Massachusetts Bankruptcy Exemptions and Law
Coronavirus Information: Massachusetts' bankruptcy courts remain open as the COVID-19 pandemic continues. But they are only open in a virtual sense. Trustees (people who oversee bankruptcy cases) and judges are conducting meetings, hearings, and other events which are normally live either online or via telephone. Live exchanges are sometimes available in unusual circumstances, such as a hearing which hinges on witness credibility. If clerks are unavailable, a dropbox is usually provided.
Since these restrictions are subject to change, click here for the latest information about available bankruptcy services.
If you owe more money than you can pay, or at least more than you can pay right away, a bankruptcy lawyer can help you claim the fresh start the Bankruptcy Code guarantees. People who get this fresh start usually keep most or sometimes even all of their property. Keep reading to learn more.
The Bankruptcy Act which Justice McReynolds referred to was the precursor to the modern Bankruptcy Code. Today, Title 11 of the U.S. Code sets out many substantive and procedural bankruptcy laws and rules. The Bankruptcy Code also allows states to make some modifications, mostly regarding property exemptions. In the Bay State, these laws are scattered in various parts of the Massachusetts Annotated Laws, mostly Chapters 115, 188, 175, 188, and 235. More on that below.
Two of the most important principles in a consumer bankruptcy are honesty and misfortune. Honest debtors do not hide income, grossly exaggerate deductions, or borrow money without intending to repay it. Misfortune usually involves financial turbulence, like serious illness or business downturn, which is often mostly beyond the debtor's control.
The Automatic Stay
However, most creditors do not care how honest or unfortunate you were. They want their money, and they want it all now. Bankruptcy's automatic stay, another key bankruptcy pillar, protects you from aggressive creditors. Section 362 of the Bankruptcy Code prohibits adverse creditor actions like:
- Lien placement
- Wage garnishment
- Utility shutoff
In fact, the automatic stay technically prohibits creditors from communicating with debtors, whether the communication is threatening or not. Therefore, out of an abundance of caution, many banks stop sending statements. Many creditors also suspend ACH and other auto-pay arrangements. You must still pay these bills if they are for secured property such as a car you want to retain, or if they for accounts such as a utility service you want to keep.
Banks tread so carefully because the penalties for violating the automatic stay are quite stiff. Furthermore, it's almost impossible for creditors to bypass the automatic stay.
Debt discharge is the third leg of the stool. Bankruptcy eliminates most unsecured consumer obligations, including:
- Medical bills
- Signature loans
- Credit cards
- Payday loans
- Revolving credit accounts
A bankruptcy discharge eliminates the legal obligation to pay a debt. But it does not eliminate the debt itself. An example can help explain this somewhat tricky legal concept:
Assume Patrick owes tuition to State U, so the university is withholding Patrick's transcript. School tuition is a dischargeable unsecured debt. However, a bankruptcy judge cannot eliminate the debt's collateral consequences. So, State U may continue to withhold Patrick's transcript. His lawyer must resolve this matter separately.
Consumer Bankruptcy Options
Most bankruptcy debtors want the same thing: Freedom from financial turbulence. However, different debtors suffer different effects. So, there are different kinds of bankruptcy.
If you are behind on house payments, for example, Chapter 13 bankruptcy might offer a way out. This model gives distressed debtors up to five years to erase past-due mortgage payments and other delinquent secured debts.
A monthly debt consolidation payment, which the bankruptcy trustee helps you arrange, is at the core of a Chapter 13. Debtors have up to sixty months to make income-based payments that take care of allowed claims. “Allowed claims" usually include delinquent secured debt, some delinquent unsecured debt, and administrative expenses.
Generally, the automatic stay remains in effect until the judge closes the bankruptcy. So, as long as you keep making debt consolidation payments, creditors cannot successfully object to the repayment plan. If the payments become a problem, perhaps because of changed financial circumstances, a lawyer can normally convert the case to a Chapter 7 bankruptcy or obtain an instant hardship discharge.
If Patrick struggles with high medical bills, which is a common problem in bankruptcy, Chapter 7 might be a better alternative. These debtors quickly get fresh financial starts.
These bankruptcies are not as complex. After debtors file their petitions and schedules, a trustee reviews the paperwork for possible fraud. The trustee also verifies the debtor's identity. So, you must normally produce relevant documents, such as a Social Security card and recent bank statements.
Assuming the trustee has no serious questions at the meeting of creditors, most Chapter 7 judges sign discharge orders without requiring hearings.
Basic qualifications for bankruptcy include a pre-filing credit counseling class and a post-filing credit management class. The credit counseling class is important and mandatory. But, it cannot substitute for a Massachusetts bankruptcy lawyer's advice.
The credit management class is important as well. Responsibly using credit is the best way to raise your credit score.
Chapter-Specific Eligibility Requirements
If you file Chapter 13, you must be under a debt ceiling. These petitioners cannot have more than $1.3 million in secured debts and $400,000 in unsecured obligations.
These numbers sound huge, but they are not. They include current and past-due obligations. Furthermore, many credit cards have very high limits. So, if you have maxed out several cards, you might be close to the ceiling.
Chapter 7 debtors must deal with the means test. Your annual income must be at or below average for that state. In Massachusetts, as of November 1, 2020, that amount was $140,309 for a family of four. That's the highest figure in the country. So, many households in the Bay State qualify for Chapter 7.
If you do not think you meet the qualifications, there may still be options. If you are on the borderline, a bankruptcy lawyer can usually offer suggestions and information about your options. Non-bankruptcy debt relief options are usually available as well. Sometimes, the threat of filing bankruptcy can be as effective as actually filing.
