Bankruptcy provides a mechanism for people to deal with their unmanageable debts through liquidation, restructuring, and financial planning, the laws are in place to help someone who is buried in debt to get a new start. While US Bankruptcy laws are extremely inclusive in the way in which they cover everything from the bankruptcy of municipalities, to that of family-farmers, this resource is going to specifically focus on describing bankruptcy as it involves the individual.
By the end of this series, you’ll know about the specifics of how Chapters 7 and 13 of the bankruptcy code could have an impact on you in the event of a hypothetical bankruptcy, and how you can discuss its impacts on an individual’s life with a lawyer. Avoiding bankruptcy will allow you to avoid payday lenders and stay in control of your finances.
– The General Filing Process
– Chapter 7 Bankruptcy: Liquidation Under the Bankruptcy Code
– Chapter 13 Bankruptcy: Negotiated Adjustment
– The Difference Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy
American Bankruptcy is such a complex area of law that it has become an industry in itself. By providing a mechanism for people to deal with their unmanageable debts through liquidation, restructuring, and financial planning, the laws are in place to help someone who is buried in debt to get a new start. While US Bankruptcy laws are extremely inclusive in the way in which they cover everything from the bankruptcy of municipalities, to that of family-farmers, this resource is going to specifically focus on describing Bankruptcy as it involves the individual.
By the end of this series, you’ll know about the specifics of how Chapters 7 and 13 of the Bankruptcy code could have an impact on you in the event of a hypothetical bankruptcy, and how you can discuss its impacts on an individual’s life with a lawyer.
While enjoying this resource as a summary of the bankruptcy basics presented on uscourts.gov, please remember that the information presented within this article should not be relied upon as a legal resource. Always consult a legal professional when dealing with issues such as bankruptcy.
The General Filing Process
A debtor files a petition with the Bankruptcy Court, as well as:
- A list of assets and liabilities.
- A list of incomes and expenditures, including their frequencies.
- A statement of general financial affairs.
- A list of all unexpired contracts and leases currently owned by the debtor, including all creditors holding claims to these contracts.
- Tax filing information, which must be presented continuously throughout the proceedings.
- If the debtor is bankrupt mainly due to consumer debts, a certificate proving that credit counseling has been obtained must be presented in conjunction with a the plan that was at that point created to repay the debts in question.
- If filing jointly, a husband and wife must both individually fulfill all document requirements listed above, in conjunction with the appropriate forms to be submitted. Ironically, these forms must be purchased from the government.
- Administrative fees for filing a case are $245 in flat fees, $46 in miscellaneous fees, and a $15 surcharge (totaling $306). All of these fees are payable upon filing, unless the income of the debtor is less than 150% of the state poverty line, in which case they are waived.
Chapter 7 Bankruptcy: Liquidation Under the Bankruptcy Code (the law)
Chapter 7 of the Bankruptcy Code is the most commonly filed resolution to insolvency. It is applicable to anyone from companies, to individuals, and married couples. However, it is important to realize that there remain several alternatives to Bankruptcy. For example, Chapter 13 of the Code provides an outline of how to handle a negotiated adjustment of an income-generating individual’s debt. By engaging chapter 13 instead of 7, one is presented with the opportunity to catch up with their past due payments through a structured plan, and therefore an opportunity retain their good standing.
To qualify for Chapter 7 Bankruptcy, an individual must be making a claim that has not previously been dismissed, or for which liens (described further on) have been assigned. In addition, the debtor must have received credit counseling from a qualified firm within six months of the filing. Lastly, the debtor must not make concerted attempts to avoid court-dates, or to misrepresent their situation in courts. Essentially, the purpose of the process is to provide a fresh start for honest individuals that wish to re-establish a contributing position in society. Those individuals that are deemed by the courts as being out to take advantage of the provisions will not be heard.
Remember, renegotiating with a creditor is always an option to avoid bankruptcy. In the event of renegotiating, everyone wins. This is because of the way in which Chapter 7 Bankruptcy results in the sale of all of a debtor’s assets in order to pay off as much of the remaining debt as possible. In this case, a Bankruptcy Trustee is appointed by the courts to act as an independent third party that will repossess assets, and place ‘liens’ on properties that prevent them for being sold. This trustee acts on the behalf of an ‘estate’ that is created at the time of filing. The Estate’s role is to act as the temporary legal owner of all of the debtor’s properties, with the goal of liquidating all non-exempt properties to pay off the remaining debt.
Exempt assets are considered by the courts to be necessary for the debtor to retain control of after the course of a bankruptcy. This can include assets such as a car, a home, or certain essential items. However, a creditor will generally retain a percentage of ownership over these items, and legally not require that they be sold (ie. They become the property of the bank). In the event that all assets of the debtor are considered to be exempt, a special ‘no asset’ report is filed to the court.
In addition, the trustee has a special set of ‘avoiding powers’ that allow them to undo any transactions from within the last 90 days before the filing that could have been pursued to circumvent repayment (ie. Transferring money to friends and family before the filing). In the event that a debtor runs a personal business, the trustee may also choose to continue running the business on the debtor’s behalf in order to generate more funds for repayment.
Assets that are under the control of the Estate are organized into six main hierarchical classes. All asset classes within a lower-ranking category must be entirely liquidated before moving onto selling the assets of the next level.
