While an individual may qualify for several different chapters in the Bankruptcy Code, most consumer debtor attorneys only concern themselves with two: Chapter 7 and Chapter 13. Occasionally, a high income debtor needs bankruptcy relief, but is disqualified from Chapter 7 because he makes too much money and has too much debt to qualify for Chapter 13. What can be done?
It’s Chapter 11 to the rescue! Chapter 11 is typically a “business bankruptcy,” however individuals may also file under this Chapter, even when there is no “business” debt. In fact, some debtors choose to file Chapter 11 instead of Chapter 13 when reorganizing personal finances using the Bankruptcy Code. However, as a general rule, individuals choose Chapter 13 over Chapter 11. Here are a few reasons why:
- Chapter 11 has a more expensive filing fee.
- Unlike Chapter 13, Chapter 11 does not have an automatic stay for co-debtors.
- Unlike Chapter 13, Chapter 11 does not contain a statutory authorization for separate classification of debts for which the debtor is co-liable.
- Chapter 11 debtor must get court approval to retain counsel, who must be disinterested. Chapter 13 debtors do not.
- Unlike Chapter 13 debtors, Chapter 11 debtors do not have the right to dismiss the case.
- Plan confirmation is much harder under Chapter 11, because impaired creditors have the right to either accept or reject the plan; under Chapter 13, a creditor’s acceptance of the plan is usually irrelevant.
That being said, there are good reasons to consider Chapter 11 over Chapter 13, including:
- The Means Test does not apply to Chapter 11 bankruptcy cases
- Disposable income under Chapter 11 need only be part of the “property to be distributed under the plan,” which, unlike Chapter 13, need not be distributed solely for the benefit of unsecured creditors, and therefore, can be distributed to administrative and secured creditors.
- The anti-cram down provision of section 1325(a) does not apply in Chapter 11.
- The plan length under Chapter 13 cannot be more than five years, but Chapter 11 has no such limit.
- Chapter 11 plan payments usually don’t start until after confirmation, which can be much later than the filing date; Chapter 13 debtors must begin payments under the plan within 30 days after the filing date, and before plan confirmation.
- As a prerequisite to discharge, a Chapter 13 debtor must complete a financial management course, but there is no such requirement for Chapter 11 debtors.
- Chapter 11 does not require that the debtor have a regular income
- There are no debt limits in Chapter 11
As suggested above, Chapter 11 does not have the same five year time limitation as Chapter 13. To illustrate how this can be useful, consider a debtor who has not paid his mortgage in three years and is now $50,000 behind in payments. If the debtor files Chapter 13, he must cure those payments over five years which could be over $800 each month for the arrears alone. On the other hand, consider the savings if the debtor proposed to repay the arrears in a Chapter 11 plan over eight or ten years!
If you are struggling with debt, speak with an experienced bankruptcy attorney and discuss your options under the federal Bankruptcy Code. The bankruptcy laws are very flexible and offer many ways back to financial health.
If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to firstname.lastname@example.org .
A primary goal in nearly every Chapter 7 case is the bankruptcy court’s discharge order which forever and completely eliminates many of the debtor’s financial burdens. The discharge order is a powerful injunction that stops collection and harassment over the discharged debt. But not every Chapter 7 debtor receives a discharge; a bankruptcy discharge is reserved for the honest debtor. See Grogan v. Garner, 498 U.S. 279 (1991).
Sometimes the dishonest debtor “sneaks through” the system and receives an undeserved discharge. The Bankruptcy Code allows the court to revoke a debtor’s discharge under certain circumstances.
Revoking a Chapter 7 Discharge
Section §727(d) permits a bankruptcy court to revoke a debtor’s discharge after a motion and a hearing. The motion to revoke may be made by either a creditor, the trustee, or the United States Trustee, and must be filed within one year of the discharge being granted (727(d)(1))—or before the case is closed—whichever is later (727(d)(2) and (3)). See 11 USC 727(e). There is no time limit identified in statute or rule for revoking a discharge under Section 727(d)(4). A discharge can be revoked if:
- Section 727(d)(1): the discharge was obtained through fraud, and the requesting party was unaware of the fraud prior to the granting of the discharge;
- Section 727(d)(2): after the discharge the debtor acquires property of the estate that is not reported or turned over to the trustee;
- Section 727(d)(3): if the debtor refuses to obey any lawful order of the court or refuses to testify other than on self-incrimination grounds unless given immunity; or
- Section 727(d)(4): the debtor failed to comply with an audit authorized under §586(f), or failed to satisfactorily explain a material misstatement during an audit.
