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Bankruptcy protection is available for individuals (including married couples), corporations, partnerships and limited liability companies.
There are two forms of bankruptcy: liquidation and reorganization.
> Liquidation of debts, for any individual or entity, is governed by Chapter 7 of the Bankruptcy Code. For an individual, the result is a discharge of debts; for any other entity, the result is a dissolution and termination of the entity.
> The reorganization provisions are contained in Chapter 11 and pertain to corporations, partnerships, limited liability companies and some high-debt debtors. Chapter 13 is the reorganization provision for individuals.
Bankruptcies are commenced by the filing of a Petition for Relief, which triggers an automatic stay against the enforcement of debt against the debtors, including continuing collection efforts, lawsuits, foreclosures and repossessions. Examples of actions that are not stayed by the filing of the bankruptcy petition include government regulatory actions, criminal actions, and establishment or enforcement of domestic support obligations.
FREQUENTLY ASKED QUESTIONS ABOUT BANKRUPTCY
1. What does Bankruptcy do for me?
The goal of filing bankruptcy is to get relief from your debts. This is called a “discharge.” Your bankruptcy filing will immediately stop the collection of all debts (except family support orders); this includes putting a stop to collection phone calls, lawsuits, foreclosures, repossessions and garnishments. The discharge is a court order, issued at the end of the legal process, confirming that the bankruptcy wiped out most unsecured debts, such as: credit cards, medical bills, signature loans, debts from a repossessed vehicle, and most civil judgments. A Chapter 7 bankruptcy can also wipe out a second mortgage, although the lien on your property will remain.
2. What types of debts does bankruptcy not wipe out or discharge?
Several types of debts will not be wiped out by your bankruptcy discharge. Debts that cannot be discharged generally fall under three categories: money owed to the government, court-ordered support of others, and some debts incurred by bad conduct. Examples of non-dischargeable debts include: civil fines and parking tickets, criminal fines or restitution, child support, spousal maintenance, Family Court orders, other than support, student loans (exceptions are rare), debts incurred by fraud. There are many other considerations. For example, if you owe money on your house or car, you need to keep making the payments if you want to keep that property.
3. Can I discharge homeowner association fees?
To the extent that the bill is from prior to the filing of bankruptcy, that amount can be discharged as part of your bankruptcy. Anything due after your filing is your responsibility, and you risk a lawsuit being filed against you in Justice Court.
4. What property do I get to keep?
State and federal laws provide protection for some of your property, which is known as “exempt” property. The purpose of exempt property is to protect certain basic necessities from creditors, and this applies also when filing bankruptcy. Examples of exempt property include: the homestead exemption of $150,000 in equity in a residence, qualified pensions, 401(k) accounts and IRAs, $5,000 in equity in a motor vehicle, and $4,000 in basic household furnishings.
- Can I keep my car after filing the bankruptcy? It depends. If you owe money on your vehicle, the debt will need to be paid. In some instances, the amount owed can be reduced. If there is no money owed on the car (or less than its value is owed), up to $5,000 is exempt.
- My car is free and clear; should I transfer it to a relative or friend to keep it safe? Transferring property before bankruptcy is a major lose-lose situation. You can lose your exemption; worse, you may be committing fraud (a felony).
- Should I cash out my 401(k), IRAs and life insurance before filing bankruptcy? As was stated above, most 401(k) accounts and IRAs are exempt from your creditors, in and outside of bankruptcy. The exemption law regarding the cash value in life insurance is currently in flux, but cashing it without consulting a bankruptcy attorney is a mistake.
5. Do I get to keep my tax refunds?
If a tax refund is owed to you at the time you file your Chapter 7 bankruptcy, you will probably not be allowed to keep it. The Trustee will demand turnover of any refunds owed to you prior to the filing of your case. For example, if you filed on September 1, 2011, the Trustee would be entitled to any tax refund, for tax years 2010 or before, that you had not received prior to September 1, 2011. You will also owe a pro rata share of your 2011 tax refunds. For a September 1 filing, the amount owed is 8/12ths of the year or 2/3 of the refunds. It is your obligation as a Chapter 7 debtor to turn over to the Trustee any tax refund. You do so by sending to the Trustee the refund check(s) without an endorsement (i.e., do not sign the back of the check). Before doing so, you should make and keep a copy of the check.
