Bankruptcy LawBankruptcy laws can be complex and an experienced attorney will guide you every step of the way. Hastings & Ron will make sure you follow all the regulations of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure so your case won’t be dismissed. Many people who file for bankruptcy make several mistakes because they are not aware of all the responsibilities and technicalities involved during this process. Most common mistakes include missing a deadline or fail to respond to an action correctly, fail to disclose assets in bankruptcy which is considered fraud, all of this which could cause your case to be dismissed. Hastings & Ron Bankruptcy Attorneys are experienced legal professionals representing Chapter 7, Chapter 11. Chapter 13 and various reorganization efforts for our clients benefit. Our client representation includes commercial creditors, debtors, debtors-in-possession, trustees, committees and third parties in all aspects of the bankruptcy and debt collection process. Collectively, the team has well over 30 years of experience in these matters. We work closely with each of our clients to understand their business, their legal issues and their financial challenges, and assist them in developing and implementing an effective strategy to accomplish their objectives.
The purpose of chapter 7 is to discharge debts and give the debtor a "fresh start" by extinguishing the debtor's personal liability on those debts. A discharge in Chapter 7 is available to individuals, not business entities such as partnerships or corporations. Although most individual chapter 7 cases result in a discharge of all debts, some types of debts are not discharged, and a discharge does not extinguish liens on property. In rare cases a chapter 7 may be dismissed if the court finds the debtor has the ability to pay a meaningful dividend to unsecured creditors in a chapter 13 case.
A chapter 7 case begins by filing a petition with the bankruptcy court in the district where the individual lives or where the business debtor has its principal place of business or its principal assets. The debtor is required to file schedules of assets and liabilities, including current income and expenses, and a statement of financial affairs. A husband and wife may file a joint petition, or a spouse may file individually. Filing a petition "automatically stays" most creditor actions against the debtor and the debtor's property. The stay arises by operation of law without any judicial action. But for only limited exceptions [such as collecting a domestic support obligation], creditors cannot initiate or continue lawsuits, repossessions, or wage garnishments while the stay is in effect. Federal bankruptcy law allows individual [vs. business] debtors to retain certain assets by claiming that property as "exempt" under federal bankruptcy law or the laws of the debtor's state. Married couples may only claim one set of exemptions. A bankruptcy trustee is appointed when the case is filed. The trustee's main duties are to examine and verify the accuracy of the debtor's bankruptcy papers and to identify assets which are not exempt. The trustee may sell the non-exempt assets which have value and distribute the net proceeds to the creditors. If an asset has a loan against it, the debtor can usually keep the asset if the equity is exempt. A "meeting of creditors" is held about 30 days after the petition is filed. The trustee runs the meeting, and the debtor must provide certain documents to the trustee in advance. The debtor must attend the meeting, and if a husband and wife file jointly, both must attend. Creditors may ask limited questions about the debtor's property, but creditors rarely come to the meeting. The bankruptcy clerk issues the discharge, usually as soon as 60 days have elapsed from the first date set for the creditors meeting. A copy of the discharge is mailed to the debtor and all the creditors listed in the debtor's bankruptcy papers. Role of the Trustee A case trustee is appointed to conduct the creditor meeting and liquidate non-exempt assets. In the most cases, all of the debtor's assets are exempt or subject to valid liens, so the trustee usually has no assets to sell. If the debtor has non-exempt assets, or if the trustee later recovers assets to liquidate, the creditors are given a deadline to file a claim form stating the basis of their debt against the debtor or the debtor's assets. The filing of a bankruptcy