Read about how the new laws may affect you!
Bankruptcy is a federally court supervised proceeding wherein an individual or business overburdened with debt may obtain relief in the form of a reduction in the total amount of debt owed, and a discharge from other indebtedness.
When businesses or individuals find themselves unable to meet their expenses on a regular basis, they may want to consider bankruptcy as a means of obtaining a fresh start.
Although the stigma formerly associated with the filing of bankruptcy has been greatly diminished, the decision to file a petition in bankruptcy should not be taken lightly. The filing of a petition in bankruptcy can have long-term consequences for those who make the decision to file.
The most significant and immediate effect of filing a petition in bankruptcy is the "automatic stay" barring any act to collect a debt owed by the debtor. As the term implies, the stay is automatic. It also comes into existence immediately upon the filing of the petition with the court. Generally speaking, there exists no other type of court order that can have this type of sudden, immediate, and broad impact and which can be issued without any notice to other persons or parties having an interest in the court proceedings.
The automatic stay operates as a nationwide federal injunction against any act to collect from the "estate" of the debtor. The bankruptcy "estate" generally consists of all property owned by the debtor at the time of the filing. Whether certain property may come into the estate will depend on which chapter the debtor chooses to file and the type of property which may be legally coming into the hands of the debtor following the filing. Your attorney can better explain what other property may be included in a debtor's estate.
There are some exceptions to the automatic stay. The filing of a Bankruptcy Petition will generally not halt the enforcement of child support or spousal support obligations against property not part of the Bankruptcy Estate; nor will the filing of a petition stay the continuation of a state court paternity proceeding, or criminal proceeding. (see 11 U.S.C. 362(b)). Neverthless, some states (i.e., California) have attempted to circumvent the automatic stay by enacting statutes intended to allow enforcement of a judgment notwithstanding the filing of a Bankruptcy Petition (see e.g., Calif. Code of Civil Procedure sec. 715.050). The Constitutionality of such state laws has been criticized and doubted, and hence they may not be enforceable. You should consult your attorney if you believe a creditor or other judgment holder is attempting to illegaly enforce a judgment or other obligation against you after you have filed a Petition in Bankruptcy. A creditor who intentionally violates the automatic stay in bankruptcy may be ordered to pay damages, attorneys' fees, and in some cases, punitive damages to the injured debtor (11 U.S.C 362(h)).
The automatic stay does not last indefinitely. Because the impact of the automatic stay is so broad, a secured creditor (i.e., a lender on an automobile loan, or the holder of a deed of trust or mortgage on real estate) may seek authorization from the Bankruptcy Court to continue a repossession, or foreclosure. 11 U.S.C 362(d) allows for such "relief" from the automatic stay for "cause," including the lack of "adequate protection"; or if the debtor does not have any equity in the property and the property is not necessary to an "effective reorganization." Other grounds for relief exist in "single asset real estate cases" as well. The terms in quotes are taken from the Bankruptcy Code. Your attorney can better explain the terms and how they may apply in your case. If a secured creditor does not apply for and obtain relief from the stay, the stay will continued until the court issues its discharge order, or until the case is dismissed. Dismissal can occur if the debtor has not complied with certain requirements under the code. In the event a case is dismissed, section 109(g) of the Bankruptcy Code will bar the debtor from refiling another Bankruptcy Petition for six months after the date of dismissal.
Which chapter of the United States Bankruptcy Code to file under depends upon several factors, such as the amount of total debt the debtor may owe, the future income available to the debtor, and the legal structure of the debtor--whether the debtor is an indivdual, corporation, partnership, farmer, etc. Generally, individuals with regular income and total unsecured debts of not more than $269,500.00 unsecured debt, and not more than $807,750.00 in secured debt are elegible to file under Chapter 13 of the Code. Corporations may not file under Chapter 13. Chapter 13 allows individuals and unincorporated small businesses which meet the requrements of the Code to establish a payment plan lasting from between 3 to 5 years to repay their debts at less than 100 cents on the dollar. Although Chapter 13 will generally allow a debtor to keep his or her house, and car, creditors who have liens securing debts for those items usually will not have the total amount they are owed reduced. Unsecured debts (i.e., credit card debts) may be reduced to less than 100 cents on the dollar in a Chapter 13 plan. Chapter 13 is explained further in this article, below.