Bankruptcy's informal eligibility rules, which vary in different courts, usually involve Schedules I and J, the monthly income/expense bankruptcy schedules.
Generally, Chapter 7 debtors should be slightly in the red every month, at least on paper. If that's the case, they have an easier time convincing the trustee that they need relief from their creditors.
Trustees usually impose the opposite requirement on Chapter 13 filers. These debtors must have enough disposable monthly income to fund a debt consolidation payment. This payment's size varies, but it's usually about as big as a rent or mortgage payment.
Debtors in the Bay State may choose between state and federal exemptions. They must choose one or the other; they cannot cherry-pick items from each list. There are informal exemptions as well. A bankruptcy lawyer can help you to maximize these complex rules to your advantage.
Massachusetts law contains some very generous property exemptions (protections). If a formal or informal protection applies, neither the trustee nor a creditor can touch it, even if the automatic stay is bypassed. Some major state exemptions include:
- Homestead exemption: This exemption protects up to $125,000 of home equity. If you record a homestead declaration, the exemption climbs to $500,000. These amounts apply to the amount of equity in your home. Mortgage loans are amortized (meaning you pay interest first). So, unless you have made more than about half the payments, you probably have very little equity in your home.
- Motor vehicle exemption: These same fiscal rules apply to the $7,500 motor vehicle exemption ($15,000 if you are disabled and older than 60). If you have a new car, you probably have almost no equity in it. Used vehicles have almost no financial value. So, the equity amount can be irrelevant in these situations and you can often keep your car.
- Personal property: Up to $20,000 in electronics, jewelry, furniture, and other household goods are exempt under Massachusetts law. This figure refers to the items' as-is cash value. This is important, as you might have paid $1,500 for a laptop, but its garage sale value might only be about $150.
- Current wages: State law protects 85% of your current wages. This exemption helps debtors continue to pay bills after they file bankruptcy. Without this protection, filing bankruptcy would force many debtors further into the hole. Massachusetts debtors may also exempt up to $2,500 a month in some kinds of rental income.
- Retirement accounts: Unless there is a child support or other Family Support Obligation (FSO) lien, most retirement accounts are 100 percent exempt. So are most 529 college savings plans. Social Security benefits and other government benefits are exempt as well.
- Wildcard exemption: These property exemptions cover most assets. If you have luxury items, like a boat or cabin you want to keep, Massachusetts' wildcard exemption, which is as much as $6,000, may protect it.
The federal exemptions have basically the same categories, but the amounts are often slightly different, as follows:
- Home equity ($25,150)
- Motor vehicle ($4,000)
- Personal property ($15,000)
- Life insurance dividends or equity ($13,400)
- Retirement accounts ($1.3 million)
- FSOs (100 percent exempt)
- Wildcard (up to $13,900).
A bankruptcy lawyer can evaluate your case and recommend an appropriate slate of exemptions.
A tenancy of the entirety protects all the equity in your home, regardless of its value. This is best explained through an example:
Assume Cherry and Bob jointly own their home. If Cherry files bankruptcy, creditors cannot seize the house, even if it is above the equity limit. It's illegal to seize one person's property to pay another person's debts.
The best interests of creditors rule also protects your assets:
Assume Johnny owns a fifth-wheel camper. The formal exemptions do not shield it. According to the trustee's calculations, the camper is worth about $1,000, it needs about $500 in repairs, and sales expenses, mostly storage costs, would be another $500.
A seizure and sale under these facts would net little or nothing for creditors. As a result, such actions would not be in their best interests.
How do I start bankruptcy in Massachusetts?
If you are filing a no-asset Chapter 7, a DIY bankruptcy might be a good idea. These filers cannot usually pay professional fees. They only pay filing fees and other court costs. Most bankruptcy forms are available here.
If you have assets and want to keep them in a Chapter 7, however, you probably need a bankruptcy lawyer. An attorney quickly and accurately completes all the complex forms. Furthermore, only a lawyer can give you legal advice and represent you at the confirmation hearing and other court hearings. The additional investment can pay off.
Where do I file bankruptcy in Massachusetts?
There are three federal bankruptcy courts in the Bay State: Boston, Worcester, and Springfield. DIY filers must conduct most or all bankruptcy-related business at one of these three physical locations. A lawyer has access to the ECF (Electronic Case Filing) system. So, for most purposes, the bankruptcy court is on your attorney's laptop.
How much does bankruptcy cost in Massachusetts?
Bankruptcy's filing fees vary, mostly according to the type of case. The fees are usually about $350. Payment plans and fee waivers are sometimes available. The professional fees vary as well, again mostly depending on the type of case. Payment plans, including post-petition payment plans, and sliding scales are almost always available.
What do you lose if you declare bankruptcy?
It is possible to not lose any property in a Massachusetts bankruptcy. State law offers broad protection to filers. Your bankruptcy lawyer can navigate complex bankruptcy exemption laws to protect as much of your property as possible.
How much debt do you have to have to declare bankruptcy?
There is no set amount. However, as a rule of thumb, if you are more than one house payment or other secured debt payment behind, you should consider Chapter 13. Banks can legally foreclose after one missed payment. Also as a rule of thumb, if you spend more than 10 percent of your income on credit cards and other unsecured debts, you should consider Chapter 7. More than 10 percent is more debt than you can realistically pay off.
What debt is not covered by bankruptcy?
Bankruptcy does not cover fraudulent debts. It also does not discharge child support, criminal fines, or spousal support. Some obligations, like back taxes and student loans, are only dischargeable in certain narrow situations.
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.
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