The Ninth Circuit Court of Appeals recently discussed revoking a Chapter 7 debtor’s discharge under Section 727. The debtor, Jerry Jones, failed to list assets in his bankruptcy schedules, then omitted or undervalued assets during his 341 meeting. After Jones’s discharge, the United States Trustee discovered his lies and brought an adversary action to revoke the discharge order. The bankruptcy court found that the omissions were fraudulent, and that the fraud was “sufficient to cause the discharge to be refused if it were known at the time of discharge” under Section 727(a)(4). The bankruptcy court revoked the discharge and the Ninth Circuit Court of Appeals affirmed the decision. See Jones v. U.S. Trustee, NO. 12-35665 (9th Cir., Dec. 2, 2013).
Revoking a Chapter 13 Discharge
The grounds for revocation of a Chapter 13 discharge under Section 1328(e) are narrower than under Section 727(d). A Chapter 13 discharge may be revoked upon request of a party in interest within one year after the discharge is granted if, after a notice and hearing, it is shown that the discharge was obtained by the debtor through fraud, and the requesting party was unaware of the fraud prior to granting the discharge. See 11 U.S.C. 1328(e). Note: any party of interest can request revocation of a Chapter 13 discharge, while only a creditor, trustee or the United States Trustee can request revocation of a Chapter 7 discharge.
The benefits of a bankruptcy discharge are great, but the risks to the dishonest debtor are perilous. A debtor who lies to the bankruptcy court may lose the benefits of bankruptcy and possibly face federal criminal charges. Your bankruptcy attorney can keep you out of trouble and offer you many options and opportunities found in the Bankruptcy Code.
Many debtors are surprised to learn that when they file bankruptcy they typically do not have to go in front of a judge. The one time that debtors typically have to attend “court-like” proceedings is the Section 341 Meeting of Creditors, often also referred to as the “Trustee Meeting”.
Many people get nervous when they hear talk of a “creditor’s meeting” and they picture a bunch of people in suits yelling at them. That is not typically what happens at the 341 meeting. At the Trustee meeting creditors do not typically show up. It is typically just a debtor, their attorney, and the Trustee. The Trustee is appointed by the Department of Justice to oversee bankruptcy cases. The Trustee’s role is to represent the creditors. It is an important distinction to note that while the Trustee represents the creditors, he/she does not work for the creditors.
The Trustee’s job is essentially to review a debtor’s bankruptcy petition and see if there are any assets to distribute to creditors. Once the Trustee reviews a debtor’s petition, he will typically ask the debtor questions about the petition. For instance, the Trustee will commonly ask debtors how they have valued their property, where they are currently working, etc. This meeting can last from 10 – 15 minutes.
The only things clients are typically responsible for bringing to this meeting are a social security card and drivers license to prove their identity. Sixty days after the Trustee meeting, a debtor will typically receive their discharge which legally erases most unsecured debts. If you, a family member, or a friend are considering bankruptcy and have questions, contact the attorneys at Fears | Nachawati today and they will be happy to help! Call us at 1.866.705.7584, or send an email to email@example.com.
Even though the bankruptcy rules are very flexible, sometimes it makes sense to dismiss a bankruptcy case and refile later. This is especially true when circumstances change, such as a temporary loss of income.
In order to combat the appearance of “bankruptcy abuse,” Congress enacted new restrictions for repeat filers in 2005. One of those restrictions is found in section 362(c)(3)(A) of the Bankruptcy Code, which limits the automatic stay to thirty days after filing for a debtor who files a second bankruptcy case within one year of a prior dismissal. Specifically, the law states:
(3) if a single or joint case is filed by or against a debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b)–
(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case[.]
The Bankruptcy Code also provides that a debtor may ask the court to extend the automatic stay, but only if a motion is filed and the matter is heard before the expiration of the thirty day period. Most courts agree that the automatic stay cannot be extended once the thirty day period has expired. After filing the second bankruptcy case, the debtor must quickly file a motion to extend the automatic stay and request a hearing. Otherwise, the period may run and the debtor may lose automatic stay protection.