Under new rules expected to go into effect within approximately the next six months, debtors seeking to obtain a discharge under Chapter 7 of the Bankrutpcy Code will be required to submit to a "means test" and consult with a credit counselor prior to filing for such relief. Under the new law, debtors who file under Chapter 7, but earn more than half of what other families of the same size earn, will be presumed to be abusing Bankruptcy. Although there will be no return of debtor's prisons, a strict evaluation of the debtor's "means" will be used for determining whether the debtor should be forced to repay some portion of his or her debts. The means test will apply IRS standards in determing what expenses are allowed and the amount of the expenses. Exceeding the amount of the allowed expenses could force the debtor into a Chapter 13 plan if he or she can repay at least 25% of the unsecured debts over 5 years. The court or trustee will be able to review the debtor's income and claimed expenses by reviewing the debtor's tax returns and pay stubs.
In addition, there will be some limits imposed on a debtor's retirement accounts. An IRA account will be exempt from creditor's reach in bankruptcy only up to $1 million. Over $1 million, the account will be subject to the creditor claims. Education IRAs and money rolled over to an IRA from a 401(k) will remain protected. The new law also limits the amount of "homestead" exemption an debtor may claim under state law. Currently, in California, depending on a debtor's choice of exemptions, age, and living arrangements, a debtor may protect between $15,000.00 and $125,000.00 of the equity in his or her residence. Under the new Bankrutpcy laws, if the debtor purchases his or her home within two years prior to filing Bankruptcy, the most he or she could exempt would be $100,000.00 no matter what state law says. For most California residents this will not have much impact. For residents in Florida, Texas, Iowa and South Dakota, where the homestead exemption amount has been virtually unlimited, the effect will be to force debtors in those states to file under Chapter 13 or wait two years before filing.
Debtors who were "upside down" on their vehicles used to be able to pay off their lender for the actual book value and keep the vehicle. Under the new laws, no matter the size of the unsecured portion of the debt on a vehicle, the debtor will be required to either pay off the loan as promised or risk repossession.
At the time of the drafting of this article, the new rules have not gone into effect. Both the Senate and House have passed bills, but because they are not identical, there is no bill to be submitted to President Bush for signature. However, the bills are similar enough that the President has indicated that he would most likely sign the final bill when it is presented to him. Check this site again for new information as it becomes available.
CHAPTER 7:
A filing under Chapter 7 of the United States Bankrutpcy Code (also commonly referred to as "straight bankruptcy") is a request that a court appointed trustee liquidate the debtor's non-exempt assets to pay creditors. If no assets are available, or if the trustee conducts a sale and the proceeds are insufficient to fully pay all creditors, the debtor is discharged from paying the otherwise outstanding claims of creditors. Usually most individuals who file under Chapter 7 have little or no assets available to pay their unsecured creditors.
In most individual chapter 7 cases, household items are usually "exempt," and therefore not available to the trustee to sell to pay creditors. Moreover, depending upon their value, many other items such as an automobile with no lien, and family jewelry are usually exempt as well. Furthermore, leased autos, items with liens, and real estate with a mortgage(s) or trust deed(s) fully encumbering the property are not available to the trustee. Nevertheless, leased items, and items with liens must be paid or surrendered to the lessor or secured creditor. If you have any question regarding whether a particular item of property would be available to the trustee to sell, consult an attorney.
When completing a bankruptcy petition, you must be careful to fully provide all information requested. Failure to list a debt will result in your not being discharged from the obligation to pay the debt. Furthermore, the failure to properly claim as exempt certain items of property could leave the item available to the trustee to sell. Moreover, the failure to disclose information, including the existence of your assets or income could subject you to harsh fines and possibly criminal penalties. Remember that prior to filing a Chapter 7 petition, pending approval of the new law, you will need to submit to a means test to determine eligibility for such relief.
If you are a debtor in a Chapter 7 case you may discover you are actually more creditworthy than you were prior to having filed for Bankruptcy. You will have been absolved of all dischargeable debts, and by law, you may not file again for seven (7) years. The seven year time period begins to run on the date of filing for Bankruptcy.
