What Is Bankruptcy?
Bankruptcy is a way for people and businesses who owe more money than they can pay right now (‘debtors') to either work out a plan to repay the money over time in a case under chapter 11, chapter 12 or chapter 13, or to wipe out (‘discharge') most of their bills in a chapter 7 case. The filing of a bankruptcy petition immediately stops most actions to collect debts which were due at the time of filing, including lawsuits, repossessions, and foreclosures. Based upon the circumstances, the court may, however, permit some eviction, repossession, and foreclosure actions to continue even after the case is filed.
What chapter you choose to file under, what bills can be eliminated, how long payments can be stretched out, and other details are controlled by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. These are federal laws, which means they apply all over the United States. The Code and Rules are found in Title 11 of the United States Code. In addition to the Bankruptcy Code and Rules, what property you can keep will be affected by sections 703 and 704 of the California Code of Civil Procedure.
Who Can Start a Bankruptcy?
Any person, partnership, corporation, or business trust may file a bankruptcy. If the person or entity who owes the money, referred to as the debtor, files a petition and starts the bankruptcy, it is called a voluntary bankruptcy. The people or entities who are owed money, referred to as the creditors, can also start the bankruptcy by filing a petition against the person or entity who owes them money. This is called an involuntary bankruptcy. In an involuntary bankruptcy, the debtor gets a chance to contest the petition and contend it should not be in bankruptcy.
Voluntary cases can be filed under chapters 7, 9, 11, 12, 13, and 15. Involuntary cases can only be filed under chapters 7 and 11. Certain types of entities, such as banks and insurance companies, may not be eligible to file bankruptcy; however, almost all other entities can file a bankruptcy. A business that is NOT a partnership, corporation or business trust, cannot file a separate bankruptcy on its own. Those assets and debts would be included in the personal bankruptcy of the owner(s).
What are the different Chapters of Bankruptcy?
Chapter 7 is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases are commonly referred to as "straight bankruptcy" or "liquidation" cases, and may be filed by an individual, corporation, or a partnership. Under chapter 7, a trustee is appointed to collect and sell all property that is not exempt and to use any proceeds to pay creditors. In the case of an individual, the debtor is allowed to claim certain property exempt.(*) In exchange for this, the debtor gets a discharge, which means that the debtor does not have to pay certain types of debts. (**) Corporations and partnerships do not receive discharges. Consequently, any individuals legally liable for the partnership's or corporation's debts will remain liable. Therefore, individual bankruptcies may be required as well as the corporation or partnership bankruptcy.
Chapter 9 is only for municipalities and governmental units, such as schools, water districts, and so on.
Chapter 11 is the reorganization chapter available to businesses and individuals who have substantial assets and/or income to restructure and repay their debts. Creditors vote on whether to accept or reject a plan of reorganization which must be approved by the court. In addition to the filing fee paid to the Clerk, a quarterly fee shall be paid to the U.S. Trustee in all chapter 11 cases. There is no debt limit under Chapter 11. To qualify as a "small business chapter 11," the debtor must be engaged in commercial or business activities, other than the ownership of real property, and the total of its secured plus unsecured debts must be less than $2,343,300. Due to the expense and complexity of chapter 11, the decision to file a chapter 11 petition should be made in consultation with an attorney.
Chapter 12 offers bankruptcy relief to those who qualify as family farmers or family fishermen. There are debt limitations for chapter 12, and a certain portion of the debtor's income must come from the operation of a farming or fishing business. Family farmers and family fishermen must propose a plan to repay their creditors over a period of time from future income and it must be approved by the court. Plan payments are made through a chapter 12 trustee who also monitors the debtor's farming or fishing operations while the case is pending.
Chapter 13 is the debt repayment chapter for individuals with regular income whose debts do not exceed $1,441,875, ($360,475 in unsecured debts and $1,081,400 in secured debts), including individuals who operate businesses as sole proprietorships. It is not available to corporations or partnerships. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the chapter 13 trustee who distributes the funds for a percentage fee. Many debts that cannot be discharged can still be paid over time in a chapter 13 plan. After completion of payments under the plan, chapter 13 debtors receive a discharge of most debts.
Chapter 15 is a new chapter to deal with insolvency cases involving debtors, assets, claimants, and other parties in interest in more than one country. Due to their complexity, these "cross border insolvency cases" will always need a lawyer.
Can I file a Bankruptcy without an attorney?
