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To understand Bankruptcy better, you need to understand these legal terms:
- Assets are property having monetary value
- Liquid assets are cash or property that can readily be converted to cash
- Liquidation is the process of converting assets to cash.
- Reorganization is the process of changing the terms of financial obligations so as to bring them under control.
- Exempt property is property creditors are not allowed to take from you in satisfaction of their claims. The law of your state specifies what property you may keep free of the demands of your creditors.
- A secured debt is an obligation secured by property owned by the debtor or another person. Examples of secured indebtedness are real-estate mortgages and liens against motor vehicles. If you fail to pay your secured debts, the creditor can simply repossess the property and sell it to satisfy its claim.
- An unsecured debt is a debt for which there is no security except the debtor’s personal obligation. Charge-cards and medical bills are examples of unsecured debt.
- A composition is a plan of reorganization which pays less than all of a person’s debts (another words a general plan that only pays a small portion to the unsecured creditors)
CHAPTER 7
Is a liquidation proceeding under the Bankruptcy Code. If you have any non-exempt assets, these may be sold by the Trustee in Bankruptcy to yield a dividend for creditors whose debts are discharged. However, in a great many Chapter 7 cases, all the debtor’s property is exempt. Therefore he/she is not required to surrender any assets.
Chapter 7 is an attractive remedy for people whose property is totally exempt and who cannot afford to make meaningful payments to reduce or pay off their debts. The debtor pays nothing out of pocket except the attorney fee and the filing fee required by the Court. The debtor typically emerges from Bankruptcy free of all his unsecured debt. Chapter 7 does not release most liens against property. Debtors who wish to retain property which is subject to a lien may reaffirm the debt involved or redeem the property by paying its value to the creditor. Also, Chapter 7 does not discharge obligations for alimony or child support, some taxes, student loans and certain other debts. If you owe debts of this nature, or if you have gotten behind on payments for property you wish to keep, you should explore the possibility of devising a Chapter 13 Plan to address these problems.
CHAPTER 13
Permits reorganization of financial obligations. Here the debtor may change the terms of his contracts so as to pay them in a way he can afford. A well drawn Chapter 13 Plan may make it possible to pay all debts in full within a reasonable period of time. Those who cannot afford to pay one hundred per cent of their debt may qualify for a composition plan. In a composition, a portion of the debt is paid, and whatever is not paid is discharged. Chapter 13 is also very helpful for people whose assets exceed the amount they would be allowed to keep in a Chapter 7 case. Property that is not exempt may be retained by paying creditors its value in a Chapter 13 Plan. This is an effective way of protecting assets from the demands of creditors.
In a Chapter 13 case, the debtor and the attorney work together to formulate a Plan. Normally, you make payments at regular intervals depending upon how your income is received. Your Chapter 13 Trustee will collect these funds and disburse them as you have directed him to do in your Plan. Any kind of debt may be paid in a Chapter 13 Plan. Also, you may use your Plan to pay income and other taxes, to reduce payments on your furniture or car, to bring house payments current over a period of time, and to pay overdue child support. Creditors are allowed to object to the Plan, and their objections will be resolved either by negotiation or by a decision of the Bankruptcy Court.
The Plan you create will be confirmed by the Court if it is feasible and otherwise complies with the requirements of the law. After the Plan has been confirmed by the Court, no creditor can demand any different or better treatment than the Plan provides. Unsecured debts are normally paid free of interest in a Chapter 13 Plan. In the case of secured debts, interest is paid only to the extent of the value of the collateral. For example, if you owe $7500.00 on a car valued at $6000.00, interest will accrue only on the first $6000.00 of the debt. The remaining $1500.00 will be paid without interest and will be treated as an unsecured debt in other respects.
