Specializing in Business and Consumer Bankruptcy


Bankruptcy Basics

Bankruptcy is a legal process in which a person or a business that is unable to pay its debts may have most of the debts canceled, or “discharged,” The purpose of bankruptcy is to allow those who suffer financial hardship to receive a fresh start. Most of the bankruptcies are filed either as a Chapter 7 or Chapter 13.

Chapter 7

Chapter 7 is known as “straight bankruptcy” or “liquidation.” In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, spousal support, property settlement through divorce, income taxes less than 3 years old (with exceptions), student loans (unless the debtor prevails in a tough fight to win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor.

Chapter 13

Chapter 13, known as “consumer reorganization", or “debt adjustment case” is a section of the Bankruptcy Code which helps qualified individuals, or small proprietary business owners (NOT a corporation or partnership), who desire to repay their creditors but are in financial difficulty. Among other things, it offers opportunities to pay off past due mortgage arrearages or car payments over 36-60 months. Although Chapter 13 bankruptcy is a debt repayment plan for individuals, repayment of unsecured debt (such as credit cards or medical bills) can be anywhere from zero to 100% of the total unsecured debt.

Chapter 13 or Chapter 7?

One purpose of a Chapter 13, as opposed to an Chapter 7 is to enable a debtor to retain certain assets (for example, a home) that might otherwise be liquidated by a Chapter 7 Trustee. It also provides an alternative to Chapter 7 when a debtor has too much "disposable income" (the net monthly income exceeds the net monthly expenses) and usually results in much lower monthly payments. than you were previously paying.

The purpose of almost any personal bankruptcy is to discharge existing debts by repaying all or a portion of debts, and to allow a fresh start on your finances. Once a discharge is granted, there is no longer a need to repay most of the debts that were incurred before an individual filed for bankruptcy.

The only way to determine which Chapter to file under is to compare your options under the other available Chapters and be sure you have consulted with an experienced bankruptcy attorney to properly analyze your options.

Eligibility for Chapter 13

Only an individual with regular income who owes, on the date the petition is filed, less than $336,900 in unsecured debt and $1,010,650 in secured debts. The debts used to calculate these limits must also be noncontingent and liquidated. The debts must be for a certain, fixed amount (or easily determinable amount) and not subject to any conditions or bona fide disputes. If they are legitimately disputed or not liquidated, then those amounts may not be factored into the debt limit calculations.

The benefits of Chapter 13

Chapter 13 protects individuals from the collection efforts of creditors, permits individuals to keep their real estate and personal property, and provides individuals the opportunity to repay their debts through reduced payments.

An individual may be able to get rid of junior liens on their real property by way of “lien stripping.” If the fair market value of a property is less than the total amount owed to the first mortgage, then it’s possible to eliminate the security interest to any junior lienholders and treat them as general unsecured creditors in your plan (thereby being able to possibly pay them less than 100%).

Certain tax repayments can be made easier by due to the elimination of interest payments.

How does Chapter 13 work and how long does it last?

First of all, an individual must have "regular income". Meaning, they must have some source of income that is regular, or at least can be averaged regularly on an annual basis.

A debtor is usually required to pay all of their disposable income to the Trustee (through their Plan) over a period between 36 months to 60 months.

In addition to plan payments, a debtor must stay current with any ongoing obligations they have to secured creditors, such as a mortgage. Chapter 13 (or any chapter of bankruptcy for that matter) only affects debts that an individual owes on or before they filed for bankruptcy. Therefore, on their mortgages, vehicle payments and other secured debts, their monthly Plan payment goes to pay any arrearages (past due amounts) that existed on the date they file. The individual can repay that arrearage over the life of the Plan; but, they must stay current from the filing date forward with any mortgage payments, etc.

Secured debts (mortgages) must be repaid in full, but Chapter 13 enables a debtor to cure the defaults (reinstate the loans) over a period of between 36 months to 60.

Any Chapter 13 Plan of Payment requires a determination by the court that the case is filed and the plan proposed in Good Faith.

Bankruptcy Discharge

The desired outcome of the bankruptcy is to get a “discharge.” A discharge is a court order which states that an individual does not have to pay most of their debts. The discharge only applies to debts that arose before the date they filed for bankruptcy. Also, if the Court finds that the debtor received money or property by fraud, that debt may not be discharged.

Some debts cannot be discharged. These debts include:

• most taxes;

• child support and alimony;

• most student loans;

• court fines and criminal restitution; and

• personal injury caused by driving under the influence.

It is very important to list all assets and debts in a debtor’s bankruptcy documents. If a debt is not listed, it may be that the debt will not be discharged. The court may also deny a discharge if the debtor does something dishonest in connection with their bankruptcy case, such as concealing property or lying.