Bankruptcy

Opening Words On Bankruptcy From Greg Gonzales, Esq.

Petitioning for bankruptcy is never an easy decision. The ramifications may be substantial and the effects may last for years. For many people, however, it is the prudent choice, especially when unforeseen and involuntary expenses, or lowered income, limit one’s ability to pay off other debt. I can explain all of your options and help you file the bankruptcy petition and all associated documents. I can also help you determine whether you should request a "“Chapter 7"” (a complete fresh start) or a "“Chapter 13" (a payment plan which allows you to retain many more assets).

This information should prove helpful to Individuals who may be considering bankruptcy. It provides a basic explanation of bankruptcy, Chapter 7, Chapter 13, and answers some of the most commonly asked questions about the bankruptcy process.

The initial half hour office consultations with me on any matter within my area of practice is always free of charge. When you are ready give me a call, my compassionate staff and I hold all client and prospective client communications in strict confidence. I strive to ensure each client receives personal attention and professional  service. You can reach my office at, 720-374-9150.

What is a Bankruptcy?

Bankruptcy is a legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of  the U.S. Bankruptcy Code. As stated by the Supreme Court (see above) A fundamental goal of the federal bankruptcy law enacted by Congress is to give debtors a financial "fresh start" from burdensome debts. BACK

What is a Bankruptcy Discharge?

A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts. BACK

 

Chapter 7 and Chapter 13

Bankruptcy law provides two basic forms of relief: (1) liquidation and (2) rehabilitation. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. A rehabilitation bankruptcy under Chapter 13 of the Bankruptcy Code is, however, the option often preferred by the courts. Under Chapter and 13, creditors may be provided with a better opportunity to recoup what they are owed. BACK

Chapter 7 Bankruptcy

Chapter 7 bankruptcies, also called "straight bankruptcies," are the most common form chosen by individual consumers. In a Chapter 7 consumer bankruptcy, the individual debtor's estate is liquidated and the assets are distributed to creditors. Partnerships, sole proprietorships and corporations are also eligible to file under Chapter 7. However, unlike individuals, these business entities are not eligible to receive a discharge. Chapter 7 business liquidations are conducted in significantly the same manner as Chapter 7 consumer bankruptcies — many of the business's assets are sold and the proceeds are divided among the company's creditors. Partnerships or corporations that wish to keep doing business may decide that Chapter 7 is not the best option because after liquidation and distribution, the business ceases to exist. BACK

 

Chapter 7 Bankruptcy Proceedings

A Chapter 7 case begins with the debtor's filing of the petition with the bankruptcy court, which triggers the automatic stay— bankruptcy terminology for the termination of all debt-collection activity. Filing a petition does not stay certain types of actions, and the stay may only be in place for a limited period of time. As long as the automatic stay is in place, creditors may not initiate or continue lawsuits against the debtor, garnish wages or call the debtor demanding payments. BACK

 

The debtor must also file a schedule of assets and liabilities; a schedule of current income and expenditures; a statement of financial affairs; and a schedule of executory contracts and unexpired leases. There are additional filing requirements for individual debtors with primarily consumer debts. These debtors must file a certificate of credit counseling and a copy of any debt repayment plan; evidence of any payments from employers made 60 days before filing; a statement of monthly net income and any anticipated increases in income or expenses after filing; and a record of any interest the debtor has in state or federal qualified education or tuition accounts. BACK

 

The court appoints a trustee who oversees the Chapter 7 case and liquidates the debtor's assets in order to pay off the debts. In many cases, however, the debtor's assets are exempt or already subject to valid liens, so there will be no assets to liquidate. Most consumer bankruptcies are "no asset" cases in which there is nothing available for the creditors. The trustee can also try to recover money for the estate under the trustee's "avoiding powers." These powers include the power to set aside preferential transfers to creditors within 90 days of filing; undo security interests and pre-petition transfers that were not properly perfected; and pursue fraudulent conveyance and bulk transfer claims under state law. If there are assets, the trustee collects the sale proceeds in a fund from which the debts are paid to the extent possible. Under §726 of the Bankruptcy Code, property is distributed according to six classes of claims; each class must be paid in full before creditors in the next lower class are paid anything. BACK

 

The trustee holds a meeting of creditors between 20 and 40 days after the debtor files the petition. During this meeting, the trustee and creditors may ask the debtor, who is under oath, questions. The debtor must attend the meeting of creditors and answer questions about his or her property and financial matters. BACK

 

When a debtor wants to keep certain secured property (such as a car) after bankruptcy, he or she may choose to reaffirm the debt. In a reaffirmation agreement, the debtor and creditor agree that the debtor will pay all or part of an otherwise dischargeable debt after bankruptcy. The creditor promises that it will not repossess the property as long as the debtor continues to pay the debt. Reaffirmation agreements must be entered into before discharge is entered and they must be signed by the debtor and filed with the court. BACK

 

When all of the proceeds are distributed, most remaining unpaid debts are discharged, meaning that they no longer exist and the debtor has no further obligation to pay them. Some debts, such as student loans, damages resulting from the debtor's willful or malicious acts, debts incurred by giving false financial information, domestic support obligations and some debts incurred just prior to filing for bankruptcy, are non-dischargeable. A court may deny a discharge if the debtor failed to keep or produce financial records; failed to satisfactorily explain any loss of assets; committed perjury; failed to follow an order of the court; fraudulently transferred or hid property; or failed to complete the required financial management course. BACK

 

Discharge Under Chapter 7

There are a number of prerequisites for obtaining a discharge. In a Chapter 7 liquidation case, if the debtor was in some way dishonest or uncooperative, such as by making fraudulent transfers or failing to keep adequate records prior to filing or by ignoring lawful court orders after filing, the court may deny discharge. In addition, a Chapter 7 debtor cannot have his or her debts discharged more than once every eight years. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides that in order to receive a discharge, an individual debtor must complete a personal financial management class. BACK