But some clever attorneys have asked, “what exactly is at risk?”
Like many of the new provisions of the Bankruptcy Code added in 2005, this new law is full of holes and ambiguities. The most glaring in this case is what stay protection terminates “respect to the debtor.” A minority of courts, including the Ninth Circuit Bankruptcy Appellate Panel, interpret what Congress means. These courts say that Congress meant to say that all automatic stay protections are lost at the end of the thirty days. See In re Reswick, 446 B.R. 362 (9th Cir. BAP 2011)
The majority of bankruptcy courts, including a recent decision out of the Northern District of Texas (In re Williford, Bankr. Court, ND Texas, 2013), interpret what Congress actually says. What the statute says is that the stay terminates with respect to the debtor, meaning the debtor and the debtor’s exempt property. Under this interpretation, the automatic stay is not terminated as to the debtor’s property that is part of the bankruptcy estate.
Bankruptcy law can be very convoluted. You need the assistance of an experienced bankruptcy attorney to guide you through the law, rules, caselaw, and political leanings of the judge. For more information or a free consultation please contact us at Fears | Nachawati Law Firm by calling 1.866.705.7584
The Miller case out of the Northern District of California is a good example of how important it is to receive sound legal advice during a bankruptcy case. Debtor Carla Miller filed her Chapter 7 petition on August 8, 2013. Her schedules, made under oath and written in her own hand, disclosed that she was self-employed in the jewelry business, had no inventory, and between $6,000 and $7,000 in personal jewelry. Miller valued her home at $1,550,000, which meant there was no equity in the home.
Miller’s case was a classic “no asset case,” but at the 341 meeting the Chapter 7 trustee discovered that the bankruptcy schedules were not accurate. Miller failed to disclose business inventory in her jewelry business that amounted to $50,000 at wholesale values. Additionally, her home was estimated to be worth $2,300,000, which meant that there was equity available to pay her creditors.
Miller asked the bankruptcy court to dismiss her case and claimed that she received bankruptcy advice from a business that was practicing law without a license. In the alternative, she asked to convert her case to a Chapter 11, should the court deny her request to dismiss.
The bankruptcy court pointed out that there is no statutory right to dismiss a Chapter 7 case, therefore the debtor has a heavy burden to persuade a court to dismiss her case on account of “fairness.” In addition, even when there is a statutory right to dismiss, that right may be forfeited if the debtor has engaged in bad faith conduct.
In this case the court found that Miller had filed false schedules in bad faith. The court stated:
"Nothing in Miller’s pleadings or her declaration or her address to the court convinces the court that there are equitable considerations militating in favor if dismissal. To the contrary, the court found her intelligent, calculating and undeserving of sympathy. She underestimated the seriousness of a bankruptcy filing and the diligence of a bankruptcy Trustee. There is no equity in allowing her to escape the consequences of her actions."
The court pointed out that the Trustee, creditors and the real estate agent stood ready for payment from the proceeds of selling Miller’s non-exempt jewelry and real estate. Dismissing the case would not be fair to these individuals.
Finally, the bankruptcy court denied Miller’s request to convert her case to Chapter 11 (and thereby have a better opportunity to protect her assets). The court said that bad faith conduct is a bar to conversion as well as dismissal.
The Miller case is a prime example of how quickly a bankruptcy case can turn bad without the leadership of a seasoned bankruptcy attorney. Reliance on bad advice is generally not a valid excuse, so it is important to get your advice from someone who knows bankruptcy law and who can protect your legal rights. If you are considering bankruptcy the experienced bankruptcy attorneys at the Fears | Nachawati Law Firm can provide you with thorough, sound legal advice that is necessary to complete the bankruptcy process both legally and efficiently. For a free consultation, contact us by dialing our office at 1.866705.7584.
The bankruptcy process always begins with the filing of a petition in Federal Bankruptcy Court. Before that, it is always wise to retain an attorney to help you prepare the petition. All of the schedules and the statement of financial affairs contained within the bankruptcy petition are filed under penalty of perjury, so it is important to get the information correct.
