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Maryland Bankruptcy Exemptions and Law
Creditors try to make people feel bad for filing bankruptcy. This idea is an offshoot of the poverty prejudice. This prejudice holds that the poor are somehow responsible for their own impoverished state. Like most prejudices, this one is clearly wrong. It makes no sense to blame the poor for being poor, and it makes no sense to blame debtors for filing bankruptcy. In fact, almost all bankruptcy petitioners file because of high medical bills, divorce, job loss, or other circumstances that were mostly beyond their control.
Furthermore, filing bankruptcy does not mean the end of the game, like it does in Monopoly. Instead, bankruptcy gives your family a fresh start. This fresh start is essentially an opportunity. Some people squander this chance, and others take full advantage of it. A bankruptcy lawyer often makes the difference. An attorney does things like use little-known property exemption loopholes and start you on the path to credit recovery.
Maryland was one of the first states to approve the Constitution and its republican form of government. Today, we take this model for granted. But back then, a federal-state partnership was a radical concept. No one was sure if it would work. Bankruptcy is a good example of this partnership. The federal Bankruptcy Code controls most procedures and some substantive law. The Maryland Code controls some other aspects, mostly property exemptions. More on that below.
Some Benefits of Bankruptcy
As mentioned, most people experience financial difficulty because of events that are beyond their control. These events trap people in a downward spiral of debt and delinquency. Bankruptcy reverses this downward spiral and gives you control over your own finances. The automatic stay is a big part of this reversal. Section 362 of the Bankruptcy Code immediately stops adverse creditor actions like:
- Lien placement
- Wage garnishment
- Creditor lawsuits
The automatic stay usually kicks in regardless of the facts. So, it typically does not matter how far behind you are on mortgage payments. Even if the foreclosure sale is imminent, the automatic stay stops it.
Bankruptcy's debt relief is not just temporary. Permanent relief is available as well, usually in the form of debt discharge. Bankruptcy removes the legal obligation to pay unsecured debts, such as:
- Medical bills
- Payday loans
- Revolving charge accounts
- Credit cards
- Signature loans
This federal debt relief program also gives a bankruptcy lawyer a chance to negotiate from a position of strength. When debt negotiations begin, creditors know they must agree to a favorable deal that reduces your interest rate, forgives some of the UPB (Unpaid Principal Balance), or provides other relief. Otherwise, the judge could discharge the debt, leaving them with virtually nothing.
Kinds of Consumer Bankruptcy
There are two common consumer bankruptcy options and one informal bankruptcy option in Maryland: Chapter 7, Chapter 13, and "Chapter 20" bankruptcy.
Chapter 7 Bankruptcy
Many families struggle with medical bills, credit cards, and other kinds of unsecured debt. In as little as six or nine months, Chapter 7 bankruptcy eliminates these debts and gives these families a fresh start.
For debtors who have a bankruptcy lawyer, the Chapter 7 process is relatively straightforward. An attorney completes and files the complicated petition and schedules. Then, your attorney is at your side during a meeting with the bankruptcy trustee. At this meeting, the trustee verifies the debtor's identity and looks for evidence of bankruptcy fraud. This evidence includes significant income changes and lifestyle/income differences. For example, if Ted drives a new SUV and reports an income of $1,000 a month, something smells fishy.
If everything goes well at this meeting, and it usually does, the judge often issues a discharge order without holding a hearing.
Chapter 13 Bankruptcy
If past-due mortgage payments or other secured debt delinquency is a problem, a Chapter 13 bankruptcy is usually the solution. Chapter 13 gives debtors up to five years to catch up on overdue bills.
A trustee sets a debtor up on a monthly repayment plan. The amount of this payment is partially based on the debtor's disposable income and partly based on the amount of allowed claims. “Allowed claims" usually include delinquent secured debts, administrative costs, and a few other obligations.
The automatic stay usually remains in force throughout the protected repayment period. So, as long as the debt consolidation plan meets minimum requirements, creditors cannot successfully object to it. They must wait for their money like everyone else.
"Chapter 20" Bankruptcy
An informal "Chapter 20" bankruptcy is usually available as well. Assume Shelly files a pro se Chapter 7, hoping to discharge some past-due taxes among other things. These obligations are priority unsecured debts. They are only dischargeable in some situations and the judge denies her request. In most cases, Shelly could file a Chapter 13 immediately after she receives a Chapter 7 discharge. That move gives her the time she needs to pay the back taxes free from IRS harassment.
