First, I explain that although a creditor could sue them and get a court judgment, the creditor wouldn't be able to collect anything from them on that judgment. Which means that the usual reason for filing bankruptcy, to prevent creditors from taking their money and other assets, doesn't exist. They are what is often called "judgment proof" but is more accurately "collection proof". Is that the end of the conversation? Not really. There may be other considerations regarding their situation that aren't obvious at first glance. Here are some examples:

• Estate planning – A man (or woman, of course) has $150,000 equity in a home, his only income is Social Security benefits, and he has not many other assets. That home equity is fully protected from creditors by California's homestead exemption ($175,000 if you're 65 or older). He also owes $140,000 in credit card debt. A Chapter 7 bankruptcy would discharge (get rid of) all those debts, but why bother since those creditors couldn't collect anything from him? Consider this … If he has someone he wants to leave that house to when he dies, without a prior bankruptcy the house would be sold from his probate estate after he dies and his creditors would be paid from that money, leaving next to nothing to pass on. If he did a Chapter 7 bankruptcy before his death, there would be no debts at the time he died so the house would pass on to whomever he specified in his will.

• Late-life planning – Same situation as above but not necessarily with the wish to leave the home to someone. What if this person later needed to reach that equity in the house to pay for his living expenses, either by selling the house or by taking out a reverse mortgage? That $140,000 of debt might be a serious obstacle to doing that. With that debt eliminated by bankruptcy, those options would be available.

• The dangers of being collection-proof – Yes, creditors may not be able to collect anything from you, but there can be complications. When a creditor gets a court judgment and the Sheriff’s department is directed to levy on a bank account, they won’t know whether or not the account has exempt Social Security benefits and the bank might not know that either. The money could be tied up for a long time if the person doesn't know what action to take to get the levy released. You still have to figure out how to get that money back (and probably pay an attorney to do it).

• Stopping the aggravation – Aggressive debt collectors can seriously bother someone for a long time. Bankruptcy stops that and provides peace of mind.

Only the particular person knows if it's worth the effort and expense of a bankruptcy in his or her situation, but the possible consequences of both ways, filing bankruptcy or not, should be fully considered.

Several companies are offering credit cards with all-but-hidden provisions that require you to pay all or part of an old debt, old enough that you're protected by the statute of limitations from being sued for it. These debt accounts are so old that the collection agencies involved probably bought them for pennies on the dollar and have now teamed up with a credit card issuer to get you to pay them, giving them a large profit. What's true about this?

• By agreeing to pay even a part of that old debt, you cause the period for the statute of limitations to start all over again. In California, the statute of limitations for credit card debt is four years (four years from the last action on the debt). If you sign that credit card application agreement, that period will start to run all over again, meaning that you can be sued for that debt just because you agreed to pay part of it.

• Paying an old debt, in part or in full, does not remove it from your credit report.

• Many of these cards also come with very high fees that are all but hidden.

So, as always, the rule is not to sign any credit agreement before reading it thoroughly and understanding the provisions.

This holiday time is significant in multiple spiritual practices and not in others. But for many, regardless of religious or spiritual persuasion, it is also a time of coming together for family and friends. That makes it a time for remembering what is really important, and also for remembering that the situations we consider to be problems are transient and are able to be handled in one way or another. In some spiritual practices, this season is a time of hope, of celebrating a new beginning. I don't think it's a stretch to say that, often, situations we face as problems turn out later to be the platforms for new beginnings in our lives.

Here's to new beginnings in 2012!

In General

A Chapter 7 bankruptcy will eliminate ("discharge") your unsecured debts, meaning those debts (like credit card debts) that are not secured by your property (like your car loan or home mortgage). It will do that quickly, normally in 3-4 months after filing. It's the one most people want.

What would you have to give up in a Chapter 7 bankruptcy?

Often, nothing or not much. You get to keep all of your assets (money and other things you own) that are "exempt" under the exemption laws of your state. In California, if you don't have equity in your home (the amount it's worth less the amount you owe), you get to exempt from creditors $23,250 worth of anything you own, including cash and bank accounts. In addition there are specific exemptions such as $3,525 of the equity in your car and all of your household goods as long as none of them are worth more than $550 each (at a garage sale, on craigslist, ebay, etc). There are other specific exemptions.

Do you qualify for a Chapter 7 bankruptcy?

If you don't make much money, you probably qualify. See the links at the end for more information.

What is the process?

