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BANKRUPTCY OVERVIEW

Bankruptcy Basics



The primary purposes of the law of bankruptcy are to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and to repay creditors in an orderly manner to the extent that the debtor has property available for payment. 
 
Most consumer cases are filed under the Chapter 7 or Chapter 13 of the Bankruptcy Code. Federal courts have exclusive jurisdiction over bankruptcy cases.
 
Types of Bankruptcy
 
CHAPTER 7
 
Chapter 7 is the chapter of the Bankruptcy Code providing for liquidation—the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.  Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor's assets. In most cases, individuals receive a discharge that releases them from personal liability for dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. 
 
To qualify for relief under chapter 7, the debtor may be an individual, a partnership, or a corporation or other business entity. Subject to the means test, relief is available under chapter 7 irrespective of the amount of the debtor's debts.
 
Chapter 7 Procedure
 
A chapter 7 case begins by filing a petition with the bankruptcy court. Debtors must also file a statement of your assets and liabilities, and schedules listing your creditors. 
 
A petition may be filed by an individual or by a husband and wife together.
 
Filing a petition automatically stops most collection actions against the debtor or the debtor's property.
 
Between 20 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. The debtor must attend the meeting and answer questions regarding the debtor's financial affairs and property. 
 
In a chapter 7 case involving an individual debtor, the creditors generally have 60 days from the first date set for the meeting of creditors to object to the discharge of the debtor and/or the dischargeability of a specific debt. If the deadline passes without any objections to the debtor's discharge being filed, the court will issue the discharge order.
 
Chapter 7 Discharge
 
A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, the bankruptcy court will issue a discharge order 60 to 90 days after the date first set for the meeting of creditors.
 
If a debtor wishes to keep certain secured property they can "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed.  In return, the creditor promises that it will not repossess or take back the property so long as the debtor continues to pay the debt.
 
CHAPTER 11
 
Chapter 11 is the chapter of the Bankruptcy Code providing for reorganization.  Both business entities and individuals can seek relief in chapter 11.  In the case of individuals, chapter 11 bears some similarities to chapter 13. Under a court-approved plan of reorganization the debtor can reduce its debts by repaying a portion of its obligations and discharging others.
 
Chapter 11 Procedure
 
A chapter 11 case begins with the filing of a petition with the bankruptcy court.
 
The Automatic Stay
 
The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed. The stay provides breathing room for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.
 
The Discharge
 
Confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the makes plan payments pursuant to the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing pre-bankruptcy contracts.
 
CHAPTER 12
 
Chapter 12 provides debt relief to family farmers and fishermen with regular income. The process under chapter 12 is similar to that of chapter 13, under which the debtor proposes a plan to repay debts over a period of time – no more than three years unless the court approves a longer period, not exceeding five years.
CHAPTER 13
 
Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts over time, usually three to five years. During this time the law forbids creditors from collection efforts.
 
Chapter 13 enables the debtor to keep their assets, such as their house and vehicle. Once the debtor completes the payments required under the plan they receive a discharge. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is broader under chapter 13 than the discharge under chapter 7.
 
Benefits of Chapter 13
 
  • Provides individuals an opportunity to save their homes from foreclosure by allowing them to cure past due mortgage payments over time through a payment plan.
  • Allows individuals to reschedule secured debts, other than a mortgage for their primary residence, and extend them over the life of the 13 plan, which may lower payments. 
  • Protects co-signers who are liable with the debtor on consumer debts.
  • Filing the petition under chapter 13 automatically stops most collection actions against the debtor or the debtor's property. While the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. Chapter 13 also contains a special automatic stay provision that protects co-debtors who is liable along with the debtor on consumer debts. 
Chapter 13 Procedure
 
A chapter 13 case begins by filing a petition with the bankruptcy court. A petition may be filed by an individual or by a husband and wife together. Under chapter 13 a trustee is appointed to administer the case. The chapter 13 trustee collects payments from the debtor and makes distributions to creditors.
 
The Chapter 13 Plan
 
In a chapter 13 case, creditors are given an opportunity to object to the plan. If no objection is filed by creditors or the trustee, the plan may be confirmed as filed. Once the plan is confirmed, the trustee will distribute the proceeds of the debtor's plan payments to creditors until the debtor completes the plan or the court dismisses or converts the case. The creditor generally have sixty days from the first date set for the meeting of creditors to object to the dischargeability of a specific debt involving fraud or a willful or malicious action. Upon completion of the chapter 13 plan, the court will issue a discharge order, the trustee will prepare a final report, and the case will be closed.
 
There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes. Secured claims are those for which the creditor has the right take back the collateral if the debtor does not pay the underlying debt. Unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.
 
The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under chapter 7. Disposable income is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15% of the debtor's gross income. Once the court confirms the plan, the debtor must make regular payments to the trustee. 
 
The Chapter 13 Discharge
 
A chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the debtor has not received a discharge in a prior case filed within a certain time frame and has completed an approved course in financial management . 
 
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with limited exceptions.  The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case.  
 
Debts dischargeable in a chapter 13, but not in chapter 7, include:
  • debts for willful and malicious injury to property,
  • debts incurred to pay non-dischargeable tax obligations, and
  • debts arising from property settlements in divorce or separation proceedings.

      

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