petition creates an "estate," and the trustee becomes the temporary legal owner of the debtor's property. The estate consists of all the debtor's legal or equitable interest in property, including property owned or held by another person. The estate includes tangible and intangible assets, such as insurance claims or lawsuits for damages. Discharge A bankruptcy discharge releases the debtor from personal liability and prevents the creditors from taking any further action against the debtor or his property to collect the debts. As a general rule, individual debtors receive a discharge in most all chapter 7 cases. A creditor has two options to oppose the discharge: 1) file a complaint objecting to the debtor's bankruptcy discharge; or 2) file a complaint to determine if the creditor's debt is excepted from the discharge. A creditor may pursue one or both of these remedies by filing a complaint with the bankruptcy court. The grounds for objecting to a chapter 7 discharge are narrow, and the creditor or trustee objecting to the discharge has the burden of proving the case. In general, the grounds for denying a discharge are: the debtor failed to keep and produce adequate financial records; the debtor failed to explain satisfactorily a loss of assets; the debtor committed a bankruptcy crime; the debtor failed to obey a lawful order of the bankruptcy court; or the debtor fraudulently transferred, concealed, or destroyed property. Once a discharge is granted, the trustee, a creditor, or the U.S. Trustee may later file a complaint to revoke a chapter 7 discharge if they can prove: a) the discharge was obtained through the fraud of the debtor; or b) the debtor acquired property that is property of the estate and knowingly and fraudulently failed to report the acquisition of such property or to surrender the property to the trustee. Generally, this complaint must be filed within a year after the discharge was granted. Certain types of debts may not be discharged in a chapter 7 such as alimony and child support, most taxes, student loans, debts for death or personal injury caused by the debtor's operation of a boat or motor vehicle while intoxicated from alcohol or other substances, and debts for criminal restitution orders. To the extent that these types of debts are not fully paid in the chapter 7 case, the debtor is still responsible for them after the bankruptcy. Debts for money or property obtained by false pretenses, debts for fraud while acting in a fiduciary capacity, or debts for willful and malicious injury to another or to the property of another will be discharged unless the creditor timely files an adversary complaint. The creditor must file the complaint within 60 days from the first date of the creditors meeting. In such cases the presumption is in favor of the discharge, and the creditor normally has the burden of proof to show the debt should be excepted from the bankruptcy discharge. Secured debts Secured creditors normally retain the right to seize their collateral after a discharge is granted. The debtor must decide whether to keep the asset. If a debtor returns the collateral, and if a discharge is granted, the debtor will have no further liability to the creditor. A debtor wishing to keep the asset, such as an automobile, may "reaffirm" the debt or redeem the property. A reaffirmation is an agreement between the debtor and the creditor where the debtor promises to pay all or a portion of the money owed. The reaffirmed debt will still be owed after the discharge. In return, the creditor promises as long as payments are made, the creditor will not repossess the automobile or other property. If the debtor defaults on the payments, the creditor may repossess and sell the collateral. Unfortunately, if the sale price is not enough to pay off the debt, the debtor will still owe a deficiency to the creditor. A debtor may opt to redeem an asset by paying the fair market value in a lump sum. For example, if the balance on a car loan is $18,000 but the car is only worth $10,000, it may be sensible to redeem the car for its market value. However, most debtors who file bankruptcy do not have ready cash [or a rich relative] to pay the market value in one lump sum. There are companies who provide redemption financing. Their interest rates are high, but if the gap between the loan balance and the value of the car is large enough, a redemption loan may be less expensive than the existing loan on the car.
