Sterling Law can help you decide if bankruptcy is a viable option in dealing with debt problems. Whether, how, and when to file a bankruptcy petition is probably the most important single decision made in a bankruptcy case. It involves the interplay of a number of factors. Many of these are unique to each client; others turn on state law, custom, or practice in a community, or the provisions of the Bankruptcy Code. The initial consultation process puts the client in a position to make an informed decision regarding bankruptcy, and lays the groundwork for a quick, aggressive, “team-oriented” approach to filing for bankruptcy, should the facts of the case warrant doing so.
Once bankruptcy is being seriously considered, and has perhaps been tentatively decided upon, much more information is necessary. Only after all of this information is gathered can bankruptcy be finally recommended. A combination of questioning the client in coordination with a detailed questionnaire completed by the client is the most common way of “filling in the complete picture.”
Before a bankruptcy case can be filed, it is necessary that a decision be made that bankruptcy is, in fact, the best option for dealing with the problems facing a particular client. The first step is the client interview. This interview will usually serve to quickly identify most cases in which bankruptcy is not appropriate. Some of the initial questions include:
What types of debt are causing the most trouble?
How were the debts incurred and are they secured?
What significant asset does the client have?
How much income does the debtor have available which is not committed to unavoidable expenses?
How imminent is creditor action which may limit the client’s options?
The answers to these general questions will reveal not only the likelihood of relief in a bankruptcy but also many other dimensions of the client’s problems: their causes, their scope, whether they are likely to continue or recur, and whether other solutions are preferable.
What Is Bankruptcy?
A bankruptcy case is a legal proceeding, brought by a debtor that seeks relief specifically provided for by a federal statute, the Bankruptcy Code. The bankruptcy case must be brought in the United State District Court, which has jurisdiction over all bankruptcy cases.
Relief Available in Bankruptcy
For individuals, there are two types of relief that are usually used. The first is liquidation under chapter 7 of the Code. In a liquidation case, all of the debtor’s nonexempt assets are converted to cash and distributed to creditors according to certain statutory rules. At the end of the proceeding, the individual debtor receives a discharge, which absolves him or her from any responsibility to pay most debts and also provides various other protections.
The second type of relief is a reorganization, or adjustment, of the debtor’s financial affairs, which is available under chapter 13 of the Code. In a chapter 13 case, the debtor proposes a plan for payment of some or all of his or her debts, within certain statutory guidelines. The plan is then carried out under court supervision with the court protecting the debtor, and usually all of the debtor’s property, from creditors. At the end of the case, as in a chapter 7 case, the debtor receives a discharge from personal liability on most debts, as well as other protections.
Neither discharge by itself protects the debtor’s property from creditors with valid liens on the property. However, the Code offers a number of ways, particularly in chapter 13, for debtors to obtain full or partial relief from secured claims in most cases.
The Bankruptcy Estate
The term "bankruptcy estate" describes all of the debtor's property rights that can be administered by the court in a bankruptcy case. The estate is created upon the commencement of the case and it generally consists of all interests of the debtor in any kind of property as of that time. Most consumer debtors will find that they can exempt all or almost all property of their estate. Even property which cannot be exempted is often of little interest to the trustee, because of the cost of liquidation, including payment of liens and taxes, and is therefore abandoned or sold back to the debtor.
Chapter 7 Bankruptcy
The filing of a voluntary chapter 7 petition constitutes an order for relief under that chapter. This means that the process of granting the relief requested is automatically set in motion. The filing of the petition operates to effectuate the automatic stay provided for in section 362 of the Code. With a number of exceptions, the stay prevents further proceedings or acts against the debtor or the debtor’s property by anyone, except in the bankruptcy court, with respect to any claims arising before commencement of the case. The scope of this rule is so broad that even "collection calls" by creditors must stop during the pendency of the stay.
