Bankruptcy
Bankruptcy is a legal procedure that helps an insolvent person or business either eliminate their debt or to repay their creditors over time. Bankruptcy is actually provided for in Article I, Section 8, of the United States Constitution, which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” Under this grant of authority, Congress enacted the “Bankruptcy Code.”
Since the Bankruptcy Code is federal law, all bankruptcy cases are handled in federal court. There is a bankruptcy court for each judicial district in the country. Each state has one or more districts. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure, often called the “Bankruptcy Rules,” and local rules of each bankruptcy court. The Bankruptcy Code, Bankruptcy Rules, and local rules set forth the formal legal procedures for dealing with the debt problems of individuals and businesses.
Fresh Start – the Discharge and the Automatic Stay
The fundamental goal of federal bankruptcy law is to give debtors a financial “fresh start” from burdensome debts. As the United States Supreme Court stated in a 1934 decision, “it gives to the honest but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from many but not all debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
Filing bankruptcy gives rise to the “automatic stay,” which is an injunction that prohibits creditors from initiating or continuing any legal actions against the debtor, such as lawsuits, foreclosures, and garnishments, as well as form taking any other attempts to collect on the debt while the bankruptcy is pending. 11 U.S.C. § 362. The stay is “automatic” because it automatically goes into effect the moment a bankruptcy is filed and the protection usually continues until the case is resolved. The automatic stay helps the debtor survive until a discharge is granted.
Secured Creditors and Unsecured Creditors
To truly understand bankruptcy it is important to know the distinction between secured and unsecured creditors, which can also be described as, secured and unsecured debt. A creditor is secured if there is collateral backing up the debtor’s promise to pay, which can be used sold to pay off the debt if there is a default. For example, with home mortgages and auto loans, the debtor grants the creditor a lien on the home or car.
If the loan goes unpaid, a secured creditor can seek to foreclosure on their lien and sell the collateral to pay off the debt, as well as, suing the debtor personally. A creditor is unsecured if there is no collateral supporting the debt, in these instances credit was extended based solely on the debtor’s promise to pay. For example, credit card debt is most often unsecured because the only recourse for the credit card company upon default is to sue the debtor personally. Importantly, bankruptcy law differs in its treatment of secured and unsecured creditors.
A bankruptcy discharge only erases the debtor’s personal liability for the discharged debt. For an unsecured creditor this means the debt is completely wiped out because their only option was to sue the debtor personally, which they will be unable to do post-discharge. However, since a discharge only erases the debtor’s personal liability, a secured creditor almost always retains their lien on the debtor’s property.
This means that post-discharge, and assuming no agreement is reached before the bankruptcy is closed, a secured creditor will still be able to file a lawsuit to foreclosure on their lien but they would not be able to recover money from the debtor directly who would no longer be personally liable. With the foregoing in mind, there are several different types of bankruptcies, which are usually referred to by their chapter in the U.S. Bankruptcy Code. The three most common types of bankruptcy are Chapter 7, Chapter 11, and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 is a liquidation bankruptcy, which contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor, reduces them to cash, and uses the proceeds to make payments to creditors. However, debtors are allowed to retain certain assets, those that are exempt from liquidation and those assets that are secured as collateral for loans such as a home or automobile provided the debtor is current on those loans.
In most Chapter 7 cases there is usually little or no nonexempt property so, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” An unsecured creditor will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. Even in those instances where there is nonexempt property, the trustee will often allow the debtor to retain possession provided the debtor pays the value to the trustee.
The Meeting of Creditors
A typical chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is typically held at the offices of the U.S. trustee. At the meeting of creditors the debtor is questioned under oath by the U.S. trustee and occasionally creditors about their debts, property, and financial affairs.
Eligibility
At the urging of creditors, the Bankruptcy Code was amended in 2005 to make it harder for people to file Chapter 7 bankruptcy. Since 2005, a debtor must qualify for Chapter 7 bankruptcy by satisfying the income eligibility requirements. If the debtor’s income is in excess of certain thresholds, the debtor may not be eligible to file for Chapter 7.
If the debtor’s “current monthly income” is less than the state median, he or she can proceed in Chapter 7. However, if the debtor’s “current monthly income” is more than the state median, the Bankruptcy Code requires application of a “means test” to determine whether the Chapter 7 filing is presumptively abusive. With limited exceptions, “current monthly income” is defined in the Bankruptcy Code as the average monthly income received over the six calendar months before commencement of the bankruptcy case. 11 U.S.C. § 101(10A).
The means test is complicated since it takes into account all household income including non-filing spouses, the total number of dependents, and the geographical location of the debtor’s residence. However, the ultimate question determined by the test is whether the debtor has the means to pay a portion of their unsecured debts over time after all factors are applied to the debtor’s finances. If one has the means to pay then the debtor is required to file under a different chapter, typically Chapter 13, which will require payments over time to the court for the benefit of creditors.
Chapter 13 Bankruptcy
In situations where an individual debtor is earning regular income that exceeds the eligibility requirements for Chapter 7, he or she can file for Chapter 13 bankruptcy. Chapter 13 involves proposing a plan to make monthly payments to creditors to repay debts over time while retaining their assets. At the end of the plan, typically 3 to 5 years, if the debtor has made the monthly payments, he or she will receive a discharge of the remaining balances on their debts. Gulisano Law does not handle Chapter 13 bankruptcies. However, additional information about Chapter 13 can be found here.
Chapter 11 Bankruptcy
Chapter 11 is a reorganization bankruptcy, most often used by companies that want to continue operating their business by reorganizing their debts through a plan of reorganization. In certain instances, individual debtors that do not qualify for Chapter 7 can file Chapter 11, though in most instances they would instead file Chapter 13.
Chapter 11 debtors usually has the exclusive right to file a plan of reorganization for the first 120 days after the bankruptcy is filed and they must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability.
Generally, confirmation of a Chapter 11 plan discharges a debtor from any debt that arose before the date of confirmation. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization.
Conclusion
Working with a bankruptcy lawyer can help you make heads or tails of whether bankruptcy is right for you, what type of bankruptcy you should file, and what debts you can discharge. Financial troubles can cause stress and anxiety. Gulisano Law’s experienced and successful Florida bankruptcy lawyers are here to help you solve your financial worries.