It is even possible to reduce the rate of interest on secured debts. In practical terms, this means that it takes much less money to pay your debts than if you continue trying to deal with your creditors outside of Bankruptcy. In Chapter 13, secured creditors can be compelled to accept payments over a period of time. The Bankruptcy Code provides that some debts are non-dischargeable. This means that after your case is completed with the issuance of a discharge, you will remain responsible for the debts that cannot be discharged. These debts include (but are not limited to) child support, alimony, certain other debts related to divorce, some student loans, criminal restitution, fines, and some taxes. Some debts that are non-dischargeable in Chapter 7 may be discharged by partial payment in Chapter 13. This is known as the Chapter 13 Super Discharge. Straight Bankruptcy (Chapter 7) will not protect cosigners on your debts. If a relative or friend has co-signed a loan for you, and you discharge the debt in bankruptcy, the creditor may collect the debt from the cosigner. However, co-makers can be protected in Chapter 13 case by providing in the Plan the debt be paid in full. It is even possible to pay cosigned debts in full while paying only a portion of other debts. (this is not always approved by the Trustee on unsecured debt- but it is always approved if it’s secured debt)
To Strip a 2nd Mortgage:
In order to do this, the value of the home needs to be valued less than the amount of the first mortgage. It can also only be done if it’s a Chapter 13.
Objection Period:
When a motion has been filed, you have 14 days in which to file a written response.
Motion for Relief of Stay:
This is filed when the creditor wants to take back a secured property from the clients. Typically this is done if the client falls behind on payments post-petition.
Resolve: If the client wants to keep this property, file a written objection.
If the client wants to surrender the property then do nothing. It will be automatically granted after the objection period has run.
Chapter 13 Plans:
There are a variety of lengths the plan can be. It must be a minimum of 36 months unless all creditors have been paid 100% of their filed claims and can not extend past a maximum of 60 months. The Trustee or Creditor has 14 days to object to the plan after it’s been filed. General creditors (secured and unsecured) have 90 days to file a proof of claim. Government Agencies have 180 days to file their proof of claims. If no claim is filed, the creditor will not get paid.
Real Estate Treatment:
If the client is within 30 days of being current, then they may elect to file a chapter 7 or Chapter 13 case and keep the real estate. If they are more than 30 days delinquent and wish to keep the property, then they would need to file a Chapter 13 as relief of stay will be granted in a chapter 7 and they could still lose the property in foreclosure. If they are more than 30 days delinquent to the lender in a Chapter 13, then the on going monthly mortgage payment must be paid inside the plan via the client’s monthly payment to the Trustee. The Trustee will then pay the on going mortgage payment each month through the life of the plan.
Vehicle Treatment in a Chapter 7:
In order to keep the vehicle in a Chapter 7, the client needs to be within 30 days of being current or current. If the client is delinquent more than 30 days but wants or needs to file a chapter 7, they could redeem the vehicle for fair market value. This is done by the client contacting the appropriate company and applying for the redemption through them. They do have certain guidelines and not all clients will be eligible for this option. A client who has either had loans/auto repossessions with the lender will not be qualified. If they have too may repossessions listed on their credit report then they might not be eligible. If the vehicle is more than 6 years old or they owe less than what the vehicle is worth then they will not be qualified. There are 2 companies that provide this service. 722Redemption (www.722redemption.com ) is the most popular. Then there is Fresh Start Loan Corporation (www.freshstartloans.com). Each company has it’s own requirements and sometimes Fresh Start can get a client approved when 722 can’t. 722Redemption uses US Bank for the financing of the redemption but not sure which lender Fresh Start uses.
Vehicle Treatment in a Chapter 13:
If the client is current and up-to-date they may choose to pay this payment outside of the plan. However, before you decide on that option you should explore all options. If the vehicle was purchased more than 910 days ago, the vehicle is eligible for cram down to where the vehicle could be paid at fair market value (Typically NADA/Kelly Blue Book Value) and an interest 1-3 points above Prime(right now it’s at 5.5% interest). This option can drastically lower the payment of the vehicle. If the vehicle was purchased within the last 910 days, the vehicle can be paid inside the plan but it must be paid at the loan amount, however the interest can be paid at the same rate as if the 910 rule was applicable. This can still lower the over all payment as the vehicle payments can be extended over the life of the plan and the interest rate can be drastically lowered.
