A brief overview of how filing bankruptcy can help you get a fresh financial start.
The Process
Article I, Section 8 of the United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies." Under this grant of authority, Congress enacted the Bankruptcy Code in 1978, which is codified as Title 11 of the United States Code. The Code has been amended several times since its enactment, most recently in October, 2005. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure and local rules of each bankruptcy court. The Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (and local rules) set forth the formal legal procedures for dealing with the debt problems of individuals and businesses. There is a bankruptcy court for each individual judicial district in the country, and each state has one or more districts. There is one district in the state of Oregon, and the cases filed in the District of Oregon are handled by Bankruptcy Courts established in Portland, Eugene, Bend, and Pendleton. There are three United States Bankruptcy Judges in the Portland Court. Much of the bankruptcy process is administrative, however, and is conducted away from the courthouse. In cases under chapters 7, 12, or 13, and sometimes in chapter 11 cases, this administrative process is handled by a trustee who is appointed to oversee the case. The debtor's involvement with the bankruptcy judge is usually very limited. A typical chapter 7 debtor will not appear in court and will not see the judge unless an objection is raised in the case. A chapter 13 debtor may only have to appear before the judge at a plan confirmation hearing, but usually the debtor is not required to attend that hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the U.S. Trustee. This meeting is usually called a "341 meeting" because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors and the trustee can question the debtor about debts and property. A fundamental goal of the federal bankruptcy laws is to give debtors a financial "fresh start" from burdensome debts. The Supreme Court, in a 1934 decision, made this point: "It gives to the honest but unfortunate debtor...a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co. v. Hunt, 292 US 235, 244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. Six basic types of bankruptcy cases are provided for under the Bankruptcy Code. Only chapter 7 and chapter 13 cases are discussed in this paper. Chapter 7, commonly referred to as "Liquidation", involves a typically orderly, court-supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. There is usually little or no nonexempt property in most chapter 7 cases and, therefore, there is often no liquidation of assets in chapter 7 cases. These cases are called "no-asset cases." The debtor normally receives a discharge approximately 90 days after the petition is filed. If a debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief. Chapter 7 is available for individuals and corporations. Chapter 13, referred to in the Bankruptcy Code as "Adjustment of Debts of an Individual with Regular Income," is designed for an individual debtor who has a regular source of income and is not available for corporations. Chapter 13 can be a better choice for an individual because it enables the debtor to keep valuable assets and allows the debtor to propose a plan to repay creditors over a period of 36-60 months. Chapter 13 is also available to debtors who do not qualify for chapter 7 relief. The debtor must make monthly payments to the chapter 13 trustee, who distributes the money to creditors according to the debtor's chapter 13 plan, and the debtor does not receive a discharge until after the payments required under the plan are completed. The debtor is protected from all collection activity by creditors while the plan is in effect. Also, more debts are eliminated under chapter 13 than the under chapter 7.
The Discharge in Bankruptcy
The bankruptcy discharge varies depending on the type of case a debtor files: chapter 7, 11, 12, or 13. A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. The discharge is a permanent court order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and any form of communications with the debtor. Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien. Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. Not all debts are discharged. The Bankruptcy Code specifically excepts certain categories of debts from the discharge, and the debtor must repay those non-dischargeable debts after bankruptcy. There are 19 categories of debts excepted from discharge under chapter 7, and a more limited list of exceptions applies to cases under chapter 13. The most common types of non-dischargeable debts are certain types of tax claims, debts not listed by the debtor on the schedules the debtor must filed with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed student loans, and debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated. Some debts are not automatically excepted from discharge and creditors must ask the court to determine that these debts are nondischargeable. Debts dischargeable in a chapter 13, but not in a chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. In Chapter 13 there some limited circumstances under which the debtor may request the court to grant a "hardship discharge," even though the debtor has failed to complete plan payments. The court may deny a bankruptcy discharge for many reasons, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of records; perjury and other fraudulent acts; violation of a court order; or an earlier discharge in an earlier case commenced within certain time frames before the petition was filed. The court may revoke a discharge under certain circumstances, such as when the debtor obtained the discharge fraudulently; failed to disclose certain facts; or committed one of several acts of impropriety described in the Bankruptcy Code. A debtor can voluntarily repay any discharged debt. Also, an individual debtor is not eligible to receive a discharge unless the debtor completes a financial management course provided by a court-approved credit counseling agency and the debtor files a certificate stating the course was completed.