6. Who or what is the Trustee?
Every Chapter 7 bankruptcy case is assigned a Bankruptcy Trustee to administer your non-exempt assets for the benefit of your creditors. For Chapter 7 filings, there is a panel of Trustees to whom cases are assigned on a rotation basis. Trustees get paid based upon the value of the money and other assets they administer on behalf of your creditors. Bankruptcy Trustees are distinct from two other “trustees” that may be part of your debt issues: For houses in foreclosure, the foreclosure is done by “trustee sales.” These trustees have nothing to do with your bankruptcy.There is also the Office of the U.S. Trustee, which is an agency of the U.S. Justice Department and is the “watchdog” of the bankruptcy process. The most usual involvement of the U.S. Trustee in a Chapter 7 bankruptcy is to “police” who is allowed to file a Chapter 7 under the “means test.” In extreme cases, the U.S. Trustee is the prosecutor of actions to dismiss bankruptcy cases for fraud and other misbehavior.
7. In preparing the bankruptcy petition, do I have to include all of my creditors?
Yes. every person, company, lender and taxing authority to which you owe money must be listed; you cannot pick and choose which creditors to “file” on. This includes your car lender and your mortgage lender, whether or not you plan to continue to make payments.
8. Will my credit cards be canceled?
Generally, yes. Even credit cards that have a zero balance will probably be cancelled.
9. Does my personal bankruptcy filing stop my creditors from pursuing my business?
No. Whether your business is a sole proprietorship, partnership, corporation or LLC, we will list all of the business’s creditors to prevent them from pursuing collection against you personally. However, this does not stop business creditors from pursuing your business and contacting you as the business’s contact.
10. What happens at the Meeting of Creditors?
Anyone filing a Chapter 7 bankruptcy must attend a meeting of creditors. In most instances, no creditors will appear. The meeting will be conducted by your Trustee, who will ask you a series of uniform questions followed by several questions specific to your case. Each Trustee has their own list of questions. However, the following questions are always asked after the Trustee administers an oath that you will tell the truth under penalty of perjury.
> Your name.
> Did you accept the oath to tell the truth under the penalty of perjury?
> Did you list all of your assets?
> Did you list all of your debts?
> Have you filed bankruptcy within the last eight years? (Sometimes, have you filed bankruptcy before?)
> Have you reviewed the Trustee’s Information Sheet?
> Do you owe child support or spousal support to anyone?
> Have you made any transfers within the last year that are not reported on your schedules?
> Do you have the right to sue anyone for money or property?
> Are you receiving money under a will or trust? Have you rejected your right to receive money under a will or trust?
Some Trustees will ask you to verify under oath that what you have submitted for identification is in fact your identification. The Trustee will want two forms of identification from you: a government-issued photo ID and proof of Social Security number from some third party. The best forms of identification are your driver’s license and Social Security card. The proceeding is tape-recorded.
11. When will my Chapter 7 case over?
Your Chapter 7 case is not over when you get your discharge. In most Chapter 7 cases, the discharge of debts will occur 60 to 90 days after the Meeting of Creditors. However, your case is not over until the Trustee has fully administered your assets. This can include any tax refunds still owed to you on the date that you filed your bankruptcy case and the tax refund for the year that you filed. If the Trustee determines to administer any of your assets, it can take six months to a year for your case to close. Our office will notify you when your case is closed. Even after a case is closed, the obligation to provide tax refunds to the Trustee does not end. Once you turn over your tax refunds or other property, the Trustee will begin to administer your estate. This process starts with a notice to your creditors to file claims. Once the deadline for claims to be filed passed, you will receive mail from the Trustee (and Trustee’s attorney regarding his or her fees, if applicable), and then a proposal for distribution of the remaining monies. The Trustee’s fee and the Trustee’s attorney’s fees are paid from the money collected. Once the deadline for those matters passes, your case will be closed. Until you get that notice, you cannot sell any of your property without permission of the Court. If you have some pressing need, consult our office regarding a Motion to Compel the Trustee to Abandon that property and receive the Court Order.
