|
Pictorial -How Bankruptcy Process Works
Chapter 7
- Liquidation
Chapter 11
- Reorganization
Chapter 13
- Reorganization
Chapter 7 Bankruptcy
A chapter 7 bankruptcy case
does not involve the filing of a plan of repayment as in
chapter 13. Instead, the bankruptcy trustee gathers and
sells the debtor's nonexempt assets and uses the proceeds of
such assets to pay holders of claims (creditors) in
accordance with the provisions of the Bankruptcy Code. Part
of the debtor's property may be subject to liens and
mortgages that pledge the property to other creditors. In
addition, the Bankruptcy Code will allow the debtor to keep
certain "exempt" property; but a trustee will liquidate the
debtor's remaining assets. Accordingly, potential debtors
should realize that the filing of a petition under chapter 7
may result in the loss of property.
Chapter 7 Eligibility
To qualify for relief under
chapter 7 of the Bankruptcy Code, the debtor may be an
individual, a partnership, or a corporation or other
business entity. 11 U.S.C. §§ 101(41), 109(b). Subject to
the means test described above for individual debtors,
relief is available under chapter 7 irrespective of the
amount of the debtor's debts or whether the debtor is
solvent or insolvent. An individual cannot file under
chapter 7 or any other chapter, however, if during the
preceding 180 days a prior bankruptcy petition was dismissed
due to the debtor's willful failure to appear before the
court or comply with orders of the court, or the debtor
voluntarily dismissed the previous case after creditors
sought relief from the bankruptcy court to recover property
upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and
(e). In addition, no individual may be a debtor under
chapter 7 or any chapter of the Bankruptcy Code unless he or
she has, within 180 days before filing, received credit
counseling from an approved credit counseling agency either
in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the
U.S. trustee (or bankruptcy administrator) has determined
that there are insufficient approved agencies to provide the
required counseling. If a debt management plan is developed
during required credit counseling, it must be filed with the
court.
One of the primary purposes
of bankruptcy is to discharge certain debts to give an
honest individual debtor a "fresh start." The debtor has no
liability for discharged debts. In a chapter 7 case,
however, a discharge is only available to individual
debtors, not to partnerships or corporations. 11 U.S.C. §
727(a)(1). Although an individual chapter 7 case usually
results in a discharge of debts, the right to a discharge is
not absolute, and some types of debts are not discharged.
Moreover, a bankruptcy discharge does not extinguish a lien
on property.
How Chapter 7 Works
A chapter 7 case begins
with the debtor filing a petition with the bankruptcy court
serving the area where the individual lives or where the
business debtor is organized or has its principal place of
business or principal assets. In addition to the petition,
the debtor must also file with the court: (1) schedules of
assets and liabilities; (2) a schedule of current income and
expenditures; (3) a statement of financial affairs; and (4)
a schedule of executory contracts and unexpired leases. Fed.
R. Bankr. P. 1007(b). Debtors must also provide the assigned
case trustee with a copy of the tax return or transcripts
for the most recent tax year as well as tax returns filed
during the case (including tax returns for prior years that
had not been filed when the case began). 11 U.S.C. § 521.
Individual debtors with primarily consumer debts have
additional document filing requirements. They must file: a
certificate of credit counseling and a copy of any debt
repayment plan developed through credit counseling; evidence
of payment from employers, if any, 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 the debtor has in federal or state
qualified education or tuition accounts. Id. A husband and
wife may file a joint petition or individual petitions. 11
U.S.C. § 302(a). Even if filing jointly, a husband and wife
are subject to all the document filing requirements of
individual debtors.
The courts must charge a
$245 case filing fee, a $39 miscellaneous administrative
fee, and a $15 trustee surcharge. Normally, the fees must be
paid to the clerk of the court upon filing. With the court's
permission, however, individual debtors may pay in
installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P.
1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item
8. The number of installments is limited to four, and the
debtor must make the final installment no later than 120
days after filing the petition. Fed. R. Bankr. P. 1006. For
cause shown, the court may extend the time of any
installment, provided that the last installment is paid not
later than 180 days after filing the petition. Id. The
debtor may also pay the $39 administrative fee and the $15
trustee surcharge in installments. If a joint petition is
filed, only one filing fee, one administrative fee, and one
trustee surcharge are charged. Debtors should be aware that
failure to pay these fees may result in dismissal of the
case. 11 U.S.C. § 707(a).
