It’s always a smart idea to have a general knowledge about bankruptcy before you file so you know how to navigate the waters. Just to be clear, the first step is always to consult a good bankruptcy attorney before you make any moves.
Chapter 7 under the US Bankruptcy Code is liquidation. This is sometimes referred to as ordinary or straight bankruptcy.
The debtor turns over all of their assets to the bankruptcy trustee, and the trustee’s job is to sell nonexempt property and distribute the proceeds to the creditors.
The remaining debts under Chapter 7 are discharged. You’ll see that that’s going to be different under other chapters.
Chapter 7 is available for any person, individual, corporation, or partnership. Corporations or partnerships a retreated as a person for Chapter 7 liquidation purposes.
Chapter 7, or straight bankruptcies, are started by filing a voluntary or involuntary petition in bankruptcy with the bankruptcy court. The bankruptcy court is the US District Court, bankruptcy division.
If the debtor files the petition, then it’s calledvoluntary, and if the appropriate number and size creditor files a petition rather than the debtor, that’s involuntary.
Prior to filing, the debtors or debtor must receive credit counseling within 180 days of filing and submit a certificate of that for credit counseling.
And has to confirm the accuracy of the contents of the filing, and an attorney must file an affidavit informing the debtor about other chapters of bankruptcy.
There are some schedules under Chapter 7:
The debtor needs to list both secured and unsecured creditors, their addresses and the amount of debt they owe, and a statement of the financial affairs of the debtor.
They also need to list all properties owned by the debtor, including the property claimed by the debtor to be exempt, and current income and expenses, that certificate that we mentioned of credit counseling, and proof of payments received from employers within 60 days prior to the filing of the petition.
They also need state the amount of monthly income, itemize to show how the amount was calculated, as well as a copy of the debtor’s federal tax return for the most recent year ending immediately before the filing of the petition.
There is the Substantial Abuse and Means Test. The basic formula is they take the debtor’s average monthly income and compare it to the median income in the areas where he lives. If it’s below the median income, there is no presumption of abuse.
Also, there is the applying the Means Test to Future Disposable Income. If the debtor’s income is above the median income, then further calculations are necessary. This would include a calculation of disposable income.
Additional grounds for dismissal would include a conviction of a violent crime or drug trafficking, or the debtor fails to pay a post-petition domestic-support obligation.
And then, the order for relief. If the filing is proper, the filing itself is the order for relief. The order for relief is granted by the bankruptcy court.
The involuntary bankruptcy is, again, by the creditor forcing the debtor into bankruptcy. If 12 or more creditors, three or more which have unsecured claims totaling at least $14,425, they join in the petition. If it’s less than three total creditors, one creditor has to have that amount of debt.
The debtor can challenge this involuntary bankruptcy, but the bank will enter an order for relief if the debtor isn’t paying debts as they come due, or the debtor was in receivership for the 120 days before the filing of the petition.
There are penalties for frivolous petitions against debtors. If a court dismisses an involuntary petition, a creditor may be required to pay fees and costs. In some cases, even punitive damages.
The vehicle for staying off the creditor is called an automatic stay.
It’s granted upon filing of the petition, and it protects the debtor from all creditors, which means a creditor can’t commence their own action or continue legal action to collect individually. There are damages for knowing violations of an automatic stay.
There are some exceptions primarily around what kind of debt is protected, domestic support obligation related to divorce, support, custody, maintenance, investigations by a security regulatory agency.
Secured parties can petition a bankruptcy court for relief from the automatic stay. And with each of these chapters, we look all of the debtor’s assets. It’s called an estate and it includes all legal and equitable interest and property. It includes property transferred in a voidable transaction, and property in which the debtor becomes entitled to within 180 days after filing.
The proceeds of profits from this date, after required property, the idea is to not just take a snapshot in time, but to look at proceeds, profits, things that were required afterwards, sales that were made immediately before. Things like inheritance, property, settlements, life insurance proceeds.
The bankruptcy trustee is appointed by the court. Their duties include collecting assets and paying creditors in order of priority.
And in terms of the means testing, they determine whether there is a substantial abuse, they file a statement within 10 days after the first meeting with the creditors.
They have powers. The trustee has the right to strong-arm creditors to return the debtor’s property. They have avoidance powers to set aside certain transfers– an example would be if someone were fraudulently transferring property to try to avoid it becoming part of the bankruptcy estate.
The trustee stands in the shoes of the debtor and can assert any lack of capacity or lack of assent. The debtor isn’t permitted to transfer property or make a payment that favors or gives preference to one creditor over another.
For a trustee to recover payment, the debtor must be insolvent, and transferred property for pre-existing debt within the previous 90 days. You could also give preferences to insiders. This avoidance power of the trustee extends to transfers made within one year before filing.
Transfers that don’t constitute preferences- for example, payment for services within 15 days, a payment has to be made in the ordinary course of business, and generally it applies to debts that are not pre-existing. And they have the power to avoid a fraudulent transfers.
There are some exemptions for things that go in the bankruptcy estate. Here are some of them:
- Equity and the debtor’s residence, burial plot.
- An interest in a motor vehicle, personal goods.
- Jewelry, other property listed in the statute
- Life insurance contract
The idea is to provide protection for home equity.
There are some requirements concerning residence and amount. The creditors do meet. The trustee calls that meeting and examines the debtor under oath.
Creditors are claiming a portion of the debtor’s estate, and each creditor must file proof of that claim. If they don’t file proof of the claim, then there is a problem later when they attempt to take the assets of the debtor and they fail to respond. The debtor needs to file a statement of intention regarding the secured collateral.
For distribution, unsecured creditors are probably not going to receive much or anything. They get what’s left over after secured creditors are paid off. So, it goes first to secured creditors and then unsecured creditors.
And then, finally, if there’s anything left over after all the debts are paid, the debtor. So at the end of that, they are discharged.
And under all the chapters of bankruptcy, discharge means an avoidance or setting aside of debts. There are some exemptions to this discharge. For example, back taxes, borrowing to pay taxes. It’s all defined by statute, fraud, support generally, retirement loans.
Chapter 11 is reorganization. This is usually for corporations and other legal entities. The debtor and creditor formulate a plan under which the debtor pays a portion of his debt, and it’s discharged. The same debtors are eligible as under Chapter 7.
There is fast track Chapter 11. That’s for small-business debtors. They have to have a certain dollar amount in their estate.
There are workouts, which are private negotiations between a creditor and debtors. The court can dismiss or suspend the proceedings if it’s deemed prejudicial to his creditors.
Generally, it needs to be fair and equitable, identify classes, and be able to be carried out reasonably, adequate means for execution, payment of tax claims for five years. Just know the difference between the different chapters of bankruptcy regarding who they apply to will help you know which direction to go. And get a good bankruptcy attorney right away!