Current law permits individuals to file their own cases and to represent their own interests in bankruptcy proceedings. However, it may not be wise for you to do so. Any bankruptcy case can become a complicated matter requiring both knowledge of the law and experience before the court to successfully complete. In order to fill out the forms required to file a case, you will need to know (among other things) the differences between the types of bankruptcies which can be filed, the types of exemptions which can be taken and the differences between secured and unsecured debts. As your case progresses, many other areas of law and knowledge may be involved. Decisions made without an understanding of basic bankruptcy law can have serious consequences including the loss of property and legal rights. Only an attorney may file a bankruptcy for a partnership or corporation. Even if an individual is the sole shareholder or the managing partner, that person may not represent the corporation or partnership before the bankruptcy court.
What is a Joint Petition?
Current law permits individuals to file their own cases and to represent their own interests in bankruptcy proceedings. However, it may not be wise for you to do so. Any bankruptcy case can become a complicated matter requiring both knowledge of the law and experience before the court to successfully complete. In order to fill out the forms required to file a case, you will need to know (among other things) the differences between the types of bankruptcies which can be filed, the types of exemptions which can be taken and the differences between secured and unsecured debts. As your case progresses, many other areas of law and knowledge may be involved. Decisions made without an understanding of basic bankruptcy law can have serious consequences including the loss of property and legal rights. Only an attorney may file a bankruptcy for a partnership or corporation. Even if an individual is the sole shareholder or the managing partner, that person may not represent the corporation or partnership before the bankruptcy court.
What Chapter of Bankruptcy is right for me?
You have a choice in deciding which chapter of the Bankruptcy Code will best suit your needs. The decision whether to file a bankruptcy, and under which chapter to file depends on the particular circumstances of the debtor. In general, chapter 7 is appropriate when the debtor has insufficient income to pay all or most of his/her debts. Otherwise, if the debtor has an income or property and can afford to pay all or a substantial portion of his/her debts, chapter 11, 12, or 13 may be appropriate depending on whether the debtor is an individual, partnership, corporation, or family farmer or fisherman.
These are only a few of the factors to consider, however. It is highly suggested that you meet with a skilled attorney to discuss your financial situation to determine which Chapter is right for you. The Law Offices of Peter G. Macaluso offers free consultations, during which we will go over your circumstances and needs and tell you what you should do.
There are also several "do it yourself" books that set out the details of each Bankruptcy Code chapter and attempt to explain the bankruptcy process. However, filing a Bankruptcy without the guidance of a skilled and experienced bankruptcy professional could lead to unexpected consequences that can jeopardize your assetts.
The decision whether to file a bankruptcy and under what chapter is an extremely important decision and should be made only with competent legal advice from an experienced bankruptcy attorney after a review of all of the relevant facts of the debtor's case.
What will I need to do to start a Bankruptcy?
Complete Pre-Filing Paperwork
Before a bankruptcy case can be filed, your attorney must collect a great deal of personal and financial information to effectively build your bankruptcy Petition and Schedules. This includes gathering documents such as:
Income statements
Tax returns
Bank statements
Mortgage statements and statements from other financed property such as vehicles or furniture
Retirement Account statements
Given the proper amount of information and documentation, your attorney can build a strong petition and Chapter 13 Plan that will not require revisions or amendments which can cost you time, energy, and money.
Complete Credit Counseling The first credit counseling course must be completed within 180 days before the filing of your bankruptcy petition from a government-approved institution. These courses cost about $20 on average and take approximately 2 hours to complete either online or over the phone. This course will walk you through the options available to you in dealing with debt.
What are exemptions?
11 U.S.C. § 522(b) allows an individual debtor to exempt real, personal, or intangible property from the property of the estate. Exempt assets are protected by state law from distribution to your creditors. Typically, exempt assets include some jewelry, vehicles up to a certain dollar amount, the equity in your home up to a certain amount, and tools of the trade.
Under bankruptcy law, you are entitled to list the assets set forth in section 703 or section 704 of the California Code of Civil Procedure as exempt. Exemptions are claimed on Schedule C. As with all schedules, it is important to fully complete and provide all the information requested. If no one objects to the exemptions you have listed within the time frame specified by the bankruptcy court, these assets will not be a part of your bankruptcy estate and will not be used to pay creditors through your bankruptcy case.
Deciding which assets are exempt and how and if you can protect these assets from your creditors can be one of the more important and difficult aspects of your bankruptcy case. It is extremely important to consult an attorney if you have any questions regarding the issue of exempt assets.
What are the main differences between Chapter 7 and Chapter 13 bankruptcy?
The goal of both Chapter 7 and Chapter 13 bankruptcy is a discharge of debts. The main differences are the eligibility requirements, the length of time the types of bankruptcy take, whether you need to repay your debts, and how much of your property you can keep. In Chapter 7 bankruptcy, you do not need to commit to repaying your debts, whereas in Chapter 13 bankruptcy, you must file a debt repayment plan with the bankruptcy court to repay all or a portion of your debts.
Is there a certain amount of debt to qualify for bankruptcy?
