What Chapter Of Bankruptcy Should I Choose?
Bankruptcy and Family Law Attorney in Coeur d’Alene
Serving Coeur d’Alene & Kootenai County Areas, including Coeur d’Alene • Hayden
Comparing and contrasting various bankruptcy chapter filing options.
There are five different types of bankruptcy protection: Chapter 7, which is a “straight,” bankruptcy that sometimes includes liquidation of assets; Chapter 9, which adjusts debts for municipalities; Chapter 11, which is a reorganization process for businesses; Chapter 12, which adjusts debts for those owning a family farm; and Chapter 13, which is used for bankruptcy protection and adjustment of debts. Chapters 7, 11, and 13 are the most common and most frequently petitioned-for forms of bankruptcy protection. We’ll focus on those types here. Which chapter you should file under for bankruptcy protection depends mostly on the kind of debts you have and your income.
When debt becomes overwhelming, bankruptcy might be the answer. Though the benefits of filing are different and unique for each case, and other options might be available, a fresh start is often the solution needed to move on with day-to-day living. One thing to think about is whether you’ll receive a full discharge of debts or not, and this is something with which a qualified bankruptcy or family law attorney can help you. The following is a brief overview of the various options for the most common forms of bankruptcy protection.
Chapter 7 Bankruptcy Protection
Most individuals choose Chapter 7 bankruptcy. Chapter 7 bankruptcy protection is probably the quickest, easiest form of bankruptcy filing. It is available to married couples, individuals, partnerships, and corporations. In a Chapter 7 filing, most unsecured debts get discharged within a few months of the case filing. In Chapter 7, the Chapter 7 trustee liquidates a debtor’s non-exempt assets, and the proceeds of those asset sales are divided among creditors. For most people filing for bankruptcy protection, all assets will be exempt; there aren’t any assets to liquidate. The reasons for this are two-fold: the exemption system permits you to keep assets that allow you to do your job and maintain day-to-day needs; secondly, most personal goods and household items have very little resale value, so creditors are almost never interested in them. Further, since pensions and 401(k) plans are not the property of the estate, you won’t have to exempt those to keep them. Retirement savings and IRAs may be considered estate property, but, in most cases, they are exempt. Since the 2005 bankruptcy amendments, IRA exemptions are set at $1 million.
To begin the process, you will need to get what’s known as a “credit briefing.” In this briefing, an approved credit counseling agency will go over your options for your debt and situation. These required classes take several hours, and some are available online. If this step is not completed, your bankruptcy case will be dismissed. In 2005, amendments to the Federal Bankruptcy Code additionally instituted these counseling sessions as mandatory to file for bankruptcy, as well as instituted a “means test” by which it is determined who can file for Chapter 7 bankruptcy protection. If your debts are mostly consumer debts, you must pass this means test or your case will be dismissed; however, if you do not pass, you do have the option of filing for bankruptcy under a different chapter. Your eligibility to file for Chapter 7 bankruptcy protection are, according to the new amendments, guided by what you earned the six months prior to filing.
In a Chapter 7 bankruptcy protection, most consumer debt is permitted for discharge. If you’ve received cash advances from credit cards within 70 days of filing and the total of that debt with interest is more than $750, this is considered fraudulent and the debt will not be discharged. Furthermore, if you’ve charged something to a credit card after making a decision to file bankruptcy or met with a bankruptcy attorney, those debts are, debatably, not a dischargeable debt, because it shows a lack of intent to pay the debt. Some taxes may also be available for discharge; ask your attorney for further information.
If you own a lot of assets that can’t be considered exempt, a bankruptcy attorney may be able to help you converting those assets to an exempt state. Be aware, however, that some courts may consider these actions bankruptcy planning, while others may see it as a plan to defraud creditors. Customarily, maximizing your exemptions is allowed, but taking it too far and hindering your creditors can result in a denial of discharge. A good bankruptcy attorney can help you decide which assets are worth converting, what options are available to you, and give you advice on the matter. However, if you have a lot of non-exempt assets or have exceeded the exemptions, you may want to consider Chapter 13 bankruptcy protection instead of Chapter 7.