Chapter 7 - Liquidation Under the Bankruptcy Code
The chapter 7 bankruptcy who is appointed to the debtor's case gathers the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. CHAPTER 7 ELIGIBILITY If the debtor's "current monthly income", as defined by the Bankruptcy Code, is more than the state median income, the Bankruptcy Code requires application of a "means test" to determine whether the chapter 7 filing is presumptively abusive. Abuse is presumed if the debtor's aggregate current monthly income over 5 years, net of certain statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as that amount is at least $6,000. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case will generally be converted to chapter 13 or will be dismissed. To qualify for relief under chapter 7, the debtor may be an individual, a partnership, or a corporation or other business entity. An individual cannot file under chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they held liens. In addition, no individual may be a debtor under chapter 7 or any other chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency. There are exceptions in emergency situations. One of the primary purposes of bankruptcy is to discharge certain debts to give an honest debtor a "fresh start." In a chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. When a partnership or corporation files for chapter 7 relief, an automatic stay is instituted by the court that prohibits collection activity by creditors while the partnership or corporation is in bankruptcy, but the debts are not discharged after the bankruptcy case is closed. Moreover, a bankruptcy discharge does not extinguish a lien on property. HOW A CHAPTER 7 WORKS A chapter 7 begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the petition, the debtor must file with the court schedules and statements setting forth assets, liabilities, income, expenses, and other financial information. Debtors must also provide the trustee with a copy of their last filed income tax returns. The debtor must also provide the US Trustee, the administrative office that oversees all bankruptcy cases, with copies of other specific important financial documents. A husband and wife may file a joint petition or individual petitions. The filing fee the court currently charges for a chapter 7 filing is $299, and normally these fees must be paid to the clerk of the court upon filing. In some circumstances debtors may pay in installments. If the debtor's income is less than 150% of the poverty level and the debtor completes an application, the court may waive the requirement that filing fees be paid. Filing a petition under chapter 7 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. The stay arises by operation of law, but the filing of the petition does not stay certain types of actions and the stay may be effective for only a short time in some situations. Approximately 30 days after the petition is filed, the case trustee will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions regarding the debtor's financial affairs and property. The Bankruptcy Code requires the trustee to ask the debtor questions to ensure the debtor is aware of the potential consequences of seeking a discharge in bankruptcy. It is also the role of the trustee to administer the case and liquidate the debtor's nonexempt assets, if there are any. Most chapter 7 cases are no-asset cases, but if there appears to be nonexempt assets creditors must file claims with the court within 90 days after the meeting of creditors in order to receive distributions from the trustee. In addition to liquidating the debtor's nonexempt assets, the trustee may also attempt to recover money or property under the trustee's "avoiding powers." The trustee's avoiding powers include the power to: set aside preferential transfers of property or money made to creditors within 90 days before the petition; undo security interests and other prepetition transfers of property that were not property perfected under state law at the time of the petition; and pursue nonbankruptcy claims such as fraudulent conveyance and bulk transfer remedies available under state law. In addition, if the debtor is a business, the court may authorize the trustee to operate the business for a limited period of time, if such operation will benefit creditors. Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. If a debtor wishes to retain secured property (such as an automobile) he or she may decide to "reaffirm" the debt. A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the property so long as the debtor continues to pay the debt. The bankruptcy judge must approve the reaffirmation agreement. If the debtor chooses not to reaffirm a secured debt, the debtor must return the collateral to the secured creditor.
Chapter 13 - Individual Debt Adjustment
A chapter 13 bankruptcy enables debtors with regular income to develop a plan to repay all or part of their debts over a period of 36-60 months (three to five years). The debtor proposes a repayment plan to make installment payments to a chapter 13 trustee, and the trustee distributes the money amongst creditors according to the terms of the plan and the requirements of the Bankruptcy Code. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause." If the debtor's income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than 5 years. During this time a stay is in effect that prevents creditors from pursuing collection efforts. ADVANTAGES OF CHAPTER 13 Chapter 13 offers individuals a number of advantages over chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under chapter 13, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments and/or property tax payments over time. Nevertheless, they must still make all mortgage payments and property tax payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan and possibly lower the payments. Chapter 13 also has a provision that protects co-signors from collection efforts while the debtor is in bankruptcy. ELIGIBILITY Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,010,650. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. Similar to chapter 7, and individual cannot file chapter 13 if, during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they held liens. In addition, no individual may be a debtor under chapter 13 unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency. There are exceptions in emergency situations. HOW CHAPTER 13 WORKS A chapter 13 begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. The debtor must file with the court and trustee all of the same documents they must file in a chapter 7 case. In addition, the debtor must file a chapter 13 plan with the court. The filing fee the court currently charges for a chapter 13 is $274. When an individual files a chapter 13 petition, the local chapter 13 trustee is appointed to administer the case. In most districts, the US Trustee appoints a trustee to serve in all chapter 13 cases. The chapter 13 trustee serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors. As in chapter 7, the filing of the petition under chapter 13 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. Approximately 30 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors. During this meeting, the trustee places the debtor under oath and both the trustee and creditors may ask the debtor questions. The debtor must attend this meeting and answer questions regarding his or her financial affairs and the proposed terms of the chapter 13 plan. The parties typically resolve problems with the plan either during or shortly after the creditor's meeting. As in chapter 7, to participate in distributions form the trustee, creditors must file their claims with the court timely. After the meeting of creditors, the debtor, the chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the debtor's chapter 13 plan. Confirmation of the plan entitles the debtor to retain property as long as payments are made. The debtor may not incur new debt without consulting the trustee. If the debtor fails to make the payments under the plan, the court may dismiss the case or convert it to chapter 7. The court may also dismiss or convert the case if the debtor fails to pay any post-filing child support or alimony, or fails to make required tax filings during the case. THE CHAPTER 13 PLAN AND CONFIRMATION HEARING A chapter 13 plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims. There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes, the costs of bankruptcy proceeding, and spousal and child support claims. Secured claims are those for which the creditor has the right to take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. Unsecured debts are generally those for which the creditor has no special rights to collect against property of the debtor. The plan must pay priority claims in full unless a particular priority creditor aggress to different treatment of the claim or, in the case of domestic support obligations, unless the debtor contributes all "disposable income" to a five-year plan. If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive at least the value of the collateral. In some circumstances the plan must provide for full payment of the debt, not just the value of the collateral. Payments to certain secured creditors (i.e., the home mortgage holder) may be made over the original loan repayment schedule so long as the arrearage is made up during the plan. The plan need not pay unsecured claims in full as long as it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under chapter 7. "Disposable income' is income (other than child support received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor and dependents. The "applicable commitment period" depends on the debtor's current monthly income. No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors and the trustee may object to confirmation. If the court approves the plan, the chapter 13 trustee will distribute funds received under the plan. If the court declines to confirm the plan, the debtor may file a modified plan or the debtor may also convert the case to chapter 7.