There is no minimum amount of debt to qualify for bankruptcy. However, certain debt limits apply to Chapter 13 bankruptcy. The maximum amount changes periodically, but is currently $1,149,525 in secured debt (such as a mortgage) and $383,175 in unsecured debt. It is also important to keep in mind that there are limits on how many times you can discharge your debts in bankruptcy. If your debt amount is relatively low, it may be a good idea to consider alternatives to bankruptcy now so that filing for bankruptcy remains an option for you in the future.
Do I have to be a certain age to file for bankruptcy?
There is no age limit for people who file for bankruptcy, though in some states debtors may have to be at least 18 years old.
What is the process for filing for bankruptcy?
The process of filing for bankruptcy is different depending on whether you are filing for Chapter 7 or Chapter 13 bankruptcy. The first step is determining which type of bankruptcy you are eligible to file. You are only eligible for Chapter 7 if you pass the means test. You can only file Chapter 13 bankruptcy if you have the income necessary to make monthly payments to the trustee.
Once you have determined which type of bankruptcy to file, filing a bankruptcy petition starts your case and triggers an automatic stay of all collection efforts by creditors. Both types of bankruptcy require you to collect information about all your debts at the outset.
Before filing for Chapter 13 bankruptcy, you will also need to receive credit counseling from an agency that has been approved by the United States Trustee's office. The agency will charge a fee for services, but there is a fee waiver or reduction for those that need it. You will also need to create a debt repayment plan, which your counselor can help you design.
In both types of bankruptcy, creditors will have the opportunity to object to the discharges of the debts they are owed. You will need to attend a 341 hearing, which is a meeting of creditors run by your bankruptcy trustee, and you will need to answer the trustee's questions about your financial situation. In Chapter 13 bankruptcy, you will also need to make monthly payments to the trustee over 3-5 years, and give the trustee annual income and expense statements. At the conclusion of this process, you will receive a discharge.
Does bankruptcy eliminate all of my debts?
Possibly. Most consumer debt can be eliminated through a bankruptcy discharge. If you forget to include a debt in the paperwork, however, it will not be discharged. Moreover, creditors have the opportunity to object to the discharge of any debt. There are 19 categories of debts that are considered "non-dischargeable," including many tax debts, child support, alimony, fines or penalties owed to the government, personal injury debts arising out of drunk driving accidents, criminal restitution, debts based on tax-advantaged retirement plans, and condo fee debts.
Some debts considered non-dischargeable can nevertheless be discharged if a creditor does not challenge your effort to get them discharged. These include credit card purchases worth more than $650 for luxury goods owed to a single creditor and incurred 90 days before filing, debts incurred due to willful and malicious personal or property injuries, and fraudulently obtained debts. Student loans are only discharged if you are able to convince the court that repaying the debt is an undue hardship for you.
Who will know if I file for bankruptcy?
When you file for bankruptcy, your case becomes a matter of public record. This means that anyone can access court records online or call the bankruptcy court to obtain details regarding your case. Your bankruptcy case will also involve a Meeting of Creditors that is open to the public, though it is unusual for anyone who is not involved in the case to attend. It may be possible to seal portions of your case, but this only occurs in rare instances.
Aside from court records, you may be listed in a local newspaper in relation to any public notices that are relevant to your case. Additionally, lenders you approach to apply for credit, and possibly employers, will learn of your bankruptcy filing if they review your credit history. However, a bankruptcy generally only stays on your credit report for 7 to 10 years, depending on whether you have filed Chapter 7 or Chapter 13 bankruptcy.
Realistically, neither friends nor employers are likely to find out about your bankruptcy filing unless you disclose it to them, or unless they look for it specifically.
How will bankruptcy affect my business?
The type of bankruptcy you file and the form of your business determines the impact of bankruptcy on your business. Only individuals can file Chapter 13, so it can be used to reorganize the personal and business debts of a sole proprietor, but it will not affect a corporation, partnership, or limited liability company. A business will file under Chapter 7 or Chapter 11.
Filing a Chapter 7 bankruptcy can wipe out your sole proprietorship's debts because it is not a separate legal entity from you. The business assets will be listed in the bankruptcy because they are your personal assets as well. A bankruptcy trustee will use the assets of a sole proprietorship to pay creditors back to the greatest possible extent. However, if you file a Chapter 7 bankruptcy there will be no impact to your business if it is organized as a partnership, corporation, or limited liability.
Chapter 11 bankruptcy is a business reorganization bankruptcy that allows your business to continue operating while reorganizing the debts according to a debt repayment plan. It is complicated, expensive, and appropriate for business owners who are trying to rebuild their businesses and plan for the future. There are expedited proceedings available for small business debtors who are trying to restructure the business, but you only have 300 days to propose a plan to repay creditors.
