Bankruptcy
The following questions and their answers are some of the most widely asked in preparing to file for bankruptcy protection. This list is very limited, however, the information if useful so that a prospective debtor can understand what the bankruptcy protections and its chapter can address.
Questions:
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What is Chapter 13?
When should I consider filing a Chapter 13?
How can I pay for an attorney?
Must I have credit counseling before bankruptcy?
What about Foreclosure and can a Chapter 13 save my home from foreclosure?
After a Sheriff Sale, can a Chapter 13 get my house back?
But I can't afford my mortgage payments, so can Chapter 13 eliminate extend or reduce them?
What if my mortgage company overcharges me?
What if I owe the electric company, will they shut off my power?
Can a bad check to a creditor be discharged in a chapter 13?
What about automobiles that are currently being financed and are there a need to reaffirm any debts?
What about Bankruptcy Choices for Small Businesses?
At a minimum, what is expected from a Debtor in a Chapter 13?
What exactly is the Section 341 – Meeting of Creditors?
What About False Statements And Fraudulent Debt Collection Practices?
What Are Exemptions?
What about Bankruptcy Choices for Small Businesses?
Is there Chapter 11 for individuals?
What is Chapter 7?
What is Chapter 13?
Chapter 13 addresses situations where assets are subject to protection, or, where income is higher and the Chapter 7 is not permitted. Additionally, Chapter 13 is used frequently to stop mortgage foreclosures and can save your home. Saving your home can be even at the last moment. Chapter 13 designed for wages earners or small businesses owners. When a case is filed, then debt collection activities are, including wage attachments, mortgage foreclosures, lawsuits, telephone calls, letters, bank setoffs or any kind of collections activity at stopped by what is called and Automatic Stay. The Debtor's attorney proposes a "plan" of repayment. The plan may, in most circumstances, propose payments in an amount less than your debts. Many, who earn less than the median income for their states, pay much less than all of their unsecured debts, and some pay none of those debts.
Whether or not this is the proper type of filing for the Debtor, as opposed to a Chapter 7 or a Chapter 11 filing, depends upon a "means test" and the level of assets that one had prior to the filing of the bankruptcy protection; respectively. For Chapter 13, the purpose of the means test is twofold. The first is to determine the length of time the Debtor must be pay into a Chapter 13 plan and the minimum amount the Debtor must repay unsecured creditors. After a "confirmation hearing," the court approves your plan, and it becomes binding upon you and the creditors. After you complete payments under the plan, the court cancels the balance of your unsecured debt.
All debts are not treated the same. Mortgage obligations, various other long term debts, alimony or child support, many taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime) are not cancelled.
When should I consider filing a Chapter 13?
Consider filing a Chapter 13 if:
- Is your home is being foreclosed?
- Have you received a notice from your mortgage company that they intend foreclosure at any time in the future?
- Are you in a severe financial difficulty and have tried, but cannot work other arrangements with your creditors?
- Is your income otherwise good, yet, you are not making ends meet so that you can pay creditors full payment, each month?
- Is your income deficient so that the Income to pay debts is less than 100% of the debts you owe and you would like to make interest-free payments to unsecured creditors?
- Are you possessing an honest desire to not "run away from" your creditors, but are not in a financial position to pay all the debt?
- At some other time, had you already been in a Chapter 13 and the case was dismissed for almost any reason so that refilling is usually possible? You should be aware that payments to mortgage creditors generally couldn't be reduced or modified?
How can I pay for an attorney?
An arrangement for period payments can be made with an attorney in a Chapter 13. However, the payment is generally paid to and through the bankruptcy trustee as part of the plan's payment. There are other things to consider when filing instead of continuing to pay-down debts. One should consider that not paying a significant portion of the indebtedness is in itself the source of the funds that have been freed in order to pay for counsel fees. Further, the savings include the payment of certain debts, which may be paid through the chapter 13 plan without interest. Also, the fees paid—one has up to five years to pay! This will increase your plan payments only marginally.
