CHAPTER 7 & Chapter 13 Bankruptcies
Bankruptcy Chapter 7
- What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is the most common form of bankruptcy and is frequently referred to as “liquidation.” Under liquidation, non-exempt property of the bankruptcy estate can be sold by a bankruptcy trustee to partially or fully satisfy creditors. Following the distribution of assets to creditors, most debts are discharged, or wiped clean. Richard A. Sadoff, Attorney at Law, has helped thousands of Kentucky residents in Kenton, Campbell and Boone Counties get a fresh financial start.
- What is the process to declare bankruptcy under Chapter 7?
Most bankruptcies begin with incessant calls, letters or other correspondence from creditors demanding payment. Usually, in response to these calls, the debtor comes to our office seeking solutions to their financial problems. During the first consultation, you meet with the attorney who will represent you for 60 to 90 minutes. Thereafter, you work with a paralegal to complete an initial inventory of your debts and assets. Before filing for Chapter 7 bankruptcy, you verify the information one final time. While this may sound like an excessive number of steps, this process — developed over decades of practice — prevents problems and unnecessary delays with your bankruptcy filing. To qualify for Chapter 7, you must pass the means test. The means test compares your average current monthly income (CMI) with the median income of a family of your size in your area. For instance, if you live in Covington, Newport, Fort Thomas or anywhere in the Northern Kentucky area, you would be compared with families who also live in your area. If your income is less than the median, you pass the means test. If not, a more complex calculation to determine your monthly “disposable income” must be performed. After your attorney files your bankruptcy petition, a trustee is appointed to oversee your case. A meeting is scheduled with your Chapter 7 Trustee, referred to as a “first meeting of creditors” or a “Section 341 meeting.” At this meeting, the trustee and creditors are entitled to ask you questions and raise objections to your plan. Following the meeting, the trustee may liquidate your non-exempt assets. However, in about 95% of cases there are no assets to sell because the assets are:
- Subject to a lien
If assets are liquidated by your Trustee, the proceeds are distributed to your creditors according to a statutory priority scheme. This liquidation and distribution process does not affect the timing of getting your Discharge, which is usually granted 90 days after the bankruptcy filing unless an objection to such relief is made. A discharge is merely the legal way of saying certain debts are wiped clean.
- How long does the liquidation process take?
The length of time it takes a Chapter 7 Trustee to complete the liquidation of assets is usually determined by the nature of the assets involved. Liquidating a bank account can occur in a matter of weeks, while obtaining a settlement or jury verdict on a personal injury case can take years. In any event, the bankruptcy case remains open until all assets are administered and the Trustee’s distribution to creditors is made, which is frequently years after debtor has been issued his Discharge.
- Are there any debts that Chapter 7 does not take care of?
Chapter 7 is a powerful means to get a fresh financial start, but it alone cannot assure your financial health. To begin with, there are certain debts that Chapter 7 does not discharge. These debts include:
- Student loans
- Criminal restitution and unpaid tickets, fines, or other penalties
- Tax liens
- Recent income taxes
- Liabilities created due to DUI
- Alimony and child support
Some debts are potentially not dischargeable if the affected creditor files a timely objection and prevails. Potentially non-dischargeable debts all involve some form of debtor misconduct, and include:
- Credit card abuse, which is the most common, and heavily litigated, issue.
- Actual fraud.
- Embezzlement from an employer, or larceny
- Infliction of willful and malicious injury to another person or his property.
If the affected creditor fails to take timely action, or takes timely action but does not prevail in Court, then this type of debt is discharged. Neither the Chapter 7 Trustee nor the US Trustee is authorized to object to the dischargeability of a particular debt. If the affected creditor does not exercise its rights, it loses them.
- Denial of a Chapter 7 discharge
In certain circumstances a creditor, the Chapter 7 Trustee or the US Trustee can file a complaint seeking to deny a discharge of all debts. Such complaints are rare and must be filed in a narrow window of time. The grounds include:
- Transferring, removing or concealing assets in the year prior to filing, or after the filing.
- Failing to maintain adequate books and records—this can be critical in a business bankruptcy.
- Filing materially false or misleading bankruptcy papers.
- Testifying falsely under oath.
- Failing to satisfactorily explain any loss of assets.
- Failing to cooperate with the Chapter 7 Trustee’s liquidation efforts.
- Refusing to obey a Bankruptcy Court Order.
