Bankruptcy Cases
Chapter 7 FACTS
Filing for Chapter 7 Bankruptcy is a way for Debtors to get a "Clean Start" and have debts eliminated. This type of Bankruptcy is also called a "Straight Bankruptcy" or "Liquidation Bankruptcy" because assets will be liquidated in order to pay off as much debt as possible.
For debtors who are incapable of repaying debts, and eligible for chapter 7, this is the most common option. Chapter 7 allows the debtor to relieve themselves of the burden associated with having a large amount of debt. It stops harassing phone calls from creditors, eliminates most debt, and eases the mental drain of dealing with these problems on a daily basis.
Individuals and Businesses are eligible for Chapter 7 given they pass a few qualifying conditions. Only a qualified bankruptcy lawyer can determine if an applicant meets all the criteria to file a chapter 7 bankruptcy. Some of the conditions are listed below:
• Must pass the Means Test
• All income tax returns must have been filed
• Must complete Credit Counseling
• All income tax returns must be signed and have been filed
• Must create and present statements of financials and information for petition schedules
Chapter 13 FACTS
Chapter 13 has many advantages in addition to its overall purpose of providing debt relief through reorganization and repayment. In particular, filing Chapter 13 stops:
• debt collection (as a result of an automatic stay);
• creditor harassment (also for cosigners);
• pending foreclosure actions (if Chapter 13 is filed before a Sheriff’s Sale occurs);
• car repossession;
• IRS confiscation of tax refunds;
• wage garnishment;
• interest payments.
In addition, creditors must accept an affordable payment. Non-dischargeable Chapter 7 debts may be paid off gradually: student loans, parking tickets and recent tax debt. Secured claims are paid at the fair market value of the asset, not the original value.
Determination of debt repayment is based on the amount and type of debt, current income, assets and living expenses. A bankruptcy lawyer helps you consolidate your debts into one monthly payment, which you pay to a court-appointed trustee or have deducted from your paycheck. For example, debt consolidation might consist of a monthly payment that covers credit cards, loans for education and transportation, medical bills, parking tickets, IRS payments and repossessions.
You essentially will pay creditors what you can afford based on the approved repayment plan.
To obtain approval for Chapter 13, adequate future income must be projected, either through employment or some other stable source of monthly income.
Filing Procedure
Four to six weeks after your bankruptcy petition has been filed with the courts, you and your attorney will attend an informal meeting with the bankruptcy trustee. The trustee will ask questions regarding your debt and income to make sure the proposed plan adequately covers debt repayment. If so, the trustee will recommend your payment plan to the court, and your lawyer will attend a confirmation hearing with the judge on your behalf. When the court approves the plan, you will begin making monthly payments to the trustee, who will pay off your creditors. When the three- or five-year plan has been completed and debts are paid, the court will issue a discharge of your debts.
Chapter 11 and Foreclosure
Chapter 11 is a rehabilitation or reorganization, used primarily by businesses but sometimes by individuals with substantial debts and assets.
In Chapter 11, a debtor retains ownership and control of its assets and is retermed a “Debtor in Possession.”
The debtor in possession runs the day-to-day operations of the business while creditors and the debtor work to negotiate and complete a plan of reorganization.
Creditors ultimately vote for acceptance or rejection of a plan and, upon confirmation of the plan, the debtor continues to operate and pay its debts under the terms of the confirmed plan.
Chapter 11 cases in which a debtor has difficulty reorganizing often end with either a “liquidating plan” or conversion to Chapter 7.
Any pending foreclosure action or scheduled sheriff sale is stayed by the filing of the Chapter 11 case by virtue of imposition of the automatic stay, with very limited exceptions.
Foreclosing creditors must determine whether a proposed plan will provide for a cure of any existing arrearage and must determine if any adverse treatment of the claim is being sought by debtor. In such an event, an objection to the proposed plan must be filed.
What s the “automatic stay”?
a. An automatic injunction which halts actions by creditors, with certain exceptions, to collect debts from a debtor who has filed for relief under the Bankruptcy Code.
b. Takes effect “automatically” the moment a bankruptcy case is filed.
c. Think “Star Trek” protective forcefield
11 U.S.C. 362(a) prevents any acts against a debtor to:
a. Commence or continue lawsuits against a debtor;
b. Enforce judgments against a debtor or his/her property;
c. Obtain possession of debtor’s property;
d. Obtain or perfect liens against debtor’s property;
e. Collect or recover claims against a debtor
11 U.S.C. 362(b) provides exceptions and does not preclude actions for:
a. Criminal proceedings against a debtor;
b. Establishment of paternity;
c. Establishment or modification of a domestic support obligation;
d. Child custody or visitation;
e. Dissolution of marriage, except to the extent it involves division of estate property;
f. Withholding of income from debtor to satisfy a domestic support obligation pursuant to court order;
g. Recovery of commercial leased real estate where the lease term has expired;
h. Evictions as to residential real estate where the lessor has obtained judgment for possession of the property pre-petition.
Termination of the Automatic Stay by Operation of Law
a. Absent actions by a creditor seeking relief from stay and/or absent a multiple filer situation, the automatic stay remains in effect until: (a) discharge, (b) dismissal or (c) closing of the case, whichever occurs first.
b. Potential defenses to a Relief from Stay Motion include:
aa. incorrect accounting by creditor
bb. debtor is in a position to bring payments current prior to hearing or debtor proposes a cure format
cc. existence of substantial equity in the real estate to rebut presumption of lack of adequate protection.
dd. issues related to standing (did correct party file the motion)
ee. possible fatal flaws with documentation (recording of lien, notary clause, assignments missing).
Timing of a Chapter 11 Proceeding
•The U.S. Trustee will generally call a meeting of the 20 largest creditors of the debtor to form an Unsecured Creditors’ Committee about 2 weeks after the filing.
• At the section 341 meeting of all creditors which occurs around 6 weeks after the bankruptcy filing, top company officials and counsel still explain to all creditors in attendance the reason for the filing ad the company’s plans, and will answer questions of the U.S. Trustee and interested creditors.
• The debtor has a 120 day exclusive right to file a plan of reorganization, 11 U.S.C. (“Bankruptcy Code”) § 1121(b) , although that 120 day period is often extended by the bankruptcy court on motion of the debtor in possession. It can only be extended through 18 months after the case was filed under Bankruptcy Code § 1121(d)(2)(A).
Information taken from CALFEE
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