Chapter 7 and Chapter 13 Bankruptcy
Bankruptcy law provides two basic forms of relief: (1) liquidation and (2) rehabilitation or reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. A reorganization or rehabilitation bankruptcy under Chapter 11 (business) or 13 (consumer) of the Bankruptcy Code is, however, the option often preferred by the courts. In a reorganization bankruptcy, creditors may have better opportunity to recoup what they are owed.
Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. The biggest advantage for many people is that Chapter 13 allows individuals the 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 bankruptcy 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 the consumer's nonexempt 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, in some situations and some jurisdictions the court may not allow the case to be converted back again.
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. To be eligible for Chapter 13, however, the debtor must have less than a certain amount of debt as periodically determined by the Judicial Conference of the United States. For example, as of April 1, 2010, the upper debt limits were $360,475 in unsecured debt and $1,081,400 in secured debt.
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 debts in excess of the Chapter 13 dollar limits or is a corporation, Chapter 11 reorganization is generally available. Farmers can file under Chapter 12, which provides for reorganization, and municipalities may file for Chapter 9 reorganization.
Experienced bankruptcy attorneys have the knowledge to help clients get out from under formidable debt and emerge as productive citizens, and can advise debtors about whether Chapter 13 is the right course of action given their particular circumstances. Contact our firm to schedule an appointment with an experienced bankruptcy attorney.
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What Happens In a Chapter 7 Bankruptcy Proceeding?
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.
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.
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 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.
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.
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.
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.
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