- Dismissal of debtor’s Chapter 7 case
A creditor, the Chapter 7 Trustee or the US Trustee can ask the Court to dismiss a Chapter 7 case involving consumer (i.e. non-business) debt if the granting of a discharge would constitute an “abuse” of the bankruptcy process. The grounds for such a dismissal are:
- Failing to “pass” the Means Test
- The “totality of the circumstances” of the debtor’s financial situation demonstrates abuse. This comes into play when:
- The debtor’s actual budget (as opposed to the Means Test “budget”) has considerable disposable income left over at the end of the month.
- The debtor attempts to maintain a lavish lifestyle rather than paying his creditors, such as continuing to make large loan payments for expensive cars or boats.
- Chapter 7 in perspective
Chapter 7 only takes care of an already existing debt problem. It does not contemplate nor attempt to fix the circumstances that led to the high debt burden. For example, after losing a job many people living with a high cost of living often rapidly accrue credit card debt. Chapter 7 bankruptcy can wipe away the credit card debt but it does not correct the imbalance between your income and expenses. You have to fix your own underlying problems.
Bankruptcy Chapter 13
- What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy differs from Chapter 7 because it is not a liquidation. Rather, Chapter 13, or a wage earner’s plan, offers certain benefits such as property protection and debt discharge in exchange for a promise to pay back all or a portion of your debts through a payment plan.
- Why should I file for a Chapter 13 bankruptcy?
To begin, Chapter 13 does not necessarily require full repayment of all debts — only past-due secured debts and priority debts must be paid in full. The amount you repay is based on your financial situation, including your income and the amount and type of debts you owe. Chapter 13 has many benefits that are not available under Chapter 7:
- You can keep your home — If you have defaulted on your mortgage, Chapter 13 can allow you to catch up on your past-due payments.
- You can keep additional property — If you have property with significant equity or other property that is not exempt from liquidation, Chapter 13 can allow you to keep that property where it would be liquidated in a Chapter 7 proceeding.
- Discharge – Chapter 13 can discharge certain debts that are non-dischargeable in Chapter 7. These debts include marital property settlements not in the nature of alimony or support, and willful and malicious damage caused to the property of others.
- Reduce amount owed on secured loans — Chapter 13 makes “strip-down” available. Strip-down allows you to reduce a secured loan to the amount of the principal, and pay that amount through your Chapter 13 Plan. For example, you took out a loan to purchase a car for $20,000. After driving the car off the lot, it depreciates significantly and is worth only $10,000 one year later, even though you still owe $15,000 on the loan. Strip-down allows you to reduce the loan amount to the $10,000 value of the property.
- Eligibility — If you filed a Chapter 7 within the past 8 years and received your Discharge, or cannot pass the means test, then you are not eligible for Chapter 7. However, you may qualify for a Chapter 13 plan to reduce your debt burden.
- Avoid 2nd and 3rd mortgages — If your residence is worth less than what is owed on your 1st mortgage, any 2nd or 3rd mortgage can be avoided, meaning that the monthly mortgage payment no longer has to be made, and the unpaid mortgage balance is treated as just another unsecured debt.
- What is the process for filing a Chapter 13 bankruptcy?
A Chapter 13 proceeding begins by meeting with an experienced bankruptcy attorney. If you decide that a Chapter 13 plan is in your best interest, your attorney files a petition with the bankruptcy court that includes:
- A repayment plan of three or five years, depending on means test results
- A schedule of income and expenditures
- A schedule of contracts and leases
- All recent tax transcripts
- A statement of financial affairs
- Proof of undergoing credit counseling
Following the filing of the petition, an “automatic stay” is triggered. The stay prohibits creditors from continuing most collection efforts, including foreclosure, against you and any cosigners to your debt. Even if you have not received plan approval yet, your first payment under your plan is due 30 days following the filing. A meeting is scheduled with your Chapter 13 Trustee, referred to as a “first meeting of creditors” or a “Chapter 13 Section 341 meeting” and a confirmation hearing follows approximately 45 days later. After all payments are made pursuant to the three- or five-year plan, a discharge is granted, your mortgage arrearages are completely caught up and all remaining unsecured debts are forgiven.
- Chapter 13 in perspective
Chapter 13 is not for everyone. Because you must follow a payment plan, Chapter 13 requires you to follow a fixed budget for a significant period of time. Chapter 13 plans can also go awry if you face significant unexpected expenses, such as car repairs, or income disruptions due to illness or loss of overtime, etc. It takes a lot of determination and a little good luck to successfully obtain a Chapter 13 discharge, but frequently it is worth the effort because the pay-off (usually saving the family residence from foreclosure) can be so great.