Next, you’ll file a petition with the court. This petition will include a comprehensive financial report regarding your assets, income, and debts, as well as a list of assets to be claimed for exemption, if necessary, and is filed in the Federal Court for the county you’ve lived in for the last 6 months. The cost for filing for Chapter 7 bankruptcy protection is the same nationwide, as it is filed in federal court. Filing costs $299, not including any attorney’s fees. Compiling the list of assets, debts, and exemptions is the most time consuming part of the process, but all debts and assets existing prior to the filing date must be listed. These documents are filed under penalty of perjury, and the entire process from filing to discharge notification takes about 4 months, but shorter and longer durations are possible. Any wages or income you earn after the filing date are yours, and no creditor will have any claim to them. Additionally, when you file your petition for bankruptcy protection, an “automatic stay” goes into effect. This prevents creditors from sending your debts to collection, starting or continuing a lawsuit, collection calls, garnishments, foreclosures, levies, tax collection, and repossession. The automatic stay will not prevent criminal proceedings, tax audits, tax assessments, or family support actions.
After filing, you usually will not have to do anything else other than attend a meeting of creditors and continue your credit counseling sessions, as directed by the 2005 amendment. The creditor meeting – also known as the “341 meeting,” – is held about a month after you file. At this meeting, you will be sworn in under oath, and your creditors have the right to ask you about your debts, your liabilities, and your assets. However, unless a creditor feels it has been defrauded or if the creditor has an interest in secured assets, most creditors don’t appear at this meeting, though they are invited to attend. The vast majority of these meetings are short, and, most of the time, you’ll only be required to confirm that the bankruptcy filing documents represent a true accounting of debts and assets. Rarely, a creditor or other interested party may bring suit against you, and you may have to attend additional court hearings or examinations. If this happens, you and/or your attorney will be notified.
A trustee will be appointed to your Chapter 7 bankruptcy protection case. The bankruptcy trustee is a person who will review your filing, carry out the creditors’ meeting (the 341 meeting), go over your eligibility for debt discharge, liquidate any assets that aren’t exempt, and distribute the money from the sale of those items/assets to your creditors. If no creditor objects to your discharge, you will receive written notification from the court that will state that your debts have been discharged. Your creditors as listed on your petition will also receive a copy of this notification. After your debts have been discharged, the fact that you’ve filed for bankruptcy will appear on your credit reports for up to 10 years.
A qualified bankruptcy attorney can help you through the complex rules and regulations for filing for bankruptcy. Getting an attorney’s help in your case can alleviate some of the stress involved with filing for bankruptcy and take some of the mystery out of the process.
Chapter 11
Usually, sole proprietors, businesses, corporations, or partnerships file for Chapter 11 reorganization. In a Chapter 11 case, the petitioner files a list of debts, assets, and liabilities, as well as a statement as to the state of the business’ financial dealings. In most Chapter 11 filings, the debtor acts as his or her own trustee – referred to as a “debtor in possession” – and he or she will keep all estate property. There are a couple of reasons that a court might appoint a trustee; these include poor management.
As in a Chapter 7 bankruptcy protection filing, in Chapter 11, the debtor meets with his or her creditors about a month after the filing date. The debtor will file month-to-month operating documents, which include income, payments, profit, loss, and balance sheets. The debtor pays fees every quarter to the U.S. Trustee based on the amount of disbursement money. During the first four months, the debtor holds the exclusive right to file a plan for the Chapter 11 reorganization, along with a statement of disclosure that details the business’ financial situation. This statement will include the cause and history that led to the Chapter 11 filing, any assets and liabilities, income, expenses, an analysis of liquidation, projected earnings, tax information, a treatment of creditors, and it will go over options for the business. Creditors to the business are placed into a “class,” and those creditors with impaired claims are allowed to vote on the debtor’s plan. Creditors are considered impaired if the plan alters their legal rights as they relate to the business and its operations. For the plan to be confirmed by the court, the voting creditors must pass the plan by a two-thirds majority in the dollar amounts of claims. The plan must be approved by at least one impaired class. If the plan gets voted down, the court may still approve the plan if it finds it to be fair to all parties and if the plan does not discriminate.