12. Can bankruptcy reduce the mortgage on my home?
Neither a Chapter 7 nor a reorganization under Chapter 13 or Chapter 11 can reduce the first mortgage on a personal residence. A Chapter 7 bankruptcy will discharge the obligation to pay a second mortgage, but the lien on the house will remain. In a reorganization, the Court can order the removal of a second mortgage if the value of the house is less than the amount of the first mortgage. Such a “strip” is conditioned on the completion of the plan of reorganization.
CHAPTER 7 AND CHAPTER 13 COMPARED
Chapter 7 bankruptcy is a liquidation process where debtors’ nonexempt assets are liquidated to satisfy their debts.
A Chapter 13 bankruptcy is a wage-earner plan, where the debtors pay their debts from their disposable income via a plan approved and overseen by a Chapter 13 trustee.
Under either chapter, the goal is the discharge of the debtors’ debts; the discharge occurs with the issuance of an Order of Discharge by the court.
Under a Chapter 7 bankruptcy, the discharge is routinely granted within four months from the date of filing.
Under a Chapter 13 bankruptcy, the discharge occurs three to five years after filing and the debtor completing a court-affirmed plan.
On its face, a Chapter 7 filing appears to be preferable to a Chapter 13. A large number of Chapter 7 filers are able to discharge their unsecured debt, keep their property and move on with their lives. However, there are dictates of bankruptcy law, as well as benefits and tools of Chapter 13, that sometimes make filing under Chapter 13 a better option. To file a Chapter 13, the debtor must be an individual or married couple and have less than $330,000 of unsecured debt and less than $1,010,650 of secured debt.
Chapter 7 is a liquidation, and the issues revolve around which debts are dischargeable and what property the debtor can protect from the administration of the Chapter 7 bankruptcy trustee.
Most debts are discharged. The exceptions to discharge fall into three general categories: taxes, family court orders, and debts incurred by bad acts.
Additionally, student loans can be discharged only in cases of “undue” or extreme hardship. Also, homeowner association fees that were due prior to filing for bankruptcy are dischargeable, while HOA fees that come due after the filing are unaffected by the bankruptcy.
Upon filing a Chapter 7 bankruptcy, a bankruptcy estate is created that consists of all property of the debtor. Debtor’s property is protected for the benefit of the debtor’s creditors, by liens securing that property and/or exemptions.
Exemptions are statutory protections of property enacted under state and/or federal law. For example, an ERISA defined benefit plan or a qualified IRA is exempt up to $1 million under bankruptcy law and perhaps for more under state and ERISA provisions. Further, a property that is liened in excess of the value of the property and/or its exemptions will not be sold by the trustee.
Chapter 13 provides a flexible means for handling a variety of common debt issues that, in a Chapter 7, might not be in the debtor’s best interest. These include the ability to: “catch up” on delinquent payments on secured property, such as a house or car; force payment arrangements on taxes and child support and other marital support obligations; keep property that otherwise would be liquidated for the benefit of the debtors’ creditors under Chapter 7; potentially discharge debts that would not otherwise be discharged in a Chapter 7 case (such as debts incurred by fraud, intentional injuries or non-support orders of the Family Court); modify the rights of secured creditors; provide relief that is not available to the debtor in a Chapter 7; and/or protect co-debtors from collection actions.
AUTOMATIC STAY AND RELIEF PROCEDURES
Civil Proceedings. Upon filing a petition for relief in bankruptcy, an automatic stay goes into effect that prohibits many civil enforcement actions, including non-judicial foreclosures. A trustee sale completed or a judgment entered after the filing of the Petition for Relief is void.
The automatic stay remains in effect until (a) the dismissal of the bankruptcy case, (b) the entry of discharge or (c) an order for relief from the Bankruptcy Court. The timing of these events is dependent upon the chapter under which bankruptcy relief is sought.
