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Negotiate. You or your attorney may be able to negotiate an agreement with your creditors. Such an agreement is commonly known as a “workout” agreement. A creditor may be willing to permit you to renegotiate repayment terms (like stretching out the number of months for repayment), or it may reduce the interest rate to lower your payment amount, and it may even be willing to “discount” or reduce the amount that you owe. Creditors are usually willing to negotiate if they believe that you are a viable bankruptcy candidate and they believe that they will receive more under the terms of the workout agreement than they would receive in a bankruptcy.
You may be able to take advantage of consumer protection laws to stop creditors who are harassing you (without having to file bankruptcy). An attorney practicing consumer law can help you determine what you may be able to do to stop creditor harassment.
Another alternative to Chapter 7 bankruptcy is to work with a credit counseling organization. The creditor counselor can negotiate a repayment schedule with your creditors. You usually make one monthly payment to the credit counseling organization, and then the credit counseling organization makes the payments to your creditors. There are many nonprofit credit-counseling organizations. The biggest is the National Foundation for Credit Counseling.
Of course, filing a Chapter 13 bankruptcy is also an alternative to filing a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you propose a plan to pay your debts, usually over a period of three to five years. To file a Chapter 13 bankruptcy, you must have a regular income, and you must have enough disposable income to make your Chapter 13 payments. An experienced bankruptcy attorney can evaluate your financial condition and let you know whether Chapter 13 is a viable alternative for you.
A creditor can object to the discharge of a particular debt. In a Chapter 7 case, certain particular debts are not dischargeable under Section 523 of the Bankruptcy Code. Debts that are not dischargeable include:
A creditor (usually a secured creditor) can move for relief from the automatic stay. If the creditor obtains relief from the automatic stay, the creditor is free to pursue its state law remedies with respect to taking action against the property (like repossessing a car or foreclosing a mortgage). A creditor is entitled to relief for “cause.” Usually, cause means the creditor does not feel that it has adequate protection in its collateral. If a creditor wants relief from stay related to an act against property, the creditor must show that the debtor does not have equity in the property and that the property is not necessary to an effective reorganization.
The United States Trustee may decide that you have enough “disposable income” to repay some or all of your debts in a Chapter 13 bankruptcy, and file a motion to dismiss your Chapter 7 case for substantial abuse. You have disposable income if your monthly income exceeds your monthly expenses. (People with debts that are primarily business-related are not subject to this test.) To find substantial abuse, a judge must determine that your debts are primarily consumer debts, not business debts. Debtors in this situation may choose to convert their Chapter 7 case to a Chapter 13 case.
The Chapter 13 Trustee may object to confirmation of your Chapter 13 plan. One of the reasons the Trustee may object is that he or she believes you are not devoting all of your disposable income to payments under the plan. If you cannot confirm a Chapter 13 plan, your case will be dismissed, you will remain liable on your obligations, and your creditors will be free to pursue you to recover their claims.
If you are dishonest and defraud the court, you may be subject to criminal prosecution. You sign your bankruptcy petition under penalty of perjury. If you fail to disclose assets, hide assets, or lie about your financial condition, you may find yourself subject to large fines and jail time.
Do take bankruptcy seriously. It is a constitutional right, and courts take a very dim view of abuse of that right.
Do be honest and forthcoming on your bankruptcy petition. It is against the law to lie in bankruptcy proceedings. That means spill your guts out; you are sacrificing a small portion of your privacy to get a discharge of your debts. If you lie on your petition, or if you conceal assets, you could get in very serious trouble. The least that will happen is that your petition could be dismissed.
Do be honest and forthcoming with your attorney. Even if it is embarrassing, even if it makes you look like an idiot or a crook, it is better if your attorney knows. Giving your attorney insufficient information is like hiring a chauffeur and not telling him or her that your brakes don’t work. Anything that isn’t listed in your petition may not be discharged.
Do make yourself available to your attorney for discussions regarding the case, especially preparation of the petition and appearance at the meeting of creditors. It is not a waste of your time if it helps you to have an uneventful bankruptcy.
Do follow your attorney’s advice about how to behave in the meeting of creditors. Remember, he or she does this almost every day. Don’t be afraid to ask him or her if something is appropriate. It’s one of the things that you are paying your lawyer for. Your attorney will tell you what he or she wants from you if the Trustee or creditors ask you unexpected questions.