Most plans call for the debtor to stay in business so that they may pay back creditors from future earnings, from borrowing, or from selling the assets. Priority claims, secured debt, and tax claims are required to be paid in full with interest. Unsecured and non-priority claims are to be paid at least as if it were a dividend from a Chapter 7 case. Chapter 11 plans vary as widely as the types of businesses that file them, and each are unique to that business’ specific situation.
Chapter 13
Though there are many ads on TV and on the radio for debt consolidation services, credit counseling services, and debt management services, some are scams and most fail to do what they promise. Chapter 13 bankruptcy protection is akin to a debt administration program backed by the federal court system. Most of us have a genuine desire to repay our debts; sometimes, it’s just not possible without help. Under Chapter 13, you do not have to negotiate with your creditors, and federal courts enforce the process. Chapter 13 costs $274 nationwide (plus your attorney’s fees and the commission for the trustee)… much less than some of the advertised credit services you hear about on TV.
Under Chapter 13 protection, creditors are forced to stop collection actions and to accept payments under your plan. Creditors are not allowed to refuse your plan or the payments coming from it. When you file Chapter 13, you make payments to your creditors based on what funds you have left after paying your bills and day-to-day living expenses. At the end of the plan and its payments, debts are discharged.
Chapter 13 bankruptcy protection is a kind of bankruptcy filing specifically for those whose unsecured debt is less than $269,000, whose secured debt is less than $807,000, and for those with a regular income. All three criteria must be met. Like in a Chapter 7 filing, in Chapter 13, a debtor files the petition along with a statement of assets, liabilities, financial statements, and a Chapter 13 plan. This plan, usually a one-page form, details a three-to-five year creditor repayment schedule. These payments are made to the Chapter 13 trustee, who makes the payments to the creditors on a priority schedule. Those who file Chapter 13 are allowed to keep all property – regardless of whether it is exempt or not – and, when the repayment schedule is completed, any remaining debt is discharged. The caveat to the discharge is that certain debts – such as restitution and fines, student loans, drunk driving debts, some child and spousal support payments, and recent taxes – must be paid in full to be discharged. In particular, family support payments must be paid in full by the term of the Chapter 13 plan. In a Chapter 13 filing, some income taxes can be discharged if the amount due was more than three years in the past and if the amount was assessed at least 240 days prior to filing. There are cases where taxes can be discharged even if it was not assessed prior to filing for Chapter 13. The first payment to the plan is generally due 30 days after filing the plan.
As is the case in all bankruptcy proceedings, the debtor must attend a meeting with creditors to go over the plan. Though creditors do not get to vote on the plan, they are allowed to file objections to it if the creditor believes that the plan does not adhere to requirements. Depending on the nature of the debt, creditors receive differing amounts under repayment. Priority debt generally includes recent taxes, and support claims, while non-priority debt usually includes consumer credit, personal loans, medical bills, and older taxes.
Chapter 13 plans, in general, cover only a partial debt repayment, but are dependent on the debtor’s income and assets. For the court to approve the plan, however, the plan must be filed in good faith, and it must account for the debtor to repay at a level equal to the debtor’s disposable income for a term at least 36 months long. The plan takes the day-to-day living expenses into account.
Finally, in a Chapter 13 filing, some of the costs can be made as payments under the plan. While a portion of your attorney’s fees and the whole of the filing fee are due upon filing, most of the rest of your attorney’s fees can be paid with payments made to the trustee under your Chapter 13 plan.