If the debtor's income is less
than 150% of the poverty level (as defined in the Bankruptcy
Code), and the debtor is unable to pay the chapter 7 fees
even in installments, the court may waive the requirement
that the fees be paid. 28 U.S.C. § 1930(f).
In order to complete the
Official Bankruptcy Forms that make up the petition,
statement of financial affairs, and schedules, the debtor
must provide the following information:
- A list of all
creditors and the amount and nature of their claims;
- The source, amount, and frequency of the debtor's
income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living
expenses, i.e., food, clothing, shelter, utilities,
taxes, transportation, medicine, etc.
Married individuals must
gather this information for their spouse regardless of
whether they are filing a joint petition, separate
individual petitions, or even if only one spouse is filing.
In a situation where only one spouse files, the income and
expenses of the non-filing spouse is required so that the
court, the trustee and creditors can evaluate the
household's financial position.
Back to Top
Chapter 11
A case filed
under chapter 11 of the United States Bankruptcy Code is
frequently referred to as a "reorganization" bankruptcy.
An
individual cannot file under chapter 11 or any other chapter
if, during the preceding 180 days, a prior bankruptcy
petition was dismissed due to the debtor's willful failure
to appear before the court or comply with orders of the
court, or was voluntarily dismissed after creditors sought
relief from the bankruptcy court to recover property upon
which they hold liens. 11 U.S.C. §§ 109(g), 362(d)-(e). In
addition, no individual may be a debtor under chapter 11 or
any chapter of the Bankruptcy Code unless he or she has,
within 180 days before filing, received credit counseling
from an approved credit counseling agency either in an
individual or group briefing. 11 U.S.C. §§ 109, 111. There
are exceptions in emergency situations or where the U.S.
trustee (or bankruptcy administrator) has determined that
there are insufficient approved agencies to provide the
required counseling. If a debt management plan is developed
during required credit counseling, it must be filed with the
court.
A chapter 11 case begins
with the filing of a petition with the bankruptcy court
serving the area where the debtor has a domicile or
residence. A petition may be a voluntary petition, which is
filed by the debtor, or it may be an involuntary petition,
which is filed by creditors that meet certain requirements.
11 U.S.C. §§ 301, 303. A voluntary petition must adhere to
the format of Form 1 of the Official Forms prescribed by the
Judicial Conference of the United States. Unless the court
orders otherwise, the debtor also must file with the court:
(1) schedules of assets and liabilities; (2) a schedule of
current income and expenditures; (3) a schedule of executory
contracts and unexpired leases; and (4) a statement of
financial affairs. Fed. R. Bankr. P. 1007(b). If the debtor
is an individual (or husband and wife), there are additional
document filing requirements. Such debtors must file: a
certificate of credit counseling and a copy of any debt
repayment plan developed through credit counseling; evidence
of payment from employers, if any, 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 the debtor has in federal or state
qualified education or tuition accounts.11 U.S.C. § 521. A
husband and wife may file a joint petition or individual
petitions. 11 U.S.C. § 302(a).
The voluntary petition will
include standard information concerning the debtor's
name(s), social security number or tax identification
number, residence, location of principal assets (if a
business), the debtor's plan or intention to file a plan,
and a request for relief under the appropriate chapter of
the Bankruptcy Code. Upon filing a voluntary petition for
relief under chapter 11 or, in an involuntary case, the
entry of an order for relief, the debtor automatically
assumes an additional identity as the "debtor in
possession." 11 U.S.C. § 1101. The term refers to a debtor
that keeps possession and control of its assets while
undergoing a reorganization under chapter 11, without the
appointment of a case trustee. A debtor will remain a debtor
in possession until the debtor's plan of reorganization is
confirmed, the debtor's case is dismissed or converted to
chapter 7, or a chapter 11 trustee is appointed. The
appointment or election of a trustee occurs only in a small
number of cases. Generally, the debtor, as "debtor in
possession," operates the business and performs many of the
functions that a trustee performs in cases under other
chapters. 11 U.S.C. § 1107(a).
