McFarlandLaw Blog

A “claim” against a debtor’s bankruptcy estate is creditor’s allegation that it has a bona fide legal right to payment from the debtor or the debtor-in-possession if the case is filed under chapter 11.

Because claims are used by creditors to legitimize the debts they are owed in the bankruptcy proceedings, it is commonly said that claims are made “against” a debtor’s bankruptcy estate. Chapter 5 of the US Bankruptcy Code (the “Code”) plays a critical role in identifying and processing creditors’ claims.

Processing claims is important because it determines which parties will be able to participate in the bankruptcy proceedings. To dig into the details, it’s best to begin with the basics. Section 101(5) of the Code defines a “claim” broadly to include any secured or unsecured right to payment. A particular claim need not be fixed, settled or even due at the time the bankruptcy case is filed. As a general rule, however, only debts that were incurred before the debtor filed for bankruptcy are included in the case. Debts that arise after filing for bankruptcy are unaltered by the proceedings.

Section 506 of the Code defines the rights of a creditor who has a properly-perfected security interest in the debtor’s collateral. (“Perfection” of a security interest is a technical legal term, governed by Colorado state law.) Congress created section 506 of the Code to handle two common situations that occur in bankruptcy. First, if the collateral securing a debt is worth more than the outstanding debt (i.e., the creditor is “oversecured”), the creditor is entitled to receive the amount that has yet to be paid. An oversecured creditor may also receive interest payments and reasonably-related expenses if it originally contracted for them. On the other hand, if the collateral is worth less than the amount of the debt (i.e., the creditor is “undersecured”), the claim can be bifurcated by the US Bankruptcy Court, which leaves the creditor with a secured claim that equals the collateral’s value and an unsecured claim for the difference. This process is commonly known as lien “stripping” or a “strip off.”

The remaining unsecured claims against the debtor’s bankruptcy estate are paid from the estate’s general funds. To do so, section 507 of the Code creates a categorical hierarchy of claims that are paid in descending order. Domestic support obligations, like maintenance payments owed to an ex-spouse, receive the highest priority, and unsecured creditors like credit cards and stockholders, if the debtor is a corporation, are given lowest priority. Many of the categories outlined in section 507 of the Code are capped, so any excess value is transferred to the next pool of creditors in order of priority.

A person or company’s bankruptcy “estate” is composed of all legal or equitable “interests in property” at the time of the bankruptcy filing – even if the property is owned or held by another person.

When a person or company files bankruptcy in Colorado, an estate is created to make it easier for the court to administer the case. From a legal perspective, the debtor’s estate is a completely new entity and is treated separately from the debtor. Under section 541 of the US Bankruptcy Code (or simply the “Code”), the estate contains a variety of things, including all legal or equitable interests of the debtor in property when the bankruptcy petition was filed.

If a bankruptcy petition is filed by an individual consumer (as opposed to a business), the Code imposes several important qualifications on what becomes property of the estate. For example, the debtor’s “earnings from services performed” after filing for bankruptcy are excluded from the estate. § 541(a)(6).

Individuals can also elect to keep their specific interests in property from the reach of creditors by exempting them under section 522. For debtors filing in Colorado, these exemptions are governed by Colorado state law and include assets like pensions, jewelry, motor vehicles and real property (i.e., the debtor’s residence). If the debtor is a business, however, these qualifications do not apply, and the Bankruptcy Code includes the business’s future earnings and similar assets in its bankruptcy estate.

Section 541 creates the baseline set of rules used by courts to define the bankruptcy estate. The trustee and Chapter 11 debtor-in-possession, however, have additional tools that allow them to add other assets to the estate, which increase its overall value for pre-petition creditors. These tools are called the “avoiding powers,” which are discussed in subsequent posts.

The US Bankruptcy “Code” is the informal name used by lawyers and judges to describe the sections of federal law that govern the bankruptcy process. Regardless of whether the case is a chapter 7, 9, 11, 12 or 13 bankruptcy, the entire statutory text of bankruptcy can be found in title 11 of the United States Code – specifically 11 USC §§ 101-1330.

