecured debts include:
- Medical bills
- Credit cards
- Payday loans
- Revolving credit accounts
- Signature loans
Typically, these debts are dischargeable in consumer bankruptcies. The discharge option is the second part of bankruptcy's powerful one-two punch. The automatic stay puts creditors against the ropes, and the discharge knocks them out.
Some unsecured obligations, like student loans and back taxes, are technically priority unsecured debts. These obligations are only dischargeable in some situations.
Furthermore, debt discharge is limited. The judge doesn't have the power to erase a debt's collateral consequences. So, if State U withholds Burt's transcript because he is behind on student loan payments, State U may continue to do so, even if a judge discharges Burt's student loans. A bankruptcy lawyer must deal with the transcript issue separately.
As mentioned earlier, discharge is an option. Many people chose to voluntarily reaffirm certain obligations, such as the family doctor's medical bills. Fundamentally, bankruptcy is about taking control of your finances.
Your Bankruptcy Options
This federal debt relief program also offers choices. Distressed debtors in Hawaii have several bankruptcy alternatives, largely depending on their financial needs.
Chapter 7 Bankruptcy
In many cases, unsecured debts, like medical bills, are overwhelming on their own. Credit cards are an even better example. Credit card interest rates are so high that it doesn't take long to dig a very deep hole.
Attorneys often recommend Chapter 7 bankruptcy in these situations. In just a few months, Chapter 7 eliminates most unsecured debts. So, your family quickly gets the fresh start it deserves.
Especially if you have a bankruptcy lawyer, Chapter 7 is normally straightforward. After debtors file a petition and schedules, the trustee normally requests copies of financial and identification documents. Common examples include recent tax returns and a Social Security card.
The trustee demands these documents simply to look for evidence of bankruptcy fraud and verify the debtor's identity. Income/lifestyle discrepancies are usually the biggest fraud red flag. If Monty drives a fully-loaded new luxury SUV, he probably earns more than $2,000 a month. Identity theft is a problem in all financial transactions, including bankruptcy. So, if the requested documents are unavailable, a bankruptcy lawyer can usually furnish an acceptable substitute.
Assuming everything goes well at an informal meeting, the trustee normally recommends immediate debt discharge.
Chapter 13 Bankruptcy
Sometimes, when money is tight, families put off mortgage payments and other secured debts so they can put food on the table and meet more urgent needs. However, as mentioned, most banks are very impatient when debtors fall behind on payments. So, if you are behind, Chapter 13 bankruptcy could be a way out.
These bankruptcies are a bit more complex than Chapter 7s. Chapter 13 trustees look for evidence of fraud and also verify debtor identities. Additionally, trustees help debtors set up monthly repayment agreements.
Essentially, the trustee puts Chapter 13 debtors on an allowance for either three or five years. After the debtor pays monthly bills, the debtor's disposable income goes toward allowed claims. Usually, “allowed claims" include secured debt arrearages, like past-due car payments, administrative costs, and a few other items.
Five years is a long time to make a debt consolidation payment which, in many cases, is about the size of a rent or mortgage payment. The exact amount varies, mostly depending on the amount of allowed claims. If your financial circumstances change and the monthly debt consolidation payment becomes a problem, a bankruptcy lawyer can offer some options. These alternatives usually include a hardship discharge, modification of the plan payment amount, or conversion to Chapter 7.
Most bankruptcy qualifications are written in federal or state law. But a few eligibility requirements are unwritten. Only an experienced Hawaii bankruptcy lawyer is familiar with them. So, if you do not have a good lawyer, you could be blindsided by requirements you had no way of knowing about.
Some eligibility requirements apply to everyone. For example, all bankruptcy petitioners must take a credit counseling course before they file and a budgeting course after they file. These brief, inexpensive courses are typically available online.
There are some specific requirements as well. The means test applies to Chapter 7 filings. These petitioners must have annual incomes below the state average. As of November 1, 2020, the average annual income for a Hawaiian family of four is $118,223. If you are above this line, a bankruptcy lawyer might still be able to qualify you, based on your actual expenses.
Chapter 13 features a debt ceiling. These debtors must have less than $1.3 million in current and past-due secured debt and less than $400,000 in current and past-due unsecured debt. Once again, if these ceilings are a problem, an attorney can offer other options.
The general unwritten requirement is that debtors be, as the Supreme Court has put it, honest yet unfortunate. We've already discussed bankruptcy fraud (honesty) and financial storms (misfortune). “Unfortunate" is a relative term. Some debtors are victims of their own poor choices, at least to a certain extent.
Other unwritten requirements are chapter-specific. For example, Chapter 7 debtors must not abuse the discharge option. As mentioned, many of these petitioners choose to voluntarily reaffirm some unsecured debts. Especially if the debtor reaffirms a large obligation, many trustees question the debtor's need to start a Chapter 7.
Chapter 13's unwritten requirements usually involve the income/expense balance in Schedules I and J. Unless debtors can clearly make the monthly debt consolidation payment, many trustees question their ability to finish a Chapter 13.