In order to effectively prepare a petition, the attorney will need documentation from the client so that the petition is accurate and will withstand scrutiny from creditors, the Trustee, and the Bankruptcy Court. Gathering documents is an integral part of the client’s role in filing either a Chapter 7 or Chapter 13. The better a client’s documentation, the easier it is for an attorney to assist that client.
The documents necessary to file a bankruptcy will vary based upon an individual client’s situation. However, the following list constitutes many of the documents that will be needed in just about any type of bankruptcy:
· A list of your assets and liabilities- Typically, an attorney will provide you a packet of questions to fill out concerning your assets, their market values, and what is owed on any of those assets. This paperwork is critical for advising a client about what to expect in either a Chapter 7 or Chapter 13 case. Typically, it is helpful to know how much is owed on a house or car so the attorney can determine how much equity you have in the property; which in turn determines what set of property exemptions you want to use and what you can protect. Additionally, while most attorneys will run a credit report for clients, it is helpful if the client prepares a list of debts that they owe. Credit reports are not always accurate. We often find that medical bills and payday loans are not typically reported to the credit bureaus, but need to be included in a bankruptcy because they are dischargeable debts. A list of the debts you think you owe will be immensely helpful in a bankruptcy case.
· Copies of your last two income tax returns- This is necessary for several reasons. First, it helps to show the Trustee your income level over a period of 2-3 years, which helps the Trustee understand your situation a little better. Second, the last two years of tax returns are required to be presented to the Trustee at least a week ahead of your Meeting of Creditors. Third, in a Chapter 13, a debtor is required to have filed their last four tax returns. Lastly, tax returns are very helpful for filling out the Statement of Financial Affairs.
· Copies of your pay statements for the last six months– Paystubs are critical, especially for consumers in either a Chapter 7 or Chapter 13. In 2005, Congress changed the Bankruptcy Code to include a new thing called “The Means Test”. The Means Test is a mathematical formula for determining whether someone qualifies to file a Chapter 7/how much the payment will be in a Chapter 13. Obviously, this is a critical part of bankruptcy. Part of the Means Test is to determine what a household’s gross income over the last six months was. Accordingly, that’s why an attorney typically needs to look at your paystubs for the last six months. If you are self-employed, an attorney will typically have you fill out a profit and loss form.
· Copies of your bank statements for the last six months– Bank statements can be very useful tools for the Trustee in verifying your assets at the time of filing; they also help paint a picture of what is going on in your monthly finances. Accordingly, Trustees often request copies of your bank statements.
· Credit Counseling Certificate– In order to file a Chapter 7 or Chapter 13, a debtor is required to take a credit counseling course and provide a certificate of completion to the Court. The course can be done online, over the phone, or in person. The class typically takes anywhere from 25 minutes to an hour. It is an absolute requirement that this course be completed by the debtor prior to filing.
After the client assembles this information, a bankruptcy attorney is able to get to work and prepare a Debtor’s bankruptcy petition. After the petition is prepared, the attorney will sit down with the client and review the petition extensively. After the petition is signed and approved by the client, the attorney will file the petition in Federal Bankruptcy Court, which will start the bankruptcy process and protections. If you are considering a bankruptcy, make sure you meet with an attorney. The experienced bankruptcy attorneys at Fears | Nachawati offer free consultations and would be more than happy to walk you through the process. For more information, contact us here or call out office at 1.866.705.7584.
The general rule in bankruptcy is that a debtor is not able to discharge student loans absent a showing of undue hardship (a very difficult standard to meet in most courts). However, not every debt to a college or university is accepted from discharge. Some debts, like unpaid tuition, may qualify for discharge during bankruptcy.
The bankruptcy discharge is very broad; ts interpretation favors discharging debts and providing the debtor with a fresh start. Consequently, and exception to discharge is treated very narrowly. Congress has carved out the student loan exception and identified the following debts as non-dischargeable (except for undue hardship) under bankruptcy chapters 7, 11, 12, or 13:
(A)(i) an educational benefit over payment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
Consequently, non-dischargeable education debts are qualifying loans (generally requiring evidence of a promissory note), or educational payments made by the school to the student, as in an advance of cash or exchange of money. Owed college tuition does not fit into the non-dischargeable category. For instance, if you attend classes without paying or signing a promissory note (an agreement signed on or about the same time providing for a definitive amount to be repaid, in specified installments, by a certain time, and at a certain interest rate), you likely can discharge this debt in bankruptcy. The same principle applies to debts at the student union, gym, bookstore, and room and board debts.