Will bankruptcy stop foreclosures or repossessions?
It is not uncommon for people to file for bankruptcy to stop foreclosures or repossessions. Filing for bankruptcy triggers an automatic stay, which requires creditors to stop their collection efforts, including efforts to foreclose on or repossess property. Whether the bankruptcy fully stops foreclosure or repossession, or merely delays these events, depends on the type of bankruptcy you file.
Filing for Chapter 7 bankruptcy allows you to stall a foreclosure sale for 3-4 months. It can buy you time to negotiate with a lender to change the loan period or loan terms of the mortgage. However, a lender may move to lift the stay. Filing for Chapter 13 can not only stop the sale, but also allow you to propose a debt repayment plan that will cover arrearages as well as mortgage payments that come due during bankruptcy. As long as the plan is approved and you make timely payments on this plan over the 3-5 years of bankruptcy, you can avoid foreclosure altogether. Moreover, you may be able to strip any junior mortgages that are not secured from your home.
While a Chapter 7 automatic stay stops a lender from repossessing your car, the lender can and probably will ask the court to lift the stay, unless you show that you are going to catch up on car payments or cure a default. The lender will need to show the court that its interests are inadequately protected because you have failed to make timely payments on the loan or you are in default. In most cases, if you cannot afford to catch up on car payments or cure your default, the court will lift the stay and will not stop a lender from repossessing your vehicle.
However, you should be able to stop a repossession altogether if you adequately address arrearages and upcoming car loan payments in your Chapter 13 debt repayment plan. To keep your vehicle, you will also need to make adequate protection payments from the date your file for bankruptcy until the date the judge approves the plan.
Can I wipe out medical bills by filing for bankruptcy?
Medical debt is one of the primary causes of bankruptcy for individuals. Medical bills usually represent a form of unsecured debt, and they can be discharged through bankruptcy.
In terms of how your debts are prioritized in repayment, the trustee handling your bankruptcy case is will pay off secured debts (such as mortgages, car, or other debts secured by property) with any available assets first. Medical debt, like credit card debt, is not likely to be tied to any collateral, meaning that medical creditors in many cases are left without payment after secured debts and higher priority unsecured debts (like child support and taxes) are paid off. Whether you file for Chapter 7 or Chapter 13 bankruptcy can often impact the extent to which any unsecured debts are satisfied.
Is student loan debt dischargeable in bankruptcy?
Student loans are considered non-dischargeable, unless you can prove to the court that repaying the loans would be an undue hardship. You must file a Complaint to Determine Dischargeability with the bankruptcy court, which will initiate a separate adversary proceeding.
Different courts use different undue hardship tests, but most courts only grant a student loan discharge if you suffer a serious disability that prevents you from working, you have dependents, or you are elderly. Under one test, known as the Brunner test, you can only obtain a discharge if: (1) repaying student loans would result in you and your dependents living in impoverished circumstances, unable to maintain a basic standard of living; (2) your situation will continue over most of the student loan repayment period; and (3) you tried in good faith to repay the loan. Another hardship test looks at the totality of the circumstances. While it is difficult to pass these tests, it is not impossible.
If you cannot pass the undue hardship test used by your court, you will owe student loans after a Chapter 7 bankruptcy is over. However, you may be able to pay a reduced student loan payment during the course of your debt repayment plan. Regular payments will resume after you have completed your Chapter 13 plan.
Will filing for bankruptcy stop collections calls and creditor harassment?
Filing for Chapter 7 or Chapter 13 bankruptcy initiates an automatic stay, which mandates that most creditors cease all collection activities. Once the stay is in place, creditors and collection agencies must stop contacting you by phone and mail, and cannot file or maintain lawsuits against you to recover most outstanding debts. They are also prohibited from filing liens against you or garnishing your wages.
The automatic stay can also temporarily stop foreclosure proceedings, utility shut-offs, and evictions. However, the stay will likely not apply to certain proceedings, such as legal actions to collect child support or alimony, and certain IRS matters. In some cases, creditors may also ask the court to lift the stay.
Repaying your debts in Chapter 13 occurs over a 3-5 year period, and you must have income sufficient to make full timely payments. You will not receive a discharge until you complete your plan. Generally, you will not lose your property in a Chapter 13 bankruptcy, as long as you account for repayment of any arrearages as well as payments that come due during the plan.
In contrast, in a Chapter 7 bankruptcy, a trustee can take the property you owe that is not exempt from collection, sell it and distribute the proceeds to your creditors so that they are repaid to the extent possible. Exemptions vary from state to state, but typically you are able to keep some or all of the equity in your home, car, and personal property. Only those who pass a "means test" can file Chapter 7 bankruptcy. Assuming you pass the means test and include all your debts in your paperwork, your debts are likely to be discharged within 4-6 months.