The Bankruptcy Code and associated written laws set forth most bankruptcy eligibility requirements. For example, all debtors must complete two financial management courses. There are some unwritten requirements as well.
The means test applies in Chapter 7 bankruptcies. These debtors must have annual incomes which are below average for that area. In Maryland, as of November 1, 2020, a family of four must earn less than $130,252. Higher-income families usually have other options, such as nonbankruptcy debt negotiation.
A debt ceiling applies in Chapter 13 bankruptcies. As of January 1, 2021, these debtors cannot have more than $1.3 million in secured debts and $400,000 in unsecured debts. These totals include current and past-due debts.
Different trustees view bankruptcy's unwritten requirements differently. These rules usually revolve around Schedules I and J, the monthly income/expense schedules in the initial bankruptcy paperwork.
Chapter 7 is a radical debt relief remedy, especially if you owe $100,000 or more. So, most trustees require debtors to be in the red every month. If that's not the case, the trustee might question the need for filing Chapter 7 instead of seeking a more conservative remedy.
The opposite unwritten requirement often applies in a Chapter 13. The aforementioned monthly debt consolidation payment is often the size of a mortgage or rent payment. Debtors must have sufficient disposable income to make this payment.
Financial circumstances often change in a Chapter 13, especially during a five-year repayment period. If the debt consolidation payment becomes a problem, a lawyer can usually convert the case to Chapter 7, modify the payment amount, or obtain a hardship discharge.
The Old Line State has some of the broadest property exemptions (protections) in the country. Furthermore, a number of unwritten exemptions are usually available as well.
Most of the bankruptcy property exemptions are in Section 11 of the Maryland Code. Some highlights include:
- Home equity: Maryland's homestead exemption is $25,150. If you have less equity than that in your home, neither the trustee nor a creditor may touch it. Unless you have made more than about half the loan payments, you probably have little cash equity in your home. Additionally, some informal homestead exemptions are available, as outlined below.
- Personal property: The law protects up to $6,000 worth of tools, furniture, clothing, electronics, and other household goods. This financial cap refers to an item's as-is cash value, or garage sale value. John's $2,000 television set is probably worth about $200 in a garage sale, especially if it has any wear and tear.
- Insurance money: Life insurance policy payments and equity are normally 100% exempt in a Maryland bankruptcy. So are most other similar payments, like personal injury and workers' compensation awards.
- Retirement accounts: This exemption might be the biggest one. Creditors often try to liquidate these accounts if you owe money. Bankruptcy protects both defined benefit plans, like pension plans, and defined contribution plans, like 401(k)s. On a related note, college tuition savings accounts and other tax-deferred savings accounts are normally exempt as well.
- Public benefits: VA disability benefits, Social Security benefits, and other government benefits are 100% exempt. Child support and other such benefits are also exempt, at least in most cases. Seventy-five percent of earned but unpaid wages are also exempt under the federal nonbankruptcy exemptions.
- Wildcard exemption: Maryland bankruptcy petitioners may protect up to $6,000 in otherwise nonexempt property. Most debtors apply this exemption to motor vehicles and cash in their checking or savings accounts.
The federal nonbankruptcy exemptions, like the current wage exemption, are available in Maryland because these filers cannot use the slate of federal exemptions found in federal law. Maryland's exemptions are generally better anyway.
If you have made more than half the loan payments, your home equity might exceed $25,150. Fortunately, bankruptcy attorneys know a few legal tricks in this area.
A tenancy in common, a special kind of joint ownership, is one option. Assume Rhea, who is married to Dan, plans to file bankruptcy. They own their $250,000 home free and clear. With the help of a bankruptcy lawyer, Rhea makes Dan a tenant in common. So, when she files, the home is safe, even though she is well above the equity exemption. It's illegal to seize one person's property to pay another person's debts.
The as-is cash value rule, which was discussed above, also applies to real estate. The garage sale value of Rhea and Dan's house might be as little as $25,000. Home investors often offer pennies on the dollar for no-inspection cash sales. If that's the case, the home is exempt.
Don't try these things at home. They could be considered fraudulent. Only a professional bankruptcy lawyer knows how to stay within the law when performing these "stunts."
Connect With a Dedicated Attorney
If your family needs to eliminate debt, protect assets, and get a fresh start, contact a Maryland bankruptcy lawyer 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.