Do consider alternatives to bankruptcy. If you can pay your debts, there may be other things you can do. There are credit consultants and debt consolidators who may be able to help you get through this rough time in your life.
Do give your attorney EVERYTHING in your relevant financial files, again even if it is embarrassing or incriminating. If you have the document, the odds are someone else does too.
Don’t assume that bankruptcy will get rid of all your debts. Some tax liabilities are non-dischargeable (basically, all tax liability accrued in the three tax years prior to filing are non-dischargeable in most circumstances). Student loans are now non-dischargeable except in cases of extreme hardship.
Don’t talk to your creditors directly after you have filed for bankruptcy. Tell them to talk directly to your attorney. If you receive mail from them, forward it to your attorney immediately.
Don’t forget to consider saving some of your credit cards. If any of your credit cards have zero balances, you may be able to keep them. Some card providers may ask you to reaffirm your debt in return for keeping a card, and this is worth considering, especially if there is a small balance. Life can be a lot harder without a credit card. But it would be wise to consult with your attorney first if you do this.
Don’t keep a creditor off your petition for any reason. If you intend to pay them back, you can anyway.
Don’t run up a lot of bills immediately before you file. If you max out your credit cards or take out a loan before you file, the court could find your petition to be fraudulent and dismiss it, or except those debts from discharge.
Don’t unnecessarily spread the news that you have filed for bankruptcy. It is your business, and unfortunately there is still a stigma attached to bankruptcy. Your friends, and your employers, don’t have any right to know that you are in financial trouble.
If you and your bankruptcy attorney decide that filing a bankruptcy is the best alternative for your company, your attorney will request that you complete some worksheets. Your attorney will use the worksheets, along with the other information you have provided, to complete the bankruptcy petition and schedules. The bankruptcy petition and schedules are key documents in a bankruptcy – the petition is what actually commences the case in court, and the schedules set forth the financial information on which your whole case is based.
When the schedules are complete, your attorney will have you review and sign them. Your attorney will then file the documents with the appropriate bankruptcy court. When the petition is filed, something called the “automatic stay” goes into effect immediately. That means that collection activities by your company’s creditors must stop. The filing of a bankruptcy case creates an “estate” consisting of all of the debtor’s nonexempt property.
Chapter 7 is “straight liquidation” – your company’s assets are, essentially, marshaled together and then divvied up between creditors according to a set of priorities laid out in the law. In a Chapter 7 case, a trustee is appointed to take possession of the property of the estate. Approximately twenty to forty days after filing the petition, you must attend the “first meeting of creditors,” also known as the “341 meeting” (named after the section of the Bankruptcy Code – section 341 – that provides for it). The trustee will ask you questions about your company’s assets and liabilities, and its income and expenses. Your creditors may also attend that meeting and ask you questions about your company’s financial condition. If your company does not have any assets, the bankruptcy case will end in about three or four months. If your company has assets, when your case ends will depend on how long it takes the trustee to gather your assets, sell them, and distribute the proceeds to your creditors. If the debtor is an individual, he or she automatically receives a “discharge” at the end of the case unless a creditor or the trustee objects.
Chapter 11 allows a company to restructure, according to a plan laid out in advance and agreed to by the parties and the court, and hopefully come out in the end as a solvent, going concern with a financial clean slate. If your company files under Chapter 11, your company becomes the “debtor in possession” with the right to retain the property of the estate and operate the business. Approximately twenty to forty days after filing the petition you must attend the “first meeting of creditors,” also known as the “341 meeting.” You will be asked questions about your company’s assets and liabilities, and its income and expenses. Your creditors may also attend that meeting and ask you questions about your company’s financial condition. The United States Trustee may appoint a “creditor’s committee” which usually consists of your company’s seven largest unsecured creditors. The creditor’s committee consults with the debtor, investigates the debtor’s conduct and financial condition, and participates in drafting the plan of reorganization. The debtor has the exclusive right to file a plan of reorganization for the first 120 days after filing. The debtor must also file a “disclosure statement” that contains financial information about the debtor and its business.