Must I have credit counseling before bankruptcy?
Absolutely! You must have credit counseling! This is one of the big reasons that you do not want to wait until the last minute, if your financial deficiencies are stemming from an impending sheriff sale. The new Bankruptcy Code (BAPCPA) presently requires credit counseling prior to filing a bankruptcy case. Failure to obtain counseling will almost always lead to dismissal of your chapter 13 case. Said another way, you are not even considered to be a debtor if you don't have counseling. The penalty for the dismissal means loss of the filing fee, possibly your attorney's fee, and perhaps even your home to a sheriff sale. Since credit counseling can be done over the Internet or over the telephone, any person reading this can obtain such counseling without major inconvenience.
What about Foreclosure and can a Chapter 13 save my home from foreclosure?
It is a frightening thing to risk losing your home due to financial circumstances beyond your control. An experienced foreclosure attorney may offer you counsel in taking the necessary positive action to save your home from foreclosure. A question that one needs to ask is whether or not there is any equity in the property exists, and whether or not there is too much of a sentimental attachment to the property.
Foreclosures in Pennsylvania are accomplished through a legal process undertaken by a bank, mortgage company or lender to terminate and end homeowners' interest in their homes after they have fallen behind on mortgage payments. Often, there are ways to stop or at least slow down foreclosure if acting soon enough. However, when your home's sheriff's sale is happening tomorrow, it may be too late! Delay is your enemy!
In other situations, especially when served the complaint or served a Motion for Summary Judgment, then there can be legal protections short of bankruptcy that one may want to consider. These include utilizing legal responses against the mortgagee (for example a bank), the loan holder. Also, they include serious negotiation, since the mortgagee does not really want the real estate back. Mortgage holders are in the business of lending money. They are not real estate companies. This can work to your advantage, if properly represented.
One special feature of chapter 13 is its ability to save home ownership when one falls behind in their mortgage payments and therefore defaults on the mortgage. In other words, Chapter 13 facilitates the addressing of mortgage payment arrearages, so that the Debtor can successfully reinstate a mortgage to its pre-default status. This is done through payment of a Chapter 13 "plan. Usually in a Chapter 13, the Debtor makes payments to a trustee over a 36 - 60 month period, which sum includes sufficient funds to reinstate the loan to current status. During this time period, the mortgage company cannot sell your home or in any way continue with the foreclosure action, if one is pending. If a foreclosure action is not commenced when you file, the mortgage company cannot begin one after you file or while the case is pending. For example, if a homeowner is behind $12,000.00 in mortgage payments, in a 60-month plan, you would pay $200.00 per month in order to bring the mortgage current.
After a Sheriff Sale, can a Chapter 13 get my house back?
You do not want to wait until the last minute to file. Generally, once your house is sold at a sheriff sale, there is no sense filing a chapter 13 to try to save it. The filing of a case will not, in and of itself, set aside or vacate a sheriff's sale held in a regular manner in accordance with the law. Sometimes, and this is rare, the state court may set aside the sheriff's sale if the sale was conducted in an illegal manner, or without proper notice. It is usually very difficult to get a court to set aside the sale. Therefore, once the "hammer falls," you had better start looking for another place to live. This is an important reason not to wait for filing bankruptcy.
But I can't afford my mortgage payments, can Chapter 13 eliminate, extend or reduce them?
One of the primary requirements of the Bankruptcy Code relating to Chapter 13 plans is the antimodification clause. This states that a Chapter 13 Debtor must provide for full payment to a mortgage company which maintains a lien on the residence of the debtor where that lien is the only security held by the mortgagee; e.g., the bank. Your mortgage payment cannot be changed, stayed or eliminated, except that mortgage arrears only may be paid over the life of the plan. This is a maximum of 60 months. However, in many situations, the holder of the mortgage may be willing to modify the loan in order to help in avoiding bankruptcy. Legal counsel should be utilized for this type of dealing.
What if my mortgage company overcharges me?
