A Fresh Start – Gibson Law Group’s Personal Bankruptcy Primer
Introduction
The personal bankruptcy process is designed to afford the honest, hardworking individual a financial “fresh start.” The Bankruptcy Code (the “Code”) enables you to receive a discharge for most, if not all, of your debts while retaining as many of your assets as possible. Bankruptcy laws were designed to help halt the distressing tactics of the collections industry and to allow good people to correct unpleasant financial situations in a quick and succinct manner.
If you are considering filing for personal bankruptcy relief, you have two main options under the Code: Chapter 7 or Chapter 13. Chapter 7, the most common type of personal bankruptcy, involves the potential liquidation of non-exempt assets while Chapter 13 requires “reorganization.” When deciding between the two, there are many factors you need to consider. For example, you should understand how disposable income, non-exempt assets, the different types of debt, and the amount of debt will affect a bankruptcy. A failure to understand these factors could lead to the loss of property or the dismissal of your bankruptcy.
Terms to Know
Automatic Stay:
The “automatic stay” is described in Section 362 of the Code. It provides protection from creditors’ collection efforts, with limited exceptions, to those who have filed for bankruptcy. This includes protection from harassing collection calls, lawsuits on pre-petition debts, wage garnishment, and the staying of foreclosure actions. The automatic stay goes into effect the moment the debtor files the petition.
Claims:
There are typically three types of claims filed by creditors: priority, secured, and unsecured. Depending on the type of bankruptcy, the classification of a claim will dictate what the creditor with the claim will receive.
Cramdown:
Available to certain Chapter 13 debtors, this process allows the non-consensual modification of certain secured loans. It brings the principle balance of the debt down to the present value of the collateral.
Discharge:
Generally, the main goal of a bankruptcy is to receive your discharge. The discharge relieves the individual debtor of any personal liability for the debt.
The Estate:
The filing of a petition in bankruptcy creates the “estate.” Once in the estate, the assets no longer belong to the individual, but instead to the estate. The distinction can have major ramifications. The Code states the estate includes “all legal or equitable interest of the debtor . . . as of the commencement of the case.” This means the estate includes all real and personal property, whether intangible or tangible, as of the filing date.
Exemptions:
Exempt property cannot be used to satisfy the claims of the debtor’s creditors. The Code sets forth federal exemptions. However, Texas is an “opt-out” state, meaning it has decided not to adopt the federal exemptions and has instead created its own. Texas exemptions include the Texas homestead exemption, without limitations on value, and exemptions for personal property up to a statutory amount. A debtor may choose to use the federal or Texas exemptions, but cannot use a mix of both.
Lien Stripping:
Available to Chapter 13 debtors, this process allows the debtor to remove wholly underwater junior liens and transform the debt into unsecured.
The Means Test:
Not all potential bankruptcy petitioners are able to file a petition for Chapter 7. Instead, if a debtor’s monthly income is greater than the Texas median monthly income, he or she must first pass the “means test.” The means test is the Court’s way of ensuring a debtor is not abusing the bankruptcy process by filing when he or she has sufficient disposable income to pay off the scheduled debts.
Meeting of the Creditors:
Also known as a “341 Meeting” after the Code section providing for it, this is a meeting between the debtor, the debtor’s attorney, and the trustee assigned to the petition. The trustee, after reviewing the debtor’s petition, clears up any concerns she may have regarding potential non-exempt assets and the debtor swears under oath his bankruptcy petition is true and correct.
Preferences:
Section 547 of the Code allows the trustee to avoid, or annul, a pre-bankruptcy transfer of assets if the transfer was to a creditor for a pre-bankruptcy debt at the expense of all other pre-bankruptcy creditors. A common scenario might involve a debtor paying off a particular credit card, to close to his filing date, with assets of the estate while ignoring other credit card accounts.
Schedules:
Schedules (A through J) make up the meat of the actual bankruptcy petition. They include information on the debtor’s assets, any exemptions the debtor is claiming, lists of all creditors the debtor owes, and information on the debtor’s income and expenses. A debtor’s failure to include a creditor in the petition can mean the overlooked debt will not be discharged. Dishonesty or attempts to hide assets when filling out the petition can lead to serious consequences.
Trustee:
A trustee is appointed in every Chapter 7 and 13 case. The trustee’s job, among other things, is to review a debtor’s petition, ensure calculations regarding income and expenses add up, and liquidate non-exempt assets in order to pay back creditors. In a Chapter 13, the trustee will also make sure the debtor is making adequate plan payments, distribute payments to creditors, and object to certain claims by creditors.
A Chapter 7 Bankruptcy Rundown
As discussed, a Chapter 7 bankruptcy is a liquidation procedure. This means any non-exempt property of the debtor may be surrendered to the trustee. The trustee would then sell the property and remit the proceeds to the debtor’s unsecured creditors. However, many Chapter 7 bankruptcies are known as “no asset” cases, meaning the debtor’s assets fall under an exemption, or are otherwise not part of the estate. In a no asset Chapter 7 there is nothing for the trustee to distribute to unsecured creditors. Although there is no limit on how much debt you can have, you must pass the means test before you are able file a Chapter 7 petition.
Chapter 7 is a great weapon to rid oneself of typical consumer debts like credit card balances, medical bills, and personal liability to various unsecured creditors. It is a more straightforward process than Chapter 13 bankruptcy, typically lasting three to five months. However, it is important to remember not all debts can be discharged in a Chapter 7 and there is the possibility of losing non-exempt property. Debts like tax claims, student loans, certain court judgments, domestic support obligations, and certain debts from luxury goods and services are non-dischargeable. The debtor may also be required to surrender secured property with which he is not current or secured property with which he is current but has significant equity.
Chapter 7 is perfect for lower income, lower asset individuals who have fallen into a financially unmanageable situation with debts which are primarily consumer. A debtor with too much disposable income, non-exempt assets, or property subject to security agreements may not qualify or wish to file a Chapter 7 petition. Instead, the debtor may need to turn to Chapter 13 bankruptcy.
A Chapter 13 Bankruptcy Rundown
Chapter 13 bankruptcy is a much more extensive process than Chapter 7. In a Chapter 13 the debtor retains possession of his property but submits to a repayment plan. The repayment plan is typically three to five years and monthly payment amounts are based upon disposable income and non-exempt asset calculations. The debtor receives his discharge when he completes his repayment plan. The debtor may also be able to, if certain conditions exist, “strip” a wholly underwater junior lien or “cramdown” certain secured loans, something a Chapter 7 debtor cannot do.
The Code has a secured and unsecured debt ceiling for potential Chapter 13 debtors, meaning if a debtor is over the Code’s limit he does not qualify for Chapter 13 bankruptcy. The repayment plan must be “feasible.” This means the debtor should be able to afford the monthly payment amount. If the debtor is current with secured creditors, he must remain current. Monthly payment amounts become an issue when the debtor has certain priority debts or secured debts in arrears. Those types of debts must be paid in full or brought current in the plan, unless, in the case of secured property, the property is surrendered. If the debtor is unable to keep up with the monthly payments, the trustee will dismiss the case and the debtor will not receive his discharge.
Chapter 13 is a valuable tool for debtors unable to qualify for Chapter 7 or unwilling to surrender significant non-exempt assets. It is also an option for debtors simply seeking to halt collection or foreclosure proceedings and whom wish to cure arrears in their repayment plan or attempt to modify their mortgage.
Conclusion
Although each Chapter has its own advantages, drawbacks, requirements, and procedures, both exist to help people get back on their feet financially. The decision to file is not an easy one, but the sooner you file the sooner you have your fresh start.