Debtors who meet these qualifications are entitled to a fresh start. Property exemptions, or property protections, are a major element of this fresh start. If petitioners lose their assets, they are forced back behind the starting line.
Most of Hawaii's property exemptions are listed in Section 651 of Hawaii's Revised Statutes. Some highlights include:
- Homestead exemption: Most people may protect up to $30,000 of home equity. If you are not the head of household or over 65, the equity exemption is $20,000. Unless you have paid off more than half of an amortized loan, you probably have little equity in your home, even if you have already paid the bank tens of thousands of dollars.
- Vehicle exemption: Hawaii law protects up to $2,575 of motor vehicle equity. Vehicle loans are amortized as well, so if you drive a new car, you probably have almost no equity. Used cars that are mostly or entirely paid off typically have very low fair market values.
- Personal property: Owners may exempt up to $1,000 of jewelry, furniture, electronics, and other household goods. That exemption amount seems very low, until you remember that the as-is cash value rule applies in this situation. Deborah's $1,000 television set might fetch, at most, $100 at a garage sale.
- Retirement accounts: Hawaii law protects every penny you have in an IRA or other retirement account. The same level of protection applies to most pension plans and tax-deferred savings accounts.
- Public benefits: Hawaii law also protects all your Social Security, VA disability, and other government benefits. On a related note, private benefits, like personal injury settlements, life insurance policy equity, and child support receipts, are typically exempt as well.
Debtors who use the state exemptions may also use the federal nonbankruptcy exemptions and protect current wages, fraternal order benefits, and a few other items.
Hawaii bankruptcy debtors can also use federal exemptions. You must pick one list or the other one. Some federal law exemptions and amounts include:
- Home equity ($25,150)
- Retirement account (unlimited)
- Personal property ($18,000)
- Public benefits (unlimited)
- Life insurance ($13,400)
- Motor vehicle equity ($4,000)
The federal exemptions also include a wildcard exemption. Debtors may protect up to $13,900 in cash or otherwise nonexempt property.
Typically, bankruptcy lawyers advise renters to use the federal exemptions and homeowners to use the state exemptions. But everyone's situation is different.
Experienced bankruptcy lawyers can use several legal loopholes to maximize your property exemptions and your fresh start as well. The mootness doctrine is a good example.
Assume Donna has $2,000 in a bank account which the written exemptions do not protect. A few weeks after she files, the trustee files a motion for turnover, claiming that this money was part of the bankruptcy estate. But by that time, she has spent the money on living expenses. So, from a legal perspective, it does not matter who owned the money, because the money is gone.
How do I start bankruptcy in Hawaii?
If you are filing a no-asset Chapter 7 and you have formal legal training as well as experience in consumer bankruptcy, a DIY (Do-It-Yourself) bankruptcy might be a good idea. You may download the forms here. If the above things aren't true, a money-saving DIY bankruptcy often backfires. The process is complex, and you must face off alone against a posse of lawyers from a creditor or the trustee.
Some people hire a BPP (Bankruptcy Petition Preparer). That's a step up from a DIY bankruptcy. But a nonlawyer BPP can only fill out forms. A BPP cannot give you any legal or financial advice. These individuals certainly cannot represent you in a court hearing.
A partnership with a Hawaii bankruptcy lawyer is an investment that always pays off. An attorney can give you solid advice and handle the entire process from beginning to end. Furthermore, only a lawyer can stand up for your legal and financial rights in court.
Where do I file bankruptcy in Hawaii?
The Aloha State's bankruptcy court is located in Honolulu. DIY and BPP petitioners must file documents, pay fees, and do almost everything else at the physical court location. Hawaii bankruptcy lawyers, using the ECF (Electronic Case Filing) system can do all these things, and more, from their laptops.
How much does bankruptcy cost in Hawaii?
The court usually charges about a $350 filing fee. The specific amount varies, mostly depending on the type of bankruptcy. Occasionally, judges allow installment payments or grant fee waivers. Professional fees also vary, again largely depending on the type of bankruptcy. Payment plans, which could include a post-petition payment plan, and sliding scales are typically available.
What happens if you have to declare bankruptcy?
When you declare bankruptcy in Hawaii, you get a fresh start. Bankruptcy stops foreclosure and other adverse actions. Bankruptcy also discharges unsecured debt and lets you catch up on past-due secured debt payments at your own pace.
Is Chapter 7 or Chapter 13 bankruptcy worse for credit?
A Chapter 7 filing usually stays on your credit report longer than a Chapter 13 filing. However, either filing looks better on credit records than repossessions, foreclosures, and other entries which usually mean the debtor simply quit.
What happens to your home if you declare bankruptcy?
In most cases, nothing happens to your home if you declare bankruptcy. Hawaii's state law has a very generous homestead exemption. Alternatively, Hawaii bankruptcy debtors can use the federal homestead exemption, which is almost as good.
Contact an Experienced Bankruptcy Lawyer
If creditors are threatening your assets and you need a fresh start, contact an experienced Hawaii bankruptcy attorney today.
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.