The plan of reorganization outlines how the debtor will deal with its creditors. The plan typically divides creditors into classes. Creditors vote on the plan of reorganization. Each class of creditors must accept the plan as it applies to that class. Usually, creditors that hold at least two-thirds in amount and more than one-half in number of the claims in a class must accept (vote yes to) the plan. However, if the court finds that the plan is “fair and equitable” and does not discriminate unfairly, the court may confirm (the legal shorthand for this is to “cram down”) the plan anyway. Plans may provide for payments to creditors over any reasonable period of time. Sometimes, payments on secured debts are extended over a period of twenty to thirty years.
Confirmation of the plan vests all property of the estate in the debtor and discharges all debts and liens that arose before the confirmation date except as provided for in the plan. The debtor has 180 days from the filing of the petition to obtain acceptance of the plan by creditors. Some plans (usually those that the debtor and creditors have mutually agreed to prior to filing) can be confirmed in two or three months. Usually, however, it takes between one and two years to confirm a plan.
Chapter 13 is for the adjustment of debts of an individual who has a regular income. A trustee is appointed in a Chapter 13 case, but does not take possession of the property of the estate. Approximately twenty to forty days after filing the petition, you must attend the “first meeting of creditors,” also known as the “341 meeting.” The trustee will ask you questions about your company’s assets and liabilities, and its income and expenses. Your creditors may also attend that meeting and ask you questions about your financial condition.
Individuals engaged in business and filing under Chapter 13 must file a plan within fifteen days of filing a bankruptcy petition. The plan must devote all of the debtor’s disposable income to payments under the plan for the next three to five years. The debtor must begin making payments under the plan within thirty days after the plan is filed. These payments are made not to the creditors but to the Chapter 13 trustee.
Creditors do not vote on the plan. If the plan complies with the requirements of the Bankruptcy Code, the court must confirm the plan. The confirmation hearing is usually held about four months after the case is filed. A discharge is granted when the debtor has completed all payments under the plan.
Note: Now, what this last means is that they have to sue you to get a response, and most creditors are more than willing to do so. It doesn’t mean that you are off the hook!
The following chronology gives a general idea of how a bankruptcy filing proceeds. Your action may be different because of differences between local court rules, state laws, and rules of civil procedure. Your attorney can help you understand exactly how your case will fit with this chronology-remember, your attorney works for you, and should clearly explain every step of the legal process.
It’s hard to say how long all these steps will take in your case. The entire process can take from as little as three months, to as long as five years. Bankruptcy is one of those rare areas where the process is faster in population centers. In Manhattan, you can receive a Chapter 7 discharge in about three months, whereas it takes about twice as long in rural Nevada. Adversary proceedings are as uncertain as any other litigation, although most Bankruptcy Courts are fairly vigilant about moving them through the system quickly.
The automatic stay is a feature of bankruptcy law that goes into effect immediately upon filing a bankruptcy petition. The automatic stay forces creditors to stop all collection actions (like foreclosures, repossessions, garnishments, and evictions) against the debtor, so that collection and distribution of assets can occur according to a fair and orderly method as specified in the Bankruptcy Code, rather than according to which creditors might be the quickest or most aggressive or have an “in” with the debtor.
A Chapter 7 bankruptcy permits the debtor to liquidate assets in an orderly way. In Chapter 7 (also known as “straight” bankruptcy), a trustee is appointed. The trustee collects all nonexempt assets of the debtor, sells those assets, and distributes the proceeds to creditors. There is no minimum or maximum debt limitation for Chapter 7, and the debtor doesn’t have to be insolvent. The goal of an individual debtor in a Chapter 7 case is to get a “discharge” of his or her debts.
A Chapter 11 bankruptcy permits the debtor to restructure or reorganize debt while carrying on, albeit in a significantly circumscribed way, their business and/or financial affairs. Individuals as well as businesses may use Chapter 11, but individuals who do so usually operate some kind of business. A trustee is usually not appointed in a Chapter 11 case. Rather, the debtor is allowed to continue to manage his or her business. Chapter 11 recognizes that there is often greater economic and/or social value in keeping a going concern going than in liquidating it, distributing what assets it has, terminating its commercial relationships, and letting its employees go.
The debtor develops a “plan” which outlines how his or her debts will be repaid. Usually, a debtor filing a Chapter 11 does not plan on “liquidating” assets, rather in most cases the debtor plans on reorganizing debts so that he or she can continue to operate, hopefully on a profitable basis. Individuals operating businesses usually file under Chapter 11 when they are facing a cash flow shortage or temporary downturn in business. Upon confirmation (court and creditor approval of its plan of reorganization), a Chapter 11 debtor receives a discharge of any debt that arose before confirmation.