CHAPTER 13:
Chapter 13 is also referred to as "debt adjustment for individuals with regular income." Chapter 13 allows individual and unicorporated business debtors to retain their assets and re-pay their creditors at less than the full amount owed over a three to five year period. Secured creditors must be paid in full, but unsecured creditors may be paid a reduced (percentage on the dollar) amount. Creditors must receive at least as much as they would have received had the debtor filed a Chapter 7 petition. Your attorney can help you to decide the correct amount to re-pay depending upon your income and expenses.
The debtor must file a "plan" with the court which will be "confirmed" at a court hearing. If the plan is confirmed, the debtor makes plan payments to a court appointed trustee for the duration of the plan. Throughout the payment period, unsecured creditors will not be allowed to pursue the debtor for the amount by which their debts have been reduced. At the conclusion of the plan, the debtor receives a discharge from repaying creditors the amount reduced by the plan.
In addition to the debtor's abililty to retain all his assets, individuals and businesses considering bankrutpcy sometimes prefer filing a Chapter 13 petition to filing a Chapter 7 petition because they repay some of their debt. To a future creditor this may signify a debtor as a less risky credit risk than had the debtor filed a Chapter 7 petition.
Special Note to debtors in community property states: The Bankruptcy Code allows married debtors to file "joint" petitions. This saves a married couple the expense (possible legal fees and court filing fees) of filing two separate petitions. Nevertheless, in certain circumstances, a married couple may be able to obtain the same effect (discharge of indebtedness) as to the marital debts even if only one spouse files. (See 11 U.S.C 362(a)(3), 11 U.S.C. 541(a)(2), and 11 U.S.C. 524(a)(3)). Married couples should therefore consult an attorney about the possible consequences of filing either a joint or individual petition before filing with the court.
CHAPTER 11:
Chapter 11 is utilized primarily by business debtors. It is commonly referred to as "reorganization." Under the Bankruptcy Code, unincorporated businesses with less than $269,250.00 in unsecured debt, and less than $807,750.00 in secured debt may file under Chapter 13. Corporate debtors, unicorporated businesses and reorganizing individuals over the Code's debt limits must file under Chapter 11.
The procedure of a Chapter 11 case starts out similar to other chapters. The debtor files a petition listing all debts and assets, as well as income and expenses, and the court sends out notices of the filing to all creditors listed in the debtor's papers. The debtor in a Chapter 11 case must also file a detailed form for review by the Office of the United States Trustee describing the business affairs of the debtor and events leading up to the Chapter 11 filing.
An interesting aspect of a Chapter 11 case is that the debtor remains in possession of all assets, and continues to manage the business. Hence the debtor becomes known as a "debtor-in- possession." Ordinarily, no trustee is appointed to take control of the debtor's business, although the Office of the United States Trustee oversees the case and may request the appointment of a trustee to operate the debtor's business if it appears that any fraud or mismanagement may exist. The U.S. Trustee wants to ensure that if the business has viability, it is rehabilitated. Creditors and employees have a significant interest in seeing the business maintained.
Similar to a Chapter 13 case, a Chapter 11 debtor-in-possession files a plan with the court. The debtor has the exclusive right to file the proposed plan during the period of up to 120 days after filing the petition. After that time, unless the court were to extend the time limit, creditors may file their own plans.
The plan and a document known as a "disclosure statement" describing the business, debts, assets, and debtor's repayment ability are reviewed by all creditors. Creditors are given an opportunity to review the documents and to vote on the plan. The debtor may provide for some creditors to be repaid more or less than others depending upon the "class" the creditor may fall into. Creditors may approve the plan if they feel it is in their interest (i.e., getting less than 100% of what they are owed may be better than nothing if the debtor were to go out of business). Moreover, even if all creditors do not approve the plan, it may be forced on the dissenters ("cramdown") depending upon the number otherwise approving the plan.
If the plan is approved by the creditors (and the court), the debtor repays his debts according to the plan, and is not obligated to repay any amounts by which the debts are reduced by the plan.