 

When a discharge is granted, it protects the debtor from any further liability on the discharged debts. No legal action may be taken against the debtor to collect on discharged debts, and no collection calls or letters may be sent with regard to such debts. A discharge does not actually cancel or extinguish the debt, however; it merely extinguishes the debtor's personal liability. Also, a discharge does not automatically discharge a co-debtor's or guarantor's liability. BACK

 

A bankruptcy discharge also has no effect on liens. Take, for example, the situation in which the debtor owes the creditor $5,000 and the debt is secured by the debtor's car, which is worth $3,000. If the debtor files for Chapter 7 relief and receives a discharge, the discharge does not extinguish the creditor's security interest. In other words, the creditor can still repossess the car. However, it cannot go after the debtor for the $2,000 difference between the debt and the value of the security. That is the personal protection afforded to the debtor by the bankruptcy discharge. BACK

 

A court may revoke a Chapter 7 discharge if the trustee or a creditor requests it, and if the debtor obtained the discharge through fraudulent means; acquired property that is property of the estate and knowingly failed to report the property or give it to the trustee; or made a material misstatement or failed to provide information in connection with an audit of his or her case.

 

Debts that Remain After a Chapter 7 Discharge

Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged:

• Debts or creditors not listed on the schedules filed at the outset of the case
• Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
• Recent federal, state and local taxes
• Child support and spousal maintenance (alimony)
• Government-imposed restitution, fines and penalties
• Court fees
• Debts resulting from driving while intoxicated
• Debts not dischargeable in a previous bankruptcy because of the debtor's fraud BACK

Chapter 13 Bankruptcy

Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. The biggest advantage for many people is that Chapter 13 allows individuals an opportunity to keep their homes and avoid foreclosure. Chapter 13 also permits individuals to reschedule secured debts and extend them over the life of the plan. In addition, Chapter 13 allows the debtor to discharge more types of debts than Chapter 7 does. Further, under Chapter 7, the court may order that all of the consumer’s assets be sold, whereas under Chapter 13 the debtor may be able to retain more of his or her assets. A consumer’s choice between Chapter 7 and Chapter 13 is not necessarily the last word; once bankruptcy proceedings have begun, a case may be converted to a different chapter. Once converted, however, the case may not be converted back again. BACK

 

Chapter 13 Eligibility

A consumer may choose bankruptcy under Chapter 13 if he or she has a stable income, believes the financial crisis is temporary and wants to repay at least some debt. The debtor must have less than $307,675 in unsecured debt and $922,975 in secured debt, however, in order to be eligible for Chapter 13. 11 U.S.C. §109(e). These amounts are adjusted periodically. BACK

 

Chapter 13 generally applies to individual consumers with smaller debts. Corporations and partnerships cannot file under Chapter 13, but self-employed individuals and those who own unincorporated businesses are eligible for Chapter 13. If the debtor is an individual with extremely large or complex debts or is a corporation, Chapter 11, which also allows for rehabilitation or reorganization, will generally apply. Farmers can file under Chapter 12, which provides for reorganization and municipalities may file for Chapter 9 reorganization. BACK

 

How does Chapter 13 Work?

A Chapter 13 proceeding, often called a wage-earner plan, is initiated by filing a petition. As in Chapter 7 cases, the filing of the petition automatically stays (stops) creditors from trying to collect on most of their debts. There is also a special automatic stay provision in Chapter 13 that protects co-debtors. A creditor generally may not seek to collect "consumer debts" from any individual who is liable along with the debtor. BACK

 

Along with the petition, the debtor must also file a schedule of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases and a statement of financial affairs. The debtor must also file a certificate of credit counseling; evidence of any payments made by an employer received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest in federal or state qualified education or tuition accounts. BACK

 

After filing the petition, a trustee is appointed to manage the case. Within 20 to 50 days after the debtor files the petition, the trustee holds a meeting of creditors. The debtor must attend this meeting and answer questions regarding financial issues and the proposed plan terms. The judge must hold a confirmation hearing within 45 days of the meeting of creditors, at which time he or she will decide whether the plan is feasible and meets the Bankruptcy Code' s standards for confirmation. Creditors may ask questions about and object to the plan. If the court approves the plan, however, the creditors can take no action outside the plan’s scope to collect their debts. BACK

 

Within fifteen days after the debtor' s filing of the petition, the debtor must file a plan that sets forth the details of how he or she intends to pay off creditors in the next three years(or, with the court’s permission, five years). The plan must provide for fixed payments to the trustee on a regular basis and it will be submitted to the court for approval. If approved, the trustee will distribute funds to the creditors according to the plan' s terms. Within 30 days of filing, the debtor must start making payments under the plan to the trustee, even if the court has not yet approved the plan. BACK

 

Once the debtor completes all payments under the plan, the debtor is entitled to a discharge, which releases him or her from all debts provided for or disallowed under the plan. To obtain the discharge, the debtor must also (1) certify that all domestic support obligations have been satisfied (if applicable); (2) complete an approved financial management course; and (3) have not received a discharge within two years in a prior Chapter 13 case or within four years in a prior case under Chapters 7, 11 or 12. BACK

 

What Happens Next?

If you've read all the way to the bottom of this section you probably have a better understanding of bankruptcy as well as a few questions.

 

The initial office consultations with me on bankruptcy or any matter within my area of practice is always free of charge. When you are ready give me a call, my compassionate staff and I hold all client and prospective client communications in strictest confidence. I strive to ensure each client receives personal attention and professional  service. You can reach my office at, 720-374-9150. BACK

 

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