Mortgage companies are notorious for adding additional charges for all kinds of things, e.g., the mortgagee will bill for sheriff's charges and not give you credit for money they receive back from the sheriff when you file bankruptcy. Further, by filing a bankruptcy, your creditors, and even and especially, your mortgagee and car finance companies do not have the right to double charge, overcharge or charge without a reasonable explanation as to the amount in their proof of claim. A "proof of claim" is the document filed by a creditor stating what they believe you owe. As a matter of fact, it is very often wrong. There is a way to handle any objection to any amount claimed from the debtor in bankruptcy. It is called an Objection or an Objection to Proof of Claim and it can be filed for any claim.
What if I owe the electric company, will they shut off my power?
The Bankruptcy Code prohibits your local power, water, telephone, or any utility company from discriminating against you because you have filed a bankruptcy. It cannot shut off your power, water or phone service or refuse you any utility service just because you filed. You should be aware that your local utility company might request a deposit from you for continued service.
Can a bad check to a creditor be discharged in a chapter 13?
Generally speaking, the writing or the issuing of a bad check is a crime. What is a bad check may be defined differently in individual states. Most states will give a chance to cure a bad check before prosecution. The bankruptcy will not protect you from criminal prosecution and will not discharge criminal liability for restitution, costs or fines. In addition, you can be arrested, notwithstanding the bankruptcy. While it is strongly recommended that you satisfy all bad checks before you file for bankruptcy protection, the payment should be made after having legal counsel in order to best address the civil and criminal ramifications of these matters.
What about automobiles that are currently being financed and are there a need to reaffirm any debts?
If you car note is current, you are not under an obligation to reaffirm. Said further, one is never under an obligation to reaffirm any debt, and, generally it is not in the debtor's best interest to reaffirm debts. Reaffirming a vehicle, based debt is not a good deal, if the vehicle is current. Most states will not permit repossession just because of a bankruptcy. Once again, local counsel should be consulted since the rules may change from one area of the country to another.
What about Bankruptcy Choices for Small Businesses?
Businesses must choose among alternative types of bankruptcies, each of which corresponds to a different part, or chapter of the federal Bankruptcy Code. Businesses usually choose either Chapter 7 or Chapter 11. Occasionally Chapter 13 maybe available. Sometimes businesses can be involuntary drawn into bankruptcy by their creditors, who face stiff financial penalties if they initiate an involuntary bankruptcy for invalid reasons. Further, the choice between Chapter 7 and Chapter 11 is not necessarily permanent; once proceedings have begun, a case may be converted to a different chapter, under certain circumstances.
At a minimum, what is expected from a Debtor in a Chapter 13?
Remember, this is a serious undertaking. You are within the jurisdiction of a Federal Bankruptcy Court. Debtors have serious duties in order to gain bankruptcy protection. The most important obligations a Debtor will have when in a Chapter 13 are as follows:
- Truth: Full disclosure is a must. Be truthful to all authorities. Lying in a bankruptcy proceeding is a federal crime and is punishable. A debtor can accomplish better results by truthfully disclosing unfavorable facts than by lying about them.
- Payments: Pay the plan faithfully. Missing two consecutive payments causes a plan to be subject to dismissal. A wage attachment does a better job of making sure the payment is made, however, it is also more restrictive. Genially, your legal counsel encourages it, when it is practicable. However, if an employer stops making payments for any reason, it is your responsibility to continue them. The first is a matter of accounting, is it suggested to retain your money order receipts as proof of payment.
- Attendance: Attend court when directed. Court appearances will be minimized, however, there is not a general reason not to attend short of an absolute emergency. Most debtors only appear one time, at what is called a Section 341 -- Meeting of the Creditors. At that meeting, the creditors are allowed to attend and ask questions.
- Mortgage Kept Current: This cannot be stressed enough. Current monthly mortgage payments must be maintained. Pay the regular monthly amount to your mortgage company unless you are instructed to do otherwise. For example, the payment for this, along with the payment of other creditors, may need to go through the Chapter 13 Bankruptcy Trustee's Office. No matter what procedure is used, the failure to pay the mortgage is never excused from making current monthly mortgage payments. Failing to comply with this requirement will eventually cost you your home.