Generally, a written
disclosure statement and a plan of reorganization must be
filed with the court. 11 U.S.C. §§ 1121, 1125. The
disclosure statement is a document that must contain
information concerning the assets, liabilities, and business
affairs of the debtor sufficient to enable a creditor to
make an informed judgment about the debtor's plan of
reorganization. 11 U.S.C. § 1125. The information required
is governed by judicial discretion and the circumstances of
the case. In a "small business case" (discussed below) the
debtor may not need to file a separate disclosure statement
if the court determines that adequate information is
contained in the plan. 11 U.S.C. § 1125(f). The contents of
the plan must include a classification of claims and must
specify how each class of claims will be treated under the
plan. 11 U.S.C. § 1123. Creditors whose claims are
"impaired," i.e., those whose contractual rights are to be
modified or who will be paid less than the full value of
their claims under the plan, vote on the plan by ballot. 11
U.S.C. § 1126. After the disclosure statement is approved by
the court and the ballots are collected and tallied, the
court will conduct a confirmation hearing to determine
whether to confirm the plan.11 U.S.C. § 1128.
In the case of individuals,
chapter 11 bears some similarities to chapter 13. For
example, property of the estate for an individual debtor
includes the debtor's earnings and property acquired by the
debtor after filing until the case is closed, dismissed or
converted; funding of the plan may be from the debtor's
future earnings; and the plan cannot be confirmed over a
creditor's objection without committing all of the debtor's
disposable income over five years unless the plan pays the
claim in full, with interest, over a shorter period of time.
11 U.S.C. §§ 1115, 1123(a)(8), 1129(a)(15).
Back to Top
Chapter 13
A chapter 13
bankruptcy is also called a wage earner's plan. It enables
individuals with regular income to develop a plan to repay
all or part of their debts. Under this chapter, debtors
propose a repayment plan to make installments to creditors
over three to five years. If the debtor's current monthly
income is less than the applicable state median, the plan
will be for three years unless the court approves a longer
period "for cause." (1) If the debtor's current monthly
income is greater than the applicable state median, the plan
generally must be for five years. In no case may a plan
provide for payments over a period longer than five years.
11 U.S.C. §1322(d). During this time the law forbids
creditors from starting or continuing collection efforts.
This chapter discusses six
aspects of a chapter 13 proceeding: the advantages of
choosing chapter 13, the chapter 13 eligibility
requirements, how a chapter 13 proceeding works, what may be
included in chapter 13 repayment plan and how it is
confirmed, making the plan work, and the special chapter 13
discharge.
Advantages of Chapter 13
Chapter 13 offers
individuals a number of advantages over liquidation under
chapter 7. Perhaps most significantly, chapter 13 offers
individuals an opportunity to save their homes from
foreclosure. By filing under this chapter, individuals can
stop foreclosure proceedings and may cure delinquent
mortgage payments over time. Nevertheless, they must still
make all mortgage payments that come due during the chapter
13 plan on time. Another advantage of chapter 13 is that it
allows individuals to reschedule secured debts (other than a
mortgage for their primary residence) and extend them over
the life of the chapter 13 plan. Doing this may lower the
payments. Chapter 13 also has a special provision that
protects third parties who are liable with the debtor on
"consumer debts." This provision may protect co-signers.
Finally, chapter 13 acts like a consolidation loan under
which the individual makes the plan payments to a chapter 13
trustee who then distributes payments to creditors.
Individuals will have no direct contact with creditors while
under chapter 13 protection.
Chapter 13 Eligibility
Any
individual, even if self-employed or operating an
unincorporated business, is eligible for chapter 13 relief
as long as the individual's unsecured debts are less than
$307,675 and secured debts are less than $922,975. 11 U.S.C.
§ 109(e). These amounts are subject to be adjusted
periodically to reflect changes in the consumer price index.
A corporation or partnership may not be a chapter 13 debtor.
An individual cannot file under chapter 13 or any other
chapter if, during the preceding 180 days, a prior
bankruptcy petition was dismissed due to the debtor's
willful failure to appear before the court or comply with
orders of the court or was voluntarily dismissed after
creditors sought relief from the bankruptcy court to recover
property upon which they hold liens. 11 U.S.C. §§ 109(g),
362(d) and (e). In addition, no individual may be a debtor
under chapter 13 or any chapter of the Bankruptcy Code
unless he or she has, within 180 days before filing,
received credit counseling from an approved credit
counseling agency either in an individual or group briefing.
11 U.S.C. §§ 109, 111. There are exceptions in emergency
situations or where the U.S. trustee (or bankruptcy
administrator) has determined that there are insufficient
approved agencies to provide the required counseling. If a
debt management plan is developed during required credit
counseling, it must be filed with the court.
A chapter 13 case begins by
filing a petition with the bankruptcy court serving the area
where the debtor has a domicile or residence. Unless the
court orders otherwise, the debtor must also file with the
court: (1) schedules of assets and liabilities; (2) a
schedule of current income and expenditures; (3) a schedule
of executory contracts and unexpired leases; and (4) a
statement of financial affairs. Fed. R. Bankr. P. 1007(b).
The debtor must also file a certificate of credit counseling
and a copy of any debt repayment plan developed through
credit counseling; evidence of payment from employers, if
any, 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 the
debtor has in federal or state qualified education or
tuition accounts. 11 U.S.C. § 521. The debtor must provide
the chapter 13 case trustee with a copy of the tax return or
transcripts for the most recent tax year as well as tax
returns filed during the case (including tax returns for
prior years that had not been filed when the case began).
Id. A husband and wife may file a joint petition or
individual petitions. 11 U.S.C. § 302(a).
In order to complete the
Official Bankruptcy Forms that make up the petition,
statement of financial affairs, and schedules, the debtor
must compile the following information:
- A list of all
creditors and the amounts and nature of their claims;
- The
source, amount, and frequency of the debtor's income;
- A
list of all of the debtor's property; and
- A detailed list
of the debtor's monthly living expenses, i.e., food,
clothing, shelter, utilities, taxes, transportation,
medicine, etc.
Married individuals must gather this
information for their spouse regardless of whether they are
filing a joint petition, separate individual petitions, or
even if only one spouse is filing. In a situation where only
one spouse files, the income and expenses of the non-filing
spouse is required so that the court, the trustee and
creditors can evaluate the household's financial position.
Filing the petition under
chapter 13 "automatically stays" (stops) most collection
actions against the debtor or the debtor's property. 11
U.S.C. § 362. Filing the petition does not, however, stay
certain types of actions listed under 11 U.S.C. § 362(b),
and the stay may be effective only for a short time in some
situations. The stay arises by operation of law and requires
no judicial action. As long as the stay is in effect,
creditors generally may not initiate or continue lawsuits,
wage garnishments, or even make telephone calls demanding
payments. The bankruptcy clerk gives notice of the
bankruptcy case to all creditors whose names and addresses
are provided by the debtor.
Chapter 13 also contains a
special automatic stay provision that protects co-debtors.
Unless the bankruptcy court authorizes otherwise, a creditor
may not seek to collect a "consumer debt" from any
individual who is liable along with the debtor. 11 U.S.C. §
1301(a). Consumer debts are those incurred by an individual
primarily for a personal, family, or household purpose. 11
U.S.C. § 101(8).
Individuals may use a
chapter 13 proceeding to save their home from foreclosure.
The automatic stay stops the foreclosure proceeding as soon
as the individual files the chapter 13 petition. The
individual may then bring the past-due payments current over
a reasonable period of time. Nevertheless, the debtor may
still lose the home if the mortgage company completes the
foreclosure sale under state law before the debtor files the
petition.11 U.S.C. § 1322(c). The debtor may also lose the
home if he or she fails to make the regular mortgage
payments that come due after the chapter 13 filing.
In a chapter 13 case, to
participate in distributions from the bankruptcy estate,
unsecured creditors must file their claims with the court
within 90 days after the first date set for the meeting of
creditors. Fed. R. Bankr. P. 3002(c). A governmental unit,
however, has 180 days from the date the case is filed file a
proof of claim.11 U.S.C. § 502(b)(9).
After the meeting of
creditors, the debtor, the chapter 13 trustee, and those
creditors who wish to attend will come to court for a
hearing on the debtor's chapter 13 repayment plan.
Back to Top |