When you “assume” a contract in bankruptcy, you are agreeing to continue performing your duties under the contract.

For example, if you currently have a monthly service contract with a cellphone provider – like AT&T, Verizon or T-Mobile – you are legally permitted to break your contract by filing bankruptcy. In some scenarios, this could be a good idea, especially if you can’t afford your monthly bill. If, however, you can afford to pay your monthly bill and you’d like to keep using your cellphone, you can choose to “assume” the cellphone contract in your bankruptcy paperwork. By doing so, there won’t be any hiccups in your service as a result of your bankruptcy filing.

In Colorado, an “adversary proceeding” is a lawsuit filed by a third party or the bankruptcy trustee to resolve a legal dispute relating to a debtor’s bankruptcy case. This term is used regardless of whether you choose to file chapter 7, 11, 12 or 13 bankruptcy.

Several examples of “adversary proceedings” are listed Federal Rule of Bankruptcy Procedure 7001, including those listed below:

  • An action to recover money or property, except a proceeding to compel the debtor to deliver property to the bankruptcy trustee;
  • An action brought to determine the validity, priority or extent of a lien or other interest in the debtor’s property;
  • An action to revoke an order of confirmation of a chapter 11, chapter 12 or chapter 13 bankruptcy plan;
  • An action seeking an injunction or similar equitable relief;
  • An action designed to subordinate any allowed claim or interest in the debtor’s bankruptcy estate, except when subordination is provided in a chapter 9, 11, 12 or 13 bankruptcy plan; or
  • A declaratory judgment relating to the debtor’s bankruptcy estate or discharge.
  • When you file bankruptcy, an “automatic stay” takes effect. The “automatic stay” is like a shield that protects you from banks, credit cards and collection agencies. To be more precise, bankruptcy’s “automatic stay” is a legal injunction that stops any lawsuits, foreclosures, garnishments or collection activities against you as of the moment your bankruptcy petition was filed.

    As a proud member of the National Association of Consumer Bankruptcy Attorneys (“NACBA”), we wanted to pass along breaking news about NACBA’s Principal Paydown Plan, which was featured in the New York Times.

    Click here to read the NY Times article: Homeowners Need Help!

    For the past year, NACBA has been urging the Obama Administration to to enact a Principal Paydown Plan to resolve the current foreclosure crisis in Colorado and elsewhere. NACBA’s plan was developed through negotiations between consumer bankruptcy attorneys, major lenders and servicers to include the PPP as one of the remedies in any settlement over foreclosure abuses. Today the PPP was featured in a NY Times editorial – pointing out once again that the nation’s economic slide will continue until major steps have been taken to address the housing mess.

    Here is a summary of the Principal Paydown Plan from NACBA’s website:

    SUMMARY

    The Principal Paydown Plan calls for a restructuring in Chapter 13 bankruptcy of certain underwater mortgages. Under this approach, homeowners will be able to eliminate negative equity, acquire modest equity and then reamortize the mortgage into a market rate loan. The reduction of principal is not achieved by a cramdown, but rather by temporarily reducing the interest rate to 0% so that all payments made by the homeowner are applied to pay down the principal. In exchange for this benefit, the homeowner would have to agree to a general settlement of claims against the servicer, trustee and investor. The Principal Paydown Plan will achieve a significant improvement in the overencumbered status of the home; provide needed and justifiable hope for the homeowner, many of whom have a legitimate claim against the servicer; and stabilize individual communities across the country, as well as the overall housing market.

    THE CONTINUING FORECLOSURE CRISIS

    While there is some debate as to whether the economy is starting to rebound, the number offoreclosures continues to increase and jeopardize the fragile recovery. An estimated 6.7 million homes already have been lost to foreclosure and that number is expected to reach 13 million by the end of 2014, resulting in about $1 trillion in direct financial losses to borrowers, local governments and financial institutions. Some analysts argue that all of these foreclosures will help the market reach its bottom, at which point recovery can ensue. This viewpoint, however, does not consider that many foreclosures are unnecessary and should not occur under a system where mortgage servicers are obligated to make changes to the mortgage if the changes would return a greater value to the investor.