Individual debtors who have a regular income (including those engaged in business) can file a Chapter 13 bankruptcy to restructure or reorganize debt. A debtor “engaged in business” is someone who is self-employed and incurs trade credit in the production of income from that employment. A debtor engaged in business may continue to operate his or her business in a Chapter 13 case. Like a Chapter 11, the debtor proposes a plan that outlines how his or her debts will be repaid. The debtor must devote all of his or her disposable income to payments under the plan for three to five years. To qualify for Chapter 13, a debtor must have: a regular income; unsecured debts of less than $290,525; and secured debts of less than $871,550. A trustee is appointed in all Chapter 13 cases, but the trustee’s role is much more limited than in a Chapter 7 case. The small business debtor is allowed to continue his or her business. In Chapter 13 cases, a debtor receives a discharge when the debtor has completed all payments under the plan.
Generally, a discharge in bankruptcy means that an individual debtor’s obligations are erased or wiped out. When a discharge is granted, it protects the debtor from personal liability on the discharged debt. A discharge is only available to certain debtors and for certain debts, however. For example, debtors that are not individuals cannot receive a discharge in a Chapter 7 bankruptcy.
Individual debtors are entitled to keep certain assets free from the claims of creditors, under federal or state exemption laws. Typical exemptions are the homestead exemption (equity in the debtor’s personal residence), cash value of insurance policies, household goods and furnishings, clothing, wages, and tools used in the debtor’s job. Different states exempt different types of property and have different maximum dollar amounts. The amount of the exemption depends on whether federal or state exemptions are available and/or used.
A fraudulent transfer is a transfer made by a debtor with the intent or effect of reducing the assets available to creditors. For instance a debtor might attempt to repay a loan to a friend or family member when those funds ought rightfully to be divided between all the debtor’s creditors. Fraudulent transfer law exists both in and outside of bankruptcy. A trustee has the power to undo or nullify (“avoid”) transfers of the debtor made with actual intent to hinder, delay, or defraud creditors, and certain transfers for which the debtor did not receive a reasonably equivalent value in exchange for the transfer.
A preference is a payment received from a debtor by a creditor in the ninety days before the debtor’s bankruptcy filing. The trustee can recover such a payment if:
There are various defenses to a preference action by the trustee, including that the payment was made in the ordinary course of the debtor’s business.
Although the automatic stay prohibits collection of debts by a creditor – including secured creditors – a secured creditor can ask the bankruptcy court for “relief” from the automatic stay. There are three bases on which a creditor might be entitled to relief from the automatic stay. First, for “cause.” Usually cause exists where the creditor can establish that it otherwise would not have adequate protection. Second, if a creditor wants relief from stay related to an act against property, the creditor must show that the debtor does not have equity in the property and that the property is not necessary to an effective reorganization. Third, a creditor is entitled to relief if its claim is secured by “single asset real estate,” unless the debtor files a plan that is likely to be confirmed or the debtor makes monthly payments to the creditor equal to interest at current fair market value on the balance of the creditor’s interest in the real estate.
Actually there are several types of bankruptcy trustees:
The United States Trustee is responsible for oversight of the bankruptcy process as a whole. The United States Trustee’s duties are to maintain and supervise a panel of private trustees (usually, but not always, private attorneys) to serve in Chapter 7 cases, review fee applications filed in Chapter 11 cases, monitor plans and disclosure statements in Chapter 11 cases, monitor activities of creditors’ committees, monitor the progress of Chapter 11 cases, and assist the United States Attorney in criminal prosecutions.
The United States Trustee appoints the trustee in a Chapter 7 case from a panel of private trustees. A Chapter 7 trustee is responsible for representing the interests of the debtor’s estate and creditors as a whole.
In a Chapter 13 case, a “standing” trustee is appointed by the United States Trustee to conduct the duties of the United States Trustee in Chapter 13 cases.
In some cases, creditors may file a petition to force a debtor into bankruptcy against the debtor’s will, so to obtain some benefit from the distribution of the debtor’s assets or proceeds. To commence an involuntary Chapter 7 or a Chapter 11 case, the creditors must meet certain threshold requirements pertaining to their number and the amount of debt owed them by the debtor.
A debtor files a petition to commence a voluntary bankruptcy.
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This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.