• You give your bankruptcy attorney the information he or she requests. You do the required credit counseling (easy and low cost). Your attorney prepares your filing papers and you review and sign them. Your attorney files your Chapter 7 case with the court. You do the required financial management course (easy and low cost).

• Approximately one month after filing, you and your attorney attend a "Creditors Meeting" with the bankruptcy trustee assigned to your case. It's usually a short meeting with no creditors showing up.

• You wait another 2-3 months and you get your discharge of debts. You now have your Fresh Start!

That sounds simple. Is there more to it than that?

Of course. There's a lot of work involved for both you and your attorney, but the outline above is the usual course of a Chapter 7 bankruptcy case.

Additional information

More detailed information about bankruptcy and the different chapters under which you can file. http://ca-bankruptcylaw.com/bankruptcy-info

How do I work? http://ca-bankruptcylaw.com/how-do-i-work

Reverse mortgages can be valuable to many people, in particular to people on a fixed income who have significant equity in their home and who need additional monthly income Typically, a reverse mortgage provides a line of credit that either allows loans to be taken periodically or pays a set amount per month (from loans taken) for a period of time which may be the remainder of the person's life. As the person receives money from the lender, the person's equity in the home is reduced by the increased amount borrowed.

If a person with a reverse mortgage files Chapter 7 bankruptcy, several issues pop up.

• What is the remaining equity in the home? Whatever it is, it's treated as any other home equity and must be protected by available exemptions (a very important subject in bankruptcy) or the home may be lost to creditors. You must get an accurate current valuation of your home and then obtain from the reverse-mortgage lender the current mortgage balance on the property.

• The unused line of credit is not an asset in the bankruptcy, to be taken by the trustee for credotors, in spite of information to the contrary that seems to get published on the internet.

• The reverse mortgage agreement may contain provisions that the amount owed becomes due and payable when filing bankruptcy, which would mean that the lender could foreclose and take the house. If the agreement doesn't contain such a clause, it nevertheless may provide that the remaining credit line (if any) will be closed upon filing bankruptcy.

• If the payments for the lender continue after filing bankruptcy, the Chapter 7 trustee might tell the lender to stop disbursing money to the debtor because those payments reduce the equity in the property which is property of the bankruptcy estate.

So the answer to the original question is a strong "maybe" and an even stronger "be very careful". Filing a Chapter 7 bankruptcy when you have a reverse mortgage requires very careful examination and evaluation.

In general, you can sell anything you want before filing bankruptcy as long as you receive a fair market price for the items. However, if you sell a car to your brother for $100, you didn't receive fair market value for it and it could very well be considered bankruptcy fraud. If you do sell things before filing bankruptcy, be sure to keep good records of the transactions and also of where the money went. The trustee assigned to your case may very well want to know those things.

Now, how can or should you use the money you receive from selling assets before filing bankruptcy? Using it to pay your attorney for your bankruptcy is fine. Using it for household or automobile expenses, including needed maintenance, is fine. Paying off debts that you want to pay despite your bankruptcy (like debts to family members) wouldn't be wise because the trustee could sue the recipient of your payments to recover the money to give to your creditors because you preferred some creditors over others.

That's an overview of an answer. You definitely should consult with a qualified bankruptcy attorney in your area to discuss the specifics of your situation so you don't make mistakes that could cost you serious money during your bankruptcy.

1. If you can exempt (protect from creditors) the rest of the value of your car, you can keep it. California has a "wildcard" exemption of approximately $23,000 if you don't need to exempt equity in your home (because you either don't own a home or don't have any equity in it). You can use that $23,000 to exempt anything you own that isn't exempted some other way, like the additional exemption amount you need for your car.

For more details about California exemptions available to keep you car, see this prior article.

2. However, if you've used all of your available exemptions to protect other things you own, or you don't get the California wildcard exemption because you need a large exemption for the equity in your home, then you need to do some pre-bankruptcy planning.

If you have a legitimate need to get a new car, for example because yours has high mileage, no remaining warranty, and you won't be able to get a loan to replace it after you file bankruptcy, then you could trade in your car for a new one for which you would owe more than the new car is worth on the resale market. You would then have no equity in your car and therefore there would be nothing available for your creditors from selling your car. Therefore you could keep that new car in a Chapter 7 bankruptcy.

I'm reminded of the adage "Don't try this at home" about pre-bankruptcy planning such as described above. Please consult with a qualified bankruptcy attorney in your area before you do something like this.