Other Secured Debt Treatment:
In a chapter 7, should a client have other secured debt such as jewelry, furniture, etc. This can be redeemed/retained for fair market value, reaffirm or surrendered. If the client wishes to redeem/retain the property for fair market value, they will need to either be able to offer acceptable terms of repayment or pay the amount to the creditor within 15 days of the order. The later of the two is typically the way the creditor prefers to be treated.
In a Chapter 13, should a client have other secured debt such as jewelry, furniture, etc. This can be crammed down to fair market value, surrendered or paid for directly outside of the plan depending on the benefit of such payment being made (directly). Typically it’s crammed down to fair market value as this is the best treatment for this type of debt.
Priority Debt Treatment:
Taxes, child support, court ordered restitution these are examples of typical priority debt in a Bankruptcy case. If filing a Chapter 7, this debt is typically not dischargeable. This debt will remain an obligation of the debtor after discharge in a Chapter 7. Certain taxes may be dischargeable if the are at least 3 years old and were filed timely. If filing a Chapter 13, although it’s a non-dischargeable debt, it may still be paid inside the Chapter 13 Plan. The benefit of this would be that interest and penalties would cease. Back owed child support can be paid inside the plan and the current on-going (Post-Petition) payments could be directly from the client. The client MUST be current with all post petition Child Support payments to obtain a discharge in a Chapter 13.
General Unsecured Debt Treatment:
Creditors such as medical, personal loans, NSF’s, credit card payments, old utilities, etc. would be deemed as general unsecured debt. If in a Chapter 7, this debt is discharged and will no longer be an obligation for repayment. If filing a Chapter 13, then the creditors may receive some funds depending on if there is anything left of the plan base after all secured, priority and administrative expenses have been paid. Even if they do not receive any funds, they are still discharged with the case and will no longer be an obligation of repayment.
Co-Signed Debt:
In a chapter 7 or 13, the person filing has the right to surrender their obligation to repay this debt. If this is done and the other party has not or is not filing a bankruptcy, they would be responsible for the debt and the creditor will go after them for repayment. If filing a Chapter 7, the debtor would also have the right to maintain/reaffirm this debt as a co-sign protect debt. If filing a Chapter 13, there is an automatic stay as to the co-debtor of the debt as well.
Debt Maximum Limit:
In a chapter 13 as of 2009, you can only file a Chapter 13 if your secured debt is less than $1,010,650 and your unsecured debt is less than $336,900. If you have more secured debt, then you would need to consider a Chapter 11 for the client and if there is more than the limit for unsecured debt, then they must file either a Chapter 11 or a Chapter 7 as they would not qualify for a Chapter 13.
Judgments/Liens on Household Goods:
If you have a judgment and the debtors own property and the judgment was taken in the county in which the property is located, it may very well be a lien against the property. It is the best and safest to assume it is attached. Therefore this debt should be listed on schedule D and attached to the home with treatment as being lien avoidance. The same would go for a debt that is secured against their personal household goods, for example- they took a loan out with CitiFinancial and used their household goods as collateral for the loan. In the event either of these occur, you will need to file a Motion to Avoid Judgment Lien or Motion to Avoid Lien against Household Goods. You must also file the appropriate notice and upload the order so if it’s approved the order can be so entered. There is a 21 day objection period on these types of motions. You must serve notice to the party as listed on the schedule as well as the highest chief officer or the registered agent with the State of Indiana. You can typically obtain this information from this website: https://secure.in.gov/sos/bus_service/online_corps/name_search.aspx
General Exemptions:
On schedule B there are typically no limits as to the value of their personal property. It’s best to remember to have them use garage sale or pawn shop value and never the replacement value. A single person filing has $9,350.00 as an exemption for personal property, this amount is doubled if filing a joint return. This exemption is the “Other Property” exemption. This would go for all of the following types of property: Rental property (any real estate in which they do not live), automobiles, motorcycles, household goods, computers, boats, animals, jewelry, books, movies, cds, etc.
For cash on hand, bank accounts, money market accounts, stocks bonds, whole life insurance policy where a dependent or spouse is NOT the beneficiary or income tax returns they only have $350 each under the “intangible property” exemption.