The determination whether a debt is dischargeable in bankruptcy is usually a complicated matter. Your bankruptcy attorney can explain how the local bankruptcy court will analyze the debt and the likely conclusion. For a free consultation with one of our experienced bankruptcy attorneys, contact us here or call the office at 1.866.705.7584.
As a resident of Texas (residing in the state for more than two years), certain property you own will automatically be protected from seizure by your creditors. This protected property is commonly known as “exempt property”. Most notably, any equity in your homestead and/or vehicles (as much as $30,000 for vehicles per household member) will be protected from your creditors. The only exception to this is if your creditor has been granted a security interest in the property like a mortgage or car note. Under Texas law, creditors typically have to get a judgment before they can try and collect any “non-exempt” or unprotected property from you to satisfy a debt. The most common types of property that are non-exempt under Texas law are bank accounts and ownership interests in businesses.
Upon filing bankruptcy, a Texan has two sets of property exemptions they get to choose from: 1)the property exemptions provided by the Federal Government, or 2) the Texas property exemptions. The set of property exemptions that will be best for you will largely depend on the type of property you need to protect and the amount of equity in that property. If you have a large amount of equity in your house and vehicles, the Texas exemptions might be best for you. In addition to protecting your house and vehicles, you can also protect home furnishings, tools of the trade, jewelry, firearms, and livestock. The major things that are not going to be protected under the Texas exemptions are business interests (like ownership interests in companies or LLCs) or money in bank accounts.
The Federal property exemptions are only available to those who file bankruptcy. Like the Texas exemptions, the Federal exemptions allow you to protect equity in your homestead and vehicles, but not as much dollar-wise as the Texas exemptions. However, the Federal exemptions are more flexible than the Texas exemptions and allow you to protect things like bank accounts, business interests, and other miscellaneous property with the “wild card exemption.” The wild card exemption can be used to protect any sort of property you want; if you don’t have equity in any real estate, you can protect up to almost $12,000 in property! Certain property like social security proceeds, life insurance values, and retirement accounts (401K, IRA, etc.), are typically protected under both Federal and State exemptions.
Choosing the right set of property exemptions and applying them properly to your assets is extremely important in bankruptcy. If you claim the wrong exemptions, you can lose property that would otherwise be protected. The attorneys at Fears Nachawati will be able to walk you through this important process and make sure that you are able to keep all of the property you are entitled to keep by law. To get started with a free consultation, call us today.
For many people Chapter 11 bankruptcy conjures up thoughts of General Motors or Washington Mutual. Fortunately, Chapter 11 bankruptcy is not just reserved for billion dollar corporations, but is a useful tool for many small companies suffering from financial distress that need to reorganize.
Chapter 11 of the Bankruptcy Code contains special provisions designed for small businesses. Generally, to qualify for these special bankruptcy procedures the small business must be engaged in commerce with debts less than $2.19 million. The small business must file a bankruptcy petition and include (1) the most recent balance sheet; (2) a statement of operations; (3) a cash flow statement; and (4) the most recent tax return.
The federal law imposes an automatic stay after the Chapter 11 case is filed that prohibits all collection actions against the small business. This stay halts lawsuits, assets seizures, and other legal actions. Normal business operations continue under the court’s supervision during the pendency of the bankruptcy.
The goal of the Chapter 11 is to obtain a court-ordered plan to repay some or all of the company’s debts over time. The business debtor’s plan may propose to pay a percentage of the debt, or change the terms of leases and contracts. In general, the court will confirm a plan that is feasible, proposed in good faith, and complies with the legal requirements under the Bankruptcy Code. Creditors must also receive as much as it would if the business’s assets were liquidated.
Chapter 11 bankruptcy offers financially distressed small businesses an opportunity to continue operations while restructuring debts. If your company could benefit from Chapter 11 of the Bankruptcy Code, contact an experienced bankruptcy attorney and discuss your options.