Residential Eviction Efforts. Continuation of Eviction Proceeding for Failure to Pay Rent. Eviction proceedings are stayed if there is no judgment of possession (a Judgment of Forcible Detainer) prior to the bankruptcy filing. However, if there is a judgment of possession, the landlord is permitted to continue with the eviction upon the filing of a certificate with the court and service of the certificate on the debtor. The required certificate needs to set out the facts that justify non-application of the automatic stay.
Continuation of Eviction Proceeding for “Endangerment of the Property or Illegal Use of Controlled Substances. Where the landlord has commenced an eviction for reason of endangerment of the property or illegal use of controlled substances and the alleged misconduct occurred within thirty days of the filing of the bankruptcy, the landlord would be permitted to continue with the eviction upon the filing of a certificate with the court and service of the certificate on the debtor. The required certificate needs to set out the facts that justify the non-application of the automatic stay. In response, the debtor would be able to keep the stay in effect by a certificate denying the allegations. the court is then required to hold a hearing within ten days as to whether the circumstances exist or have been remedied.
Family Law Cases. The automatic stay has authority over Family Law cases only to the extent of the division of property and debts. There is an exclusion from the automatic stay under §362(b)(2) for the establishment or enforcement of Domestic Support Obligations (DSOs). Beyond seeking a state court’s order to establish or enforce support, the exclusion from the automatic stay also includes the continuation of wage assignments, the continuation of administrative enforcement (such as suspension of licenses, e.g., drivers, professional or recreational), reporting overdue DSOs to consumer reporting agencies, interception of tax refunds, and enforcement of medical obligations.
Repeat Filer Issues. A vexing issue for secured creditors, especially mortgage lenders, arises when debtors have filed petition after petition, stopping foreclosure proceedings or a trustee sale. 11 U.S.C. provides that, if the debtor had one case dismissed within the prior year, the automatic stay as to secured creditors or leases terminates within thirty days, unless the debtor moves to extend the stay and, after a hearing, the Court extends the stay. The debtor must overcome a presumption of bad faith by showing a substantial change of financial condition from the circumstances of the prior case. 11 U.S.C. provides that, if the debtor had two or more cases dismissed within the prior year, the automatic stay as to secured creditors or leases will not go into effect. The debtor may move to impose the stay by motion within thirty days of the petition, and the debtor must overcome a presumption of bad faith by showing a substantial change of financial condition from the circumstances of the prior cases. Additionally, relief from the automatic stay will be ordered “if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved either (A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or (B) multiple bankruptcy filings affecting such real property.
Procedures for Relief from the Automatic Stay. An order for relief from the automatic stay may be granted after hearing and only upon “cause,” such as: for cause, including the lack of adequate protection of an interest in property of such party in interest; with respect to a stay of an act against property under subsection (a) of this section, if: the debtor does not have an equity in such property: and such property is not necessary to an effective reorganization. Relief from the Automatic Stay is initiated by motion. Motions for Relief are viewed as a summary procedure and the resolution of these motions is handled on an expedited basis.
FAMILY LAW ISSUES
Domestic Support Obligations are not discharged in a bankruptcy filing.
In addition, a Chapter 7 bankruptcy discharge does not end the obligations of a divorce decree, separation agreement or other orders of the court. So, there is merit to filing a bankruptcy from the entry of the final decree of divorce and depriving the family court judge of the jurisdiction to divide debts. It also takes a very contentious issue off the negotiation table. However, a discharge of debts by a party to a divorce may cause the family court to consider the discharge of debts in dividing community assets. Debts that arise from orders in divorce or separation proceedings can be discharged in a Chapter 13 proceeding.
Right to Pursue the Insurer of the Debtor. The filing of bankruptcy by the defendant in a personal injury action stays that action. However, it does not preclude the plaintiff from proceeding against the defendant’s insurer. The court will grant a stay relief motion that permits the plaintiff to pursue the defendant in name only for purposes of proceeding against an insurer or any other entity that may be liable on the debtor’s behalf (for example, a unit of state or local government). This stay relief can be granted prior to discharge or after discharge.
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