401k, IRA’s, Retirement programs are fully exempt as well as whole life insurance policies where the beneficiary is a spouse or a dependent. The 401k/retirement etc. has a 401k exemption to use and the whole life insurance has an insurance where dependent/spouse is beneficiary exemption.
529 B or other educational savings programs are fully exempt as well. If you have one of these accounts, the debtors need to provide a copy of the statement. You must redact any information other than the last 4 numbers on the account and the value information. Child information must be fully redacted and you must file this with the court. There is a special exemption for this as well under Educational Savings Account.
Real Estate of which the debtors live in has an exemption of $17,600 for a single file and doubled for a joint filing. This exemption is the Residence exemption.
There are other exemptions but those are not commonly used. The ones listed above you will use on almost every case.
*** note to remember- put in anticipated tax refund on #20 on schedule B and exemption out any portion you can. This would be whatever you have left over on your intangible exemption after exempting cash on hand/bank accounts/etc.
General expenses (limits allowed by the Trustee):
On Schedule J there are certain limits to expenses allowed by Trustee. Generally it’s best to get the budget from the clients, if their expenses are higher then these limits then you need to make sure they are prepared to provide proof of the expense as the Trustee will typically request this information. Below are some of the limits you should keep in mind.
Medical Expenses: $150 (if higher- explain on #19 of schedule J)
Food- $300-$350 for a single person, $400-450 for 2 and increase accordingly for larger family sizes (typically $50-100 per person)
Electric/Gas: typically $200-250
Water/Sewer: $50-75
Telephone/Land Line: $50-75 unless 3 in one package to include cable/internet
Home repairs (unless an older home: $100-150
Laundry: $45 unless using a laundry mat)
Here’s a few items you might want to include as to eat up some of the excessive income (if necessary):
School books/lunches/activities, etc. (typically about $20/month is the max on this expense – the higher the value here they may need to be prepared to provide proof of this to the Trustee.
Car Repairs/Maintenance: typically $50-75
Personal grooming/hygiene: typically $50-75
Pet Food/Vets: $50-75
Diapers
Amendments:
In the event you need to file an amended schedule such as I/J (these are typically done to resolve issue with objections to the plan as you want to show the plan is feasible and not to show there’s an excessive amount left for the creditors to obtain). You need to file an amended summary of schedules and a declaration to the schedules (which is the signature page) with each amendment of the schedules. If adding creditors or making any changes to schedules D, E, F, G, H (other than adding additional notices to an original creditor) there is a $26.00 fee that must be paid to the court. You also must do a notice of amendment when filing the amendment if you are adding creditors and this must be noticed out to all new creditors along with the FMOC notice, the amendment, and anything else that was previously noticed to all creditors.
General items to remember:
- Scan the certification of counseling and attach it to Exhibit D or scan to Best Case and name CCC so that it will be filed with the case.
- Scan Pay Stubs and name them Pay Stubs or if joint filing: PayStubs1 and PayStubs2. This way they will file with the case as well.
- Scan all required documents to the Trustee and email upon case filing. Chapter 13 Trustee’s require the last filed tax returns where as the Chapter 7 Trustee’s require: Last filed tax return, 3 months bank statements to include date of filing, proof of 401k/Retirement, Real Estate property valuation, child support information. The Chapter 7 Trustee’s also have a Document Production Form that they provided that they typically prefer to receive as well but it’s not mandatory.
- Always put your Trustee name on Best Case. Also put in any upcoming court dates and notes on case. It’s the easiest way to have everything in one location.
Important Dates for cases:
After case filing (Chapter 7 or 13)
FMOC approximately 30-45 days
Discharge: 90 days for chapter 7
3-5 yrs for chapter 13
2nd Credit Counseling Due (DEC): 45 days after the first set FMOC (chapter 7) or prior to discharge in a Chapter 13
Bankruptcy Case Number and what it means:
Example: 10-10345-JKC-13
- The first 2 numbers indicate the year (10 = 2010)
- The next 5 numbers indicate the number of cases that have been filed in that court district (10345 indicates that this is the 10, 345th case filed in the district)
- The 3 letters are the judges initials
- The last 1 or 2 numbers indicate whether it’s a chapter 7 case or chapter 13
- No upcoming events