In every case under chapter 7 or chapter 13 of the Code, a trustee is appointed by the United States trustee. The trustee’s basic role is to represent the interests of the unsecured creditors.
Normally, within a few weeks after filing, the court mails to all creditors, the debtor, and the debtor’s attorney, a notice of the stay and of the date and place set for the section 341(a) meeting, also known as the meeting of creditors. The debtor’s first, and often only, appearance at any kind of a hearing usually occurs at the section 341(a) meeting (meeting of creditors). This proceeding is intended to give the various parties a chance to examine the debtor and her affairs. In practice, the meeting allows the trustee to learn whatever she feels is necessary to perform the trustee’s duties.
After the Meeting of Creditors
What happens after the meeting of creditors depends to some extent on whether there are substantial assets in the bankruptcy estate that are neither exempt nor encumbered, and that are thus available for the unsecured creditors.
In all cases, unless some party successfully objects, the debtor retains property claimed as exempt. The trustee generally abandons all property in which there is little or no nonexempt equity by declining to administer (i.e., sell) the property and closing the case. If the estate has more than nominal assets, the trustee may attempt to collect and sell the nonexempt property for distribution to unsecured creditors. In most cases involving consumer debtors, of course, no distribution is made to any creditor because there are no non-exempt assets to distribute.
The final step in a chapter 7 bankruptcy is usually the granting of debtor’s discharge. The discharge is effective as to most debts, with notable exceptions including domestic support obligations and student loans. Also, to the extent a secured creditor’s lien has not been avoided, that creditor normally will retain the right to bring a foreclosure action to enforce its lien.
Once the discharge order has been entered, a no-asset chapter 7 case is complete, except for a notice of discharge sent out by the court to the debtor and all creditors. Except for some narrow circumstances including the receipt of an inheritance within 180 days of the filing of the original petition, there is nothing further to be done by the court and the case is closed.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy gives the debtor the opportunity to adjust his or her financial affairs without having to liquidate current assets. Rather than being designed to pay debts out of those assets, a chapter 13 case usually involves payment of debts out of future income. The debtor is allowed to keep and use all property, whether exempt or not, and to pay some or all debts according to a plan approved by the court. At the completion of this plan the debtor receives a discharge which, with several significant exceptions, is similar to the discharge received in a chapter 7 case.
The Chapter 13 Plan
Many of the forms required for a chapter 13 filing are identical to those required in chapter 7. There are only a few significant differences in the filing required under the two chapters. One is the chapter 13 plan. The debtor is given great leeway in formulating the plan, subject to only a few requirements. The most important of the provisions usually required, are listed below:
All claims given priority under the Code (such as domestic support obligations) must be paid in full, with very limited exceptions;
The present value of payments on unsecured claims must be at least equal to what would be paid in a chapter 7 liquidation;
With respect to each secured claim under the plan, either: 1) the secured creditor must accept the plan; or 2) the plan must provide for payments with a present value in the amount of the claim; or 3) the debtor must surrender the property securing the claim to the creditor;
If a party objects to the plan, the plan must either commit all of the debtor’s disposable income for the applicable commitment period (three or five years) or pay unsecured claims in full.
The Confirmation Hearing
Once a chapter 13 debt repayment plan is proposed, the debtor appear at a Confirmation Hearing at the bankruptcy court, at which the Judge will determine if the chapter 13 plan meets the requirements listed above. The effect of confirmation is to bind the debtor and all creditors of the debtor to the terms of the plan. The trustee then begins payments to creditors under the plan.
The final step in a successfully completed chapter 13 case is the discharge. The discharge received in a chapter 13 case is often broader than that received in a chapter 7 case. The chapter 13 discharge may eliminate liability on certain debts no dischargeable in a chapter 7 case, including willful and malicious injuries to property, marital property settlements, and certain fines or penalties. However, as in chapter 7, to the extent that a secured creditor’s lien has not been avoided, that creditor most likely will retain the right to bring a foreclosure action to enforce its lien.