- Compliance: Obey all orders of the Bankruptcy Court.
What exactly is the Section 341 – Meeting of Creditors?
This sounds scary, but generally speaking, it is not! Ordinary debtor should not dread it. Most of the time, few or even no creditors actually show. If they do, your attorney should be easily being able to handle them. The trustee presides over the meeting. The trustee will ask you questions about the reasons for filing and he will verify essential facts. It is therefore important that you come prepared. You can get a checklist as to what to bring for your legal counsel. Generally, these are the items that you will need to bring to a meeting of creditors.
Things you made need to bring:
- A copy of your last tax return must be in the trustee's possession at least 7 days prior to the creditor's meeting,
- Proof of identification, which contains a picture. This needs to be a government pictured identification (ID) and social security number.
- Proof of your income.
- Proof of income from rent, leases and other agreements.
- Proof of real estate value.
- Proof of outstanding balance on secured debt, such as- mortgages and car loans.
- Proof of insurance for all vehicles.
- Proof of other insurances such as fire insurance on real estate.
- IRA, stock and mutual fund accounts, annuities, savings account statements.
- Copies of lawsuit complaints for pending matters.
- Listing agreements if your house is presently being sold, copies.
What About False Statements And Fraudulent Debt Collection Practices?
A federal statute known as the Fair Debt Collection Practices Act gives specific legal rights to sue debt collectors who unlawfully threaten, berate, intimidate or harass; including calling during odd hours, make false representations about the debt or their intentions, or otherwise act in ways proscribed.
False statements may include threats to:
- Attach your wages when unlawful or not intended.
- Threats to take more wages that is permitted by the federal limitation.
- Contact your employer about the debt.
- Calling "everyday until the debt is paid."
- Selling the debt to another company for the purposes of continuing collection on a time-barred debt.
- Contact neighbors about the debt.
- Contact the Department of Homeland Security about your alien status.
- Threaten imprisonment or criminal punishment.
- Report a financed vehicle as "stolen" because you missed one or more vehicle payments.
- File or threaten to file criminal bad check charges on a post-dated check that the collector solicited.
- Immediately evict, whether or not by an agent for a landlord, lockout, or seize personal property where such relief is limited by state law.
- Sue, where no suit is intended, e.g. a collector requested "settlement prior to possible legal action" where the collection agency had no authority to sue, or to retain counsel.
- Threats implying that the collection agency has multiple employees or investigators working to collect the debt, where only one or two people work for the agency.
- Collect or sue for "collection costs," "attorney's fees," interest not pre-agreed to in excess of that allowed by statute, "fines," or any other fee in excess of the actual amount due, unless the original agreement provides for the amount the collector threatens to collect. The collector cannot threaten to add attorney's fees or his fees where the agreement you signed does not specifically provide for them.
- Add "collection costs, attorney's fees" and similar additional charges have also been held to be deceptive and misleading, because they do not state exactly what debt is being sought.
- Sue or bring any kind of legal action where the threat is not followed through, or any number or other threats designed to demoralize, humiliate, degrade; embarrass or intimidate a debtor into payment.
- Or any threat where the collector says he is legal counsel or an attorney/lawyer when he is not.
- Or a threat or attempt to mislead a debtor that a claim will be transferred to an attorney or separate department of a collector.
- Letters misrepresenting that the account has been transferred to an attorney may include an attorney's letterhead with threats of legal action.
What Are Exemptions?