    Unfortunately, foreclosures still outpace the negotiation of affordable and sustainable loan modifications. This is true despite the Administration’s Home Affordable Modification Program (or “HAMP”), which offers monetary incentives to servicers and borrowers in an effort to encourage such modifications. The shortcomings of HAMP, which have been well documented, are that it does not include mandated principal reduction and the modified loan capitalizes arrears into the new principal, thereby stopping the foreclosure but resulting in a loan that is even more undersecured.

    We are facing historic levels of homes lost through foreclosures. Not every individual foreclosure can or should be stopped, but there is an urgent need to stop the epidemic by closing the growing chasm between prevention and losses. Without stronger policy intervention, not only will millions of families lose their homes unnecessarily, but massive foreclosures will continue to destroy communities, drag down the housing market, and keep a full economic recovery out of reach.

    A SOLUTION – A PRINCIPAL PAYDOWN PLAN FOR UNDERSECURED MORTGAGES

    There is no “silver bullet” strategy to fix every mortgage or repair every foreclosure-ravaged neighborhood.

    Moreover, the toxic combination of negative equity and a weak economy means that many homeowners with fixedrate, prime mortgages are experiencing much higher default numbers as well. The breadth and depth of the housing crisis means that we must address it through multiple approaches and solutions. Recent research has shown a strong correlation between negative equity and mortgage delinquency. Homeowners who are underwater have no cushion to absorb financial difficulties. Furthermore, in some cases, homeowners who are unlikely to move into a positive equity position have fewer incentives to stay in the home or make the necessary ongoing investments in maintenance. For these homeowners, even the reduction of monthly payments to an affordable level does not fully solve the problem. As a result, a homeowner’s equity position has emerged as a key predictor of loan modification redefault, more so than unemployment or other factors. Bankruptcy courts are an attractive venue for addressing foreclosure problems in many cases. In particular, a Chapter 13 bankruptcy case provides the following benefits:

  • Supervision by a federal bankruptcy judge and trustee over the term of the Chapter 13 plan (usually three to five years).
  • A discharge of some or all general unsecured debt, leaving the homeowner in a much better financial position to make future mortgage payments.
  • A process for dealing with wholly unsecured junior mortgage or liens on real property – where no home value exists beyond the balances owed on senior mortgages. Voiding these liens also improves the homeowner’s ability to pay the senior mortgage in the future.
  • Legal authority to essentially “quiet title” to real property, providing a process that can clarify legal rights to the property so that all parties are on notice of the results.
  • The stigma of filing bankruptcy and the imposition of stingy expense allowances for those in a Chapter 13 bankruptcy are more than enough to dissuade homeowners with the ability to pay from filing bankruptcy for the purpose of “gaming” the system. Furthermore, the bankruptcy court’s detailed budget review of the Chapter 13 debtor prevents the moral hazard of misuse of bankruptcy protection.

    There currently are about 1.6 million active and pending Chapter 13 bankruptcy cases, of which approximately 880,000 include mortgages. An additional 22,000 new Chapter 13 cases that include mortgages are filed each month. The Principal Paydown Plan, as outlined below could apply to all of these cases. In summary, the Plan:

  • Applies only to Chapter 13 bankruptcy cases.
  • Applies only to principal residences.
  • Does not involve a “cramdown” of first mortgages or principal reduction down to fair market value.
  • Enables the homeowner to quickly accumulate equity (or diminish negative equity) by reducing the interest to 0% for five years so that all payments made by the homeowner are credited directly to principal. At the end of the five year period, the remaining principal balance is amortized over 25 years at market rate.
  • Utilizes current bankruptcy law regarding wholly unsecured junior mortgages to void those liens.
  • Would require the borrower to settle claims against mortgage stakeholders. Most homeowners do not want to go through the expensive, time-consuming, painful and uncertain process of litigating their rights and would welcome the opportunity to keep their homes in exchange for a settlement of claims.
  • Would include a short-form “quiet title” action that would settle the rights of the mortgage-related stakeholders and ensure that the homeowner is making future payments to the proper party and that property title is marketable.
  • We applaud NACBA’s efforts to improve the current foreclosure crisis gripping Colorado and the nation! Hopefully, the Obama Administration will see the value in NACBA’s Principal Paydown Plan and begin taking proactive steps to help homeowners struggling with their underwater mortgages.

    Bankruptcy releases a debtor from personal liability for certain types of debts through a process known as the bankruptcy “discharge.” Once the debtor’s discharge is granted by the bankruptcy court, he or she is no longer legally required to make payments on any debts covered by the discharge.

    DISCHARGING DEBTS BY FILING BANKRUPTCY

    From a legal perspective, bankruptcy’s discharge is a permanent order prohibiting a debtor’s creditors from taking any form of collection action on discharged debts – including legal action and communications with the debtor like phone calls, letters, email and other personal contact.

    Although a debtor is not personally liable for discharged debts, a valid lien that has not been “avoided,” or made unenforceable in the bankruptcy case, won’t be included in the debtor’s discharge. Therefore, a secured creditor may enforce its right to repossess the collateral secured by its lien.

    WHEN DOES THE DISCHARGE OCCUR?

    The timing of the discharge varies, depending on the chapter under which the case is filed. In achapter 7 bankruptcy case, for example, the court usually grants the discharge promptly on expiration of the deadline for filing an objection to the debtor’s discharge and the deadline for filing a motion to dismiss the case on account of abuse, which is usually 60 days following the first date set for the 341 Creditors’ Hearing. Typically, the a chapter 7 discharge occurs about four months after the date a debtor files the petition with the clerk of Colorado’s bankruptcy court.

    In non-business chapter 11 cases, chapter 12 cases involving family farmers and fishermen, and chapter 13 bankruptcies, the court generally grants the debtor’s discharge as soon as practicable after the debtor completes all of his or her payments under the plan. Because a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor’s discharge in a chapter 7 or 13 case if the debtor fails to complete an instructional course concerning “financial management.” The Bankruptcy Code provides limited exceptions to the financial management requirement, but it may not be required if the US Trustee or bankruptcy administrator determines there are inadequate educational programs available or if the debtor is disabled, incapacitated or on active military duty in a combat zone.

    HOW DO I GET A DISCHARGE?

    In Colorado, unless there is pending litigation over objections to the discharge, the debtor will almost always receive his or her bankruptcy discharge. The Federal Rules of Bankruptcy Procedure require the bankruptcy court’s clerk to mail a copy of the order of discharge to all creditors, the US Trustee, the bankruptcy administrator and the trustee’s attorney (if applicable). The debtor and the debtor’s attorney also receive copies of the discharge order.

    The notice is simply a copy of the final order of discharge. It informs creditors that the debts owed to them have been discharged and that they are prohibited from attempting any further collection activities. Creditors are also cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly, within the time required by the rules, does not affect the validity of the order granting the discharge.

    ARE ALL OF MY DEBTS DISCHARGED OR ONLY SOME?

    Not all debts are discharged. Debts that are eligible to be discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons – based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as drunken driving.

    There are 19 categories of debt excepted from discharge under chapters 7, 11 and 12. A more limited list of exceptions applies to cases under chapter 13.

    Generally speaking, the exceptions to discharge apply automatically. The most common types of non-dischargeable debts are listed below:

  • Certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court;
  • Debts for spousal or child support or alimony;
  • Debts for willful and malicious injuries to person or property;
  • Debts to governmental units for fines and penalties;
  • Debts for most government funded or guaranteed educational loans or benefit overpayments;
  • Debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

    The types of debts described in sections 523(a)(2), (4) and