Once the claim for Chapter 7 is filed, the majority of collection actions against the debtor must be temporarily stopped. This includes collections, repossessions, and calls demanding payment. All creditors that are mentioned in the submitted petition are contacted by the bankruptcy court, and informed that all short-term collection actions must be halted, on the behalf of the debtor. Once this halt-order is submitted, the trustee places the debtor under oath, and interviews the debtor with the creditor. During this meeting, the debtor is required to truthfully collaborate with both the trustee and the creditor. This interview is mainly staged to help all parties involved to assess whether there is an equitable solution to be reached with the debts, or to convert the filing to a different class of bankruptcy.
Upon initiating the claim, the main objective of the debtor is to obtain a discharge ruling from the courts, which releases them from (usually 99% of) the relevant personal debts in question, and from any collection charges being pressed by current creditors. However, a Chapter 7 discharge is subject to a series of exemptions, and should therefore be planned for in conjunction with a legal professional before filing. These exemptions include any secured claims that creditors may have, as well as concealed property, and debts from alimony, child support, minor taxation, and money owed for willful injury or injury caused by intoxication.
In addition, a creditor and debtor may agree to ‘reaffirm’ a debt, which represents an agreement between the creditor and debtor to continue a specific asset-secured debt. This is usually done to either maintain a relationship, or to prevent the repossession of an asset that may maintain a secured lien against it. This sort of agreement must be made before the debtor achieves discharge.
Chapter 13 Bankruptcy: Negotiated Adjustment
Chapter 13 Bankruptcy is meant to act as a stage for adjusting debt payments for individuals with regular income. It allows the debtor the opportunity to propose a 3-5 year plan to repay their debts, in accordance to their ability to earn. By renegotiating, individuals are offered the opportunity to maintain control of their assets by preventing foreclosure, and maintain a contributing role in society. However, it will also generally extend the term of the debts in question, and therefore keeps the debtor in a position where they must continually strive to make regular repayments.
In order to qualify for filing for Chapter 13, an individual (not a corporation) must be earning a form of income, must have unsecured debts of below $360,000, and secured debts below $1million. Additionally, no additional dismissed claims may have been filed within the last 6 months. Lastly, as with filing for Chapter 7, an individual must be able to prove that they have attended a credit-counseling session with a certified planner. The application itself is similar to the requirements of filing a claim for Chapter 7, as described in the above section. However, the debtor must also file a repayment plan within 15 days of the application.
Once the process has begun, a trustee is appointed to evaluate the case, and to act as an agent for collecting and distributing payments between creditors. Essentially, this means that the government has appointed an intermediary that will consolidate all of a debtor’s credits into a single account, and will distribute the payments on the debtor’s behalf. This helps the debtor to better plan out their payments to a single entity, while providing them with the ‘breathing room’ to work out the loans. As with Chapter 7, a filing under Chapter 13 halts a creditor’s ability to foreclose, collect, or solicit a debtor for non-exempt funds or assets.
When distributing funds, a trustee assigns funds in accordance to three classes of claims:
- Priority Claims: may be secured or unsecured, and will generally be repaid near in full. These claims are considered to be of a high priority because they generally consist of the fees associated with taxes, and the funding of the bankruptcy itself.
- Secured Claims: give the creditor the right to claim property in place of the debt, unless the debtor contributes “all disposable income” towards its repayment, or fulfill the full value of the collateral over the repayment plan.
- Unsecured Debt: need not be repaid in full, but should be redressed with all projected disposable income. This generally means that a creditor should be repaid as much as they would have received had the debtors assets simply been liquidated at once.
Once the repayment plan is established, it is the responsibility of the debtor to repay the new consolidated debt. Upon repaying the certified requirements, and completing a certified financial management course, the debtor is ruled to be legally discharged of the debts involved. Upon being discharged, the debtor may no longer be pursued by previous creditors, excluding for the exempt credits listed in the above section, but including debts arising from willful or intoxicated injury to property, debts incurred to pay tax obligations, and debts arising from property settlements in divorce.
The Difference Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy
The main differences between Chapters 7 and 13 of the Bankruptcy code are their breadth and timeline. A Chapter 7 discharge occurs immediately, but places greater constraints on the debtor right away. Additionally, the debtor immediately loses control of their assets. This is as opposed to Chapter 13’s 3-5 year repayment process, which generally allows the debtor to maintain reasonable control over their assets (even if they are still acting as collateral for a secured loan). Most importantly, Chapter 13 provides the debtor with a greater flexibility to renegotiate their repayments, while maintaining control of their assets.
By structuring a repayment plan around the debtor’s ‘disposable income’, the debtor is provided with greater flexibility to continue with expenses associated with raising a family, maintaining a contributing lifestyle, and to actively pursue the repayment of their loans. Essentially, Chapter 13 allows the debtor a greater amount of control over their Bankruptcy proceedings through consolidation and counseling. Should the debt proceed to go delinquent again after the required 180 day period, it may then be possible for the debtor to convert the claim to a full Chapter 7 liquidation.
This resource as a summary of the bankruptcy basics presented on uscourts.gov, please remember that the information presented within this article should not be relied upon as a legal resource. Always consult a legal professional when dealing with issues such as bankruptcy.