Always consult bankruptcy counsel for proper exemption counseling. These choices need extensive expertise, so that the situation of a bankruptcy can best utilize the exemptions available. Every state does not permit the use of federal exemptions. Some states have "opted-out" of the system. Although the Bankruptcy Code is federal, Congress specifically permitted this opt-out of the federal bankruptcy exemption scheme. Sometimes, a debtor may want to choose the state exemptions out of choice. For example, Pennsylvania law includes tenancy- by- the-entireties. Tenants-by-the-entireties covers personal property such as bank accounts and in fact, anything acquired by the spouses for use in a home owned in the entireties. "Entireties" ownership means husband/wife joint ownership. However, while it is an unbreakable unity and is unassailable by any creditor of either spouse, it does not hold true when both spouses owe the debt jointly.
Bankruptcy Exemptions Under Federal Law (Sec. 522)
| Section | Description |
|---|---|
| 522(d)(1) | Real property or personal property used as a residence (e.g. a trailer). |
| 522(d)(2) | Debtor's interest in one motor vehicle. |
| 522(d)(3) | Household goods, clothing, appliances, animals, crops, musical instruments for family use, not to exceed $525 in any one item. |
| 522(d)(4) | Jewelry for personal or family use. |
| 522(d)(5) | Aggregate interest in any property, not to exceed $975 in value plus $9,250 of unused amount of exemption under 522(d)(1). |
| 522(d)(6) | Implements, professional books, tools of trade. |
| 522(d)(7) | An unmatured life insurance contract of debtor other than credit life. |
| 522(d)(8) | Unmatured life contract's accrued dividend . |
| 522(d)(9) | Professionally prescribed health aids. |
| 522(d)(10) | Debtor's right to receive social security, veteran's benefits, disability, illness and unemployment benefits, alimony, support or maintenance to extent reasonably necessary for the support of debtor and dependents. Also a payment under a stock bonus, pension profit-sharing, annuity or similar plan on account of illness disability, death, age or length of service to the above extent. |
| 522(d)(11)(d) | Rights to receive bodily injury payment for pain & suffering or actual pecuniary loss. |
What about Bankruptcy Choices for Small Businesses?
Business Chapter 11 Overview
In Chapter 11 bankruptcies, which are usually filed by businesses and more rarely by individuals, the commercial debtor is usually allowed to stay in business throughout the bankruptcy proceeding, as a debtor-in-possession. A business debtor may only operate independently in its ordinary course of business. Transactions outside the ordinary course of business require court approval such as the sale of equipment or the taking on of additional capital.
A Chapter 11 proceeding is initiated by filing a petition, but a trustee is not automatically appointed. Although the bankruptcy judge may decide to appoint a trustee in a Chapter 11 case, it is the exception rather than the rule. As in Chapter 7, the filing of the bankruptcy petition stops creditors from attempting to collect their debts.
The debtor has time to file a proposed plan of reorganization. The plan of reorganization sets forth in detail how the debtor intends to conduct its business and explains how the operation of this business assists in the additional payment to creditors, in a way that it would pay more than if the business assets are liquidated and the proceeds were used to pay the creditors. From a practical perspective, many companies wait too long and are too far into the financial hemorrhage in order to turn the operation around. Like most situations, debtors should gain legal counsel earlier, since many matters can be addressed prior to the filing of the Chapter 11, in order to have a softer landing and better probability of having a successful turnaround.
In some situations, creditors may instead or also propose plans of reorganization. Creditors are divided into classes with varying rights depending upon the types of debt they hold. The approval process involves negotiation and input from creditors. Ultimately, the court must approve a plan. In some cases, the court approves the plan even though some of the creditors did not. If no plan is approved, however, the bankruptcy is often converted to Chapter 7 liquidation or may be dismissed. In sophisticated businesses, where the unsecured debts may be significant, the court may allow for the appointment of a creditors' committee, so that they can engage the Debtor and the Court in proposals along the way, in order to assure their repayment.
Is there Chapter 11 for individuals?
Most of the time, Chapter 11 Bankruptcy protection is applied to businesses; usually corporations. However, in certain instances, Chapter 11 will be the avenue for bankruptcy protection for individuals because of the size of the estate that an individual or individuals might possess. In many situations it may be used by sole proprietors, such as doctors, lawyers, and other professionals that have a business operation and for some reason, never went further to incorporate.