Chapter 11 is primarily for business reorganization. The business continues to operate, but the automatic stay gives the debtor time to restructure its finances. Persons with too much debt to qualify for chapter 13 may also file chapter 11. However, since the provisions are so complex and the costs so expensive, Chapter 11 is normally filed by corporations and other business entities. A business may reorganize by: 1) drastically lowering expenses; 2) obtaining additional operating capital; or 3) liquidating all or a portion of the business. The presumption is the ongoing value of business is greater than the sale of its assets. However, a liquidating plan is also permissible and allows the debtor to sell the business at a better price or under more advantageous circumstances than a chapter 7. Cooperation among the various interests in a case is often crucial to a successful reorganization. How Chapter 11 Works A debtor commences a chapter 11 by filing a petition and immediately becomes a "debtor in possession." The debtor typically retains management and control of assets during the reorganization without the appointment of a case trustee as in a chapter 7. A written disclosure statement and plan of reorganization are filed with the court. The disclosure statement must contain sufficient information about the debtor's assets, liabilities, and financial affairs to enable a creditor to make an informed judgment whether to vote to accept or reject the plan. Once the disclosure statement is approved by the court, a copy is sent to creditors with the plan and a ballot. Creditors whose claims are "impaired," meaning their rights are modified by the plan or they will be paid less than the full claim under the plan, may vote to accept or reject the plan. A confirmation hearing is held. If there are sufficient votes in favor of the plan, it is confirmed as a consensual plan. If not, the court determines whether to "cram down" the plan over creditor objections. The Debtor-In-Possession A debtor in possession owes fiduciary duties and has the powers of a bankruptcy trustee. Such duties include accounting for property, examining and objecting to claims, and filing tax returns and reports as required by the court and the United States Trustee. A debtor in possession has the power to employ attorneys, accountants, brokers, or other professionals, subject to court approval, to help with the case. If a debtor in possession fails to comply with the U.S. Trustee requirements, fails to comply with court orders, or fails to take appropriate steps to submit a plan for confirmation, the U.S. Trustee or a creditor may file a motion to appoint a case trustee, convert the case to chapter 7, or dismiss the case. The United States Trustee The United States Trustee monitors the progress of a chapter 11. The U.S. Trustee reviews the debtor's monthly operating reports, applications to employ professionals, motions for fees, and any plan or disclosure statement filed in the case. The U.S. Trustee conducts the creditors' meeting at the beginning of the case where their representative and creditors may question the debtor concerning the debtor's conduct, assets, and the plans for reorganization. The U.S. Trustee imposes certain requirements on the debtor such as reporting monthly income and operating expenses, opening new bank accounts, and ensuring payment of current employee withholding and other taxes. While the case is pending the debtor pays a quarterly fee to the U.S. Trustee. The amount of the fee is based upon the disbursements made in the prior quarter and adds a significant expense to the case. Creditors' Committee The unsecured creditors' committee may play a major role in the case. The U.S. Trustee appoints the committee, consisting of several creditors who hold the largest unsecured claims. The committee may consult with the debtor on the administration of the case, investigate the debtor's conduct or business operations, and participate in the formulation of a plan. The committee may hire its own lawyer, and the legal fees are usually paid from the debtor's bankruptcy estate. This can make a chapter 11 case very expensive. The Automatic Stay The automatic stay stops all collection activities, foreclosures, and repossessions on any claim that arose before the filing of the bankruptcy petition. The stay automatically goes into effect when the petition is filed. The stay provides a breathing spell so negotiations can occur to resolve the debtor's financial difficulties. In certain circumstances, a creditor may move to lift or modify the stay. For example, if there is no equity in a particular property, and the property is not necessary for reorganization, the creditor can request an order granting relief from the automatic stay to foreclose on the property. Who Can File A Plan There is no specific time for filing a plan; however, the debtor initially has an exclusive period to file a plan and disclosure statement. This period may be extended or reduced by court order. After the exclusive period expires, a creditor or the case trustee, if one is appointed, may file a plan. The time limit on the debtor's exclusive right to file a plan is intended as an incentive for the debtor to file a plan promptly. The Discharge Confirmation of a plan discharges the debtor from any debt arising before the date of confirmation. After confirmation, the reorganized debtor and the creditors are bound by the terms of the plan. The confirmed plan creates new contractual rights, replacing or superseding prepetition contracts. There are exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan does not discharge an individual debtor from any debt made nondischargeable by section 523 of the Bankruptcy Code. Confirmation does not discharge the corporate or partnership debtor if the plan is a liquidation plan, as opposed to one of reorganization. When the debtor is an individual, confirmation of a liquidation plan will effect a discharge unless grounds would exist for denying the debtor a discharge if the case were proceeding under chapter 7 instead of chapter 11.
Chapter 13 is only available to individuals (vs. partnerships or corporations) with regular income from any source, not just wages. A sole proprietor can also file a chapter 13. The goal is to reorganize by paying creditors through a plan that requires monthly payments for a minimum of three and no more than five years. Unsecured debts must be $336,900, or less, and secured debts $1,010,650, or less, to qualify for chapter 13.
