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Rhode Island Bankruptcy Exemptions and Law
Living hand to mouth is a fact of life for most Rhode Island families. Roughly two-thirds of households in Little Rhody do not have the cash to pay a $400 emergency expense. So, they do not have the resources to deal with the financial storms life sends their way. These events include serious illness, divorce, and job loss.
Surviving a Financial Crisis Through Bankruptcy
No family is immune to these issues. They affect everyone at one time or another. In fact, these storms usually come in bunches at one time or another. These events are very diverse, but they have at least one thing in common. For the most part, the events leading to a financial crisis were completely beyond your control.
A Rhode Island bankruptcy lawyer helps you take control over what was an out-of-control situation. If you are trying to weather a storm, you do not have to wait and hope that the situation improves. Keep reading to see how bankruptcy can give you the fresh start you deserve.
The law in the United States is a delicate balancing act. At the federal level, there are three branches of government. This government shares power with Rhode Island and the other state governments. Bankruptcy is a prime example of the way this system is supposed to work. Bankruptcy is a combination of federal and state laws.
Most of the basic principles of bankruptcy law are found in the Bankruptcy Code and the various federal court cases which interpret it.
Student loans are a good illustration. These obligations are unsecured debts, which are normally dischargeable in Chapter 7 or Chapter 13. However, when Congress amended the Bankruptcy Code in 1978, lawmakers added an “undue hardship" provision to the student loan discharge section.
Initially, courts harshly defined an “undue hardship" in a way that made it difficult to discharge these obligations. But as the student loan crisis has escalated (former students owe almost $1.7 trillion in educational debt), courts have relaxed this requirement somewhat.
Most other bankruptcy principles have remained essentially unchanged for over a hundred years. A good example is the automatic stay, which immediately halts most forms of adverse creditor actions such as:
- Wage garnishment
- Lien placement
- Creditor lawsuits
In Chapter 13, the automatic stay typically lasts up to five years. The automatic stay expires faster in most Chapter 7s. Judges discharge most unsecured debts almost immediately in these cases.
Discharge means the judge eliminates your legal obligation to repay a debt. Most unsecured debts are dischargeable. These obligations include:
- Medical bills
- Signature loans
- Payday loans
- Better Business Bureau loans
- Credit cards
There are a few exceptions. Some unsecured debts, mostly criminal fines, alimony, and child support, are not dischargeable. However, the automatic stay still applies. Priority unsecured debts, like student loans, are only dischargeable in certain situations. Past-due income taxes are also priority unsecured debts.
If there is a dispute about discharge, and there usually is regarding priority unsecured claims, most judges refer the matter to mediation. During mediation, both sides have a duty to negotiate in good faith. So, a lawyer is often able to at least obtain a partial discharge.
Types of Consumer Bankruptcy
As mentioned, everyone must endure the financial storms of life at one time or another. These storms affect different families in different ways.
In a desperate attempt to weather a storm, many people over-rely on credit cards. Families often use cards to pay monthly bills when money is tight. Credit card interest is so high that this strategy is not sustainable for more than a few weeks or months. Chapter 7 is designed for families in this unfortunate situation. Most people with significant credit card debt spend hundreds of dollars a month just to make minimum payments. Imagine what you could do with that money after the judge eliminates credit card debt.
Other times, financial storms cause families to fall behind on secured debt, such as mortgage payments. When money is tight, other obligations often come before mortgage payments. Chapter 13 gives families up to five years to gradually erase mortgage delinquency and other past-due secured obligations. Since the automatic stay remains in effect, even the most aggressive creditor must generally accept this income-based repayment plan. So, you are in control.
An informal “Chapter 20" bankruptcy is usually available as well. Here's an example:
Assume Jimmy falls behind on student loan payments. He files Chapter 7, hoping the judge will discharge the debt. However, the judge does not grant any relief. Jimmy could probably file a Chapter 13 immediately after the judge closes the Chapter 7. At this point, he could not receive another discharge. But he does not need or want a discharge. He only wants to prevent the bank from garnishing his wages while he makes catch-up payments. Chapter 13 meets those requirements nicely.
The answer is almost always “yes." Just like there are formal and informal types of bankruptcy, there are official and unofficial eligibility requirements. Most people meet both of them.
Chapter 7 Qualifications
If they have not already done so, Chapter 7 filers must take a debt counseling course before they file. They must also take a debt management course after they file.
Another formal requirement is the means test. You may file Chapter 7 if your annual household income is below $108,105. This figure varies based on family size. Furthermore, the number changes every few months.
Chapter 7's informal requirement usually involves the debtor's monthly income and expense figures in Schedule I and Schedule J. Frequently, if your income is substantially higher than your expenses, the trustee may argue that a Chapter 7 is unnecessary and you should try to repay your debts.
Chapter 13 Qualifications
The course requirements are the same for Chapter 7 and Chapter 13. But Chapter 13 has the opposite informal qualification as Chapter 7. As mentioned, Chapter 13 debtors gradually pay delinquent secured debts over time. So, their disposable incomes must be high enough to fund a monthly debt consolidation payment.
Additionally, debt ceilings apply to Chapter 13. As of January 1, 2021, these debtors cannot have more than $1.4 million in secured debt and $400,000 of unsecured debt. So, if you recently bought a very large house, you might be ineligible for Chapter 13. Nevertheless, you still have options if you work with a bankruptcy lawyer.
Unless bankruptcy protects your property, you cannot get a fresh start. Continuing a familiar theme, there are both formal and informal property exemptions in Rhode Island.
Rhode Island debtors may choose between state and federal bankruptcy exemptions. Some highlights of the state bankruptcy exemptions include:
- Home equity ($500,000)
- Vehicle equity ($12,000)
- Personal property ($12,000)
- Insurance payments (100% exempt)
- Tools of the trade ($2,000)
- Current wages ($50)
- Retirement accounts (100 percent exempt)
- Government benefits (100 percent exempt)
- Wildcard ($6,000)
Most people have very little equity in their homes or motor vehicles unless they have paid off at least half the loan. Tools of the trade and personal property exemptions are subject to the as-is cash value rule. Most home furnishings and other personal property items have almost no “garage sale" value. You can apply the wildcard exemption to cash in a checking account and other property that would otherwise be unprotected.
Debtors who have lived in Rhode Island for at least two years may claim state exemptions. Otherwise, you must file in your former state of residence or use federal exemptions. The federal bankruptcy exemptions include:
- Home equity ($25,150)
- Vehicle equity ($4,000)
- Household goods ($13,400)
- Tools of the trade ($2,525)
- Insurance dividends or equity ($13,400)
- Retirement account ($1.3 million)
- Personal injury awards ($25,150)
- Government benefits (100 percent exempt)
- Wildcard (up to $13,900)
All Rhode Island filers, even if they qualify for state exemptions, may choose the federal exemptions instead.
The best interests of creditors rule often protects property that would be nonexempt under state or federal law. For example:
Assume June has a fifth-wheel camper. She cannot protect it under the formal exemptions. So, the trustee considers seizing it and selling it. Similar campers in the area are selling for about $1,000 each. The trustee budgets $500 for repairs and $500 for storage and other sales costs.
Given these facts, even though her fifth wheel is technically nonexempt, the trustee cannot touch it. Liquidating this property would generate little or nothing for creditors. So, a seizure and sale would not be in their best interests.
Unlike the official exemptions, unofficial exemptions like this one are not automatic. You must exercise it.
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.