A Chapter 11 case also provides a debtor with the benefit of the automatic stay and an individual has the right to claim exemptions as to his assets. In fact, the automatic stay also protects a co-debtor of the debtor for a consumer debt. In addition, the debtor has a greater ability to retain property because the debtor is making payments to creditors out of the debtor's future earnings.
When a debtor exceeds the debt limits set forth in Chapter 13, the alternative is a Chapter 11. Under Chapter 11, the debtor typically remains in possession of his/her property. The debtor is able to claim certain of his/her assets as exempt. Depending on the bankruptcy court in which the debtor files, the debtor may be able to choose between two different sets of exemptions -- state law exemptions or federal bankruptcy exemptions. While federal bankruptcy exemptions are uniform, state exemptions vary dramatically from state to state.
Under Chapter 11 the debtor typically keeps his/her property by repaying creditors (to a certain extent) out of the debtor's future income. Each Chapter 11 debtor writes a Plan, which must be approved. The establishment of a plan is part of the preparation undertaken with the help of legal counsel.
The approval process is complicated involving the debtor's creditors, the trustee and the Bankruptcy Court. The Debtor is required to make certain disclosure statements in addition to maintaining regular payments to creditors as stated in the plan. Further, in order to prepare a petition (and schedules and statement of financial affairs and plan) under Chapter 11, the debtor must provide debtor's name, age, social security number, assets, debts, income, expenses, dependent children, as well as other information regarding the debtor's financial history.
In Chapter 11, the debtor must attend a Section 341 hearing, which is a meeting set for creditors to attend. The hearing is scheduled. Notice of the hearing is provided shortly after the bankruptcy is filed. At that hearing, the debtor is questioned by the trustee about the information contained in the bankruptcy documents (the petition, the schedules and the statement of financial affairs). A trustee may request the debtor to bring certain documents to the meeting depending on the information contained in the debtor's schedules. A trustee is appointed in a Chapter 11 case as in other cases.
In a Chapter 11 case, a debtor can be discharged from almost all debts, except for claims for alimony, maintenance or support, claims for certain educational loans, certain debts where the last payment will not be due until after the completion of the plan, debts arising from operating a motor vehicle while legally intoxicated and claims for restitution obligations imposed as a condition of probation in a state criminal case.
A debtor will not be able to proceed under Chapter 11 unless he/she has some regular source of income and current income exceeds current expenses (as if the debtor were starting anew without any delinquency owing to any creditor as of the petition date). The regular source of income does not have to be wages from a job.
In a Chapter 11, priority claims must be paid in full even if there would be no distribution to such claimants in a Chapter 7 proceeding. Priority claims are such claims as various types of taxes, certain wages owed to employees and deposits for the purchase, lease or rental of property or services for personal, family or household use, where the property or services were not delivered or provided, claims which are generally not dischargeable in a Chapter 7.
Generally, a debtor's unsecured creditors in a Chapter 11 case will have to receive at least as much as they would if the debtor's non-exempt property were liquidated and the monies generated from the sale were distributed as if the case were a Chapter 7 proceeding. Generally, a plan has to be filed within 120 days after the filing of the bankruptcy petition after which time the debtor's creditors review and vote on the proposed plan. Creditors may also propose a counter plan. The plan can provide for payments of up to 60 months.
What is Chapter 7?
Chapter 7 is usually employed by consumer debtors, but can also be used by businesses that want to liquidate their assets to be relieved of debt. A Chapter 7 bankruptcy is commenced when the business files a petition with the bankruptcy court. The court then orders an automatic stay of all collection action against the business and its property. A court-appointed trustee manages the details of the bankruptcy, selling business assets to satisfy business debt, to the extent possible. At the conclusion of the proceeding, remaining debts of the business are not discharged as with an individual debtor, but generally the business ceases to exist because its assets are gone and it is no longer a profitable concern. Chapter 7 bankruptcies are called "liquidation bankruptcies."