How Chapter 13 Works A chapter 13 begins with a petition filed at the bankruptcy court where the debtor has a domicile or residence. The debtor files schedules of assets and liabilities, a schedule of current income and expenditures, and a statement of financial affairs. A husband and wife can file a joint petition or may file individually. If only one spouse files, the income and expenses of the non-filing spouse must be disclosed in the debtor's schedules. The filing of the petition under chapter 13 automatically stays most actions against the debtor or the debtor's property. While the "stay" is in effect, creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession, or wage garnishment. Chapter 13 provides a "co-debtor" stay which stops a creditor from trying to collect a "consumer debt" from another individual who is also liable with the debtor on the debt. A consumer debt is an obligation incurred for consumer, as opposed to business, purposes. A debtor facing foreclosure can stop the foreclosure sale by filing chapter 13. The chapter 13 plan permits the debtor to cure defaults on real estate debts by repaying the arrears within a reasonable period of time [usually within 36 months]. If a trust deed becomes all due during the chapter 13, the plan can provide for payment of entire debt. Upon filing the petition, a trustee is appointed to administer the case. The chapter 13 trustee's role is to collect plan payments from debtors and make distributions to creditors according to the debtor's plan. The debtor must file a plan with the court and begin making plan payments to the trustee. The plan provides for regular monthly payments to the trustee and must ultimately be confirmed by the court. Upon confirmation, the trustee begins distributing plan funds to creditors according to the terms of the plan. A plan may offer unsecured creditors less than full payment of their claims. However, the debtor's ability to modify automobile loans was significantly eroded by the 2005 amendments to the bankruptcy laws. A meeting of creditors is held in every case, and the debtor is examined under oath. The meeting is held about 30 days after the petition is filed. The trustee conducts the meeting and asks questions about the debtor's financial affairs and the proposed plan. Creditors may attend and ask questions. Debtors must attend, and if a husband and wife filed jointly, both must be present. Problems with the plan are typically resolved during or shortly after the creditors' meeting. If there are no plan objections, a confirmation order is submitted at the creditors' meeting. If the trustee or a creditor objects to confirmation of the plan, a hearing is scheduled before the court. The bankruptcy judge will determine whether the plan meets the legal requirements for confirmation. A variety of objections may be made, but the most frequent objections are: the total plan payments are less than creditors would receive if the debtor's assets were liquidated; or the debtor's plan does not commit all of the debtor's projected disposable income for the necessary commitment period. The debtor must commit all projected "disposable income" during the time the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income excludes those sums necessary to pay ordinary operating expenses. If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee begins distributing funds to creditors according to the plan. If the plan is not confirmed, the debtor may attempt to modify the plan, convert the case to a chapter 7, or let the case be dismissed. New limits on multiple filings make it unwise to allow the case to be dismissed. Making The Plan Work On occasion, changed circumstances will affect a debtor's ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to a motion by the debtor. The trustee may also request plan modifications. The provisions of a confirmed plan are binding on the creditors. Once the court confirms the plan, it is the responsibility of the debtor to make certain the plan is consummated. Chapter 13 is not designed to solve financial problems that arise after the case is filed. The debtor must make regular payments to the trustee, which will require living on a fixed budget for the length of the case. The debtor's employer may be required to withhold the amount of the plan payment from the debtor's paycheck and send it to the chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property, the debtor may not incur any significant new debt without consulting the trustee, and a court order may be appropriate. Failure to make plan payments may result in dismissal of the case. The Chapter 13 Discharge The chapter 13 debtor is entitled to a discharge upon successful completion of all payments. The discharge releases the debtor from all claims provided for in the plan or disallowed by the court. It is the creditor's duty to file a claim in the case. Those creditors who were provided for in full or in part under the chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations. Pursuant to the 2005 amendments, the scope of the chapter 13 discharge has been reduced. Debts that are proven to be the result of fraud or breach of a fiduciary duty by the debtor may no longer be discharged in a Chapter 13. As before, the debtor is not discharged from debts for alimony or child support, student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. To the extent that these types of debts are not fully paid pursuant to the chapter 13 plan, the debtor will still be responsible for the unpaid balance on these debts after the chapter 13 case has concluded.
If you are interested in learning how Hastings & Ron can help you evaluate your current situation for a possible bankruptcy filing, contact our office to arrange a consultation. Call us today at 209-476-1010.
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