Bankruptcy

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The following is a very general discussion of differences between chapters 7, 11 and 13 under the bankruptcy code. As of the writing of this letter I am not your attorney and nothing contained in this letter is intended as legal advice.  

• Bankruptcy Estate
  • When a debtor files bankruptcy all of their assets become a part of the bankruptcy estate
  • It can be thought of as a pot containing all of your assets
  • Some assets, such as ERISA retirement plans (IRA’s, 401(k)’s etc.) are not part of the bankruptcy estate, these are called exclusions
  • Some assets can be taken out of the pot through the exemptions
• Trustee
  • The trustee is in charge of administering the bankruptcy estate and ensuring that creditors are paid when possible
  • The trustee is not your advocate or on your side, they are on the creditors side
• Discharge
  • When the bankruptcy process is over the debtor receives a discharge of their personal obligation on certain debts and they are no longer obligated to pay them
  • When a loan is made and property is promised as collateral for the loan two obligations are usually created.
    • 1) A personal obligation to repay the loan. It is because of this personal obligation that creditors can sue you to obtain a judgment. This judgment can be used to levy on your bank accounts and wages and you are forced to pay them out of these assets
    • 2) A creditor’s right in the asset is created. It is because of this right that a creditor can take back the asset if you fail to pay the loan
  • The discharge does not cut off the creditor’s rights that are attached to the asset, it only gets rid of the debtor’s personal obligation to repay the loan
  • Bankruptcy law allows a debtor to keep assets that have a loan on them (car, house etc...) under certain circumstances through a reaffirmation agreement
  • Certain debts generally cannot be discharged and you will have to pay them
    • Most taxes
    • Student Loans
    • Child Support, Alimony
    • Court fines and restitution
• Reaffirmation of debt
  • If you can afford to keep assets that have a loan on them you can opt to continue paying the debt and keep the asset
  • Most commonly this applies to homes and cars
  • The debtor promises to continue paying the debt
• CAUTION: If you reaffirm a debt and cannot or do not continue to stay current on that loan the creditor can obtain a judgment against you and/or repossess the asset. Reaffirmation agreements should only be made when the debtor is certain that they will be able to make all of the payments on the loan
• Exclusions
  • An asset that is not part of the bankruptcy estate due to law
  • Examples include ERISA retirement plans as mentioned above
• Exemptions
  • Assets that can be removed from the bankruptcy estate and kept through the bankruptcy process
  • The dollar limits for exemptions refer to the equity you have in an asset
    • For example lets say that the exemption amount on a car is $3000. If you owe $1000 on the car and it is worth $5000 you have $4000 in equity.
    • Since you have $4000 in equity and the exemption amount is only $3000 you have a few options
      • 1) Pay the trustee the amount over the exemption limit, here that is $1000
      • 2) Since you don’t likely have $1000 you can surrender the car. It will be sold and if it is sold for more than what is owed on it ($1000) you will receive that money from the trustee in cash
      • 3) Reaffirm the debt and keep paying your loan throughout the bankruptcy process
  • The most common examples are;
    • Homestead
    • Automobile
    • Household Furnishings
    • Tools used in a trade or business
    • Jewelry
    • Health Aids
    • Veterans Benefits
    • Alimony, child support

• A chapter 7 case is a liquidation case, your assets and debts will be gathered and listed on your petition and the trustee will be appointed and be charged with paying your creditors with your assets if possible
• Chapter 7 places limits upon who can file based on the income of the debtor
  • If the debts are primarily consumer debt the debtor must pass a “means-test” before they are allowed to file a chapter 7
    • The test takes in to account monthly income and expenses and number of dependants in the family
    • If the debtor fails the means test they may be forced in to a chapter 13 bankruptcy
  • If the debts are primarily business debt the debtor does not have to pass a means test and generally any amount of debt can be discharged in chapter 7
• Exemptions are applied to specific assets allowing the debtor to keep some property though the bankruptcy process
  • Please refer to the exemption list enclosed with this letter for all of the exemptions available to debtors
• If an asset falls within one of the exemption categories and the value of that asset is below the exemption amount the debtor keeps the asset
  • If the value of the asset is above the exemption amount the debtor has 2 options
    • 1) Pay the trustee for the amount over the exemption
    • 2) Surrender the asset. The asset will then be sold and the debtor will get the exemption amount in cash from the sale of the asset.
• After the petition is filed a “first meeting of creditors” is scheduled. This is commonly referred to as a 341 meeting because of bankruptcy code section 341 which mandates that this meeting take place. 
  • The meeting is scheduled for a date around 30 days from when the petition was filed
  • The trustee puts the debtor under oath and asks questions relating to the petition that was filed
  • Generally these meetings are quick and easy and are over in about 5 minutes
• Overall chapter 7 is more attractive to most debtors as they receive a discharge of the debts that are unpayable much quicker than chapter 11 or 13. If a business owner needs to file bankruptcy and does not wish to continue the business it is usually advisable to close the business down and file a chapter 7 for the individual.
• Once a chapter 7 discharge has been ordered the debtor may not file another chapter 7 for eight years. However chapter 11 and 13 bankruptcies are usually available for a debtor that has filed a chapter 7 within the previous eight years
• The cost of a chapter 7 varies depending upon the debtors situation, but as a very general rule chapter 7 bankruptcies will cost the debtor anywhere from $1500 to $3000 with a $299 filing fee. It is very important to remember that your costs may vary from this range

• Chapter 11 is a reorganization primarily used by business to restructure debt and to keep the business running.
• The difference between a reorganization and a liquidation is that the business stays open while debt is being restructured and paid off.
• Chapter 11’s are vary rare as compared to chapter 7 and 13 because of the expense and complexity of the process. Unlike in a chapter 13, there is no time limit to the repayment period in a chapter 11.
• Similar to a chapter 7 a petition is drafted and filed with the court. About 30 days later the 341 meeting would be held and a trustee may be appointed if the court determines one is necessary. If a trustee is appointed they would be in charge of running your business until the payment plan has ended.
  • Exemptions and exclusions apply in chapter 11 as well
• A typical chapter 11 case will require a retainer around $10,000. This is due to the large amount of work involved in a chapter 11. For example several motions must be drafted and filed when the bankruptcy process begins. The filing fee is around $1,000.
• Chapter 11’s are recommended for businesses who want to stay open and would be more profitable if some debt could be restructured.
• Currently I handle chapter 11 cases with another attorney in my office building has been handling chapter 11 cases for years.

• Chapter 13 is a reorganization plan for individuals
• Similar to a chapter 7, a petition is drafted and filed with court and a payment plan is proposed. A 341 meeting is scheduled as well as a confirmation hearing.
  • At the confirmation hearing the judge will either approve or deny your plan to repay your debts in a 3 to 5 year period.
  • Your income, expenses and debts will determine how much you can pay each month and therefore which creditors will get paid
  • Again like chapter 7 some debts must be repaid in full and this will impact which creditors get paid. Exemptions and exclusions apply in a chapter 13 as well. Assets with loans on them can be kept if the debtor can continue to make payments on those assets.

• Chapter 13 has debt limits for individuals
  • Currently an individual can have no more than about $300,000 in unsecured debts and just over $1,000,000 in secured debts
• The cost of Chapter 13’s vary greatly depending upon the debtors financial situation but is will certainly cost more than a chapter 7 and likely will cost less than a chapter 11. The filing fee for a chapter 13 is $274
• Chapter 13’s are recommended for individuals who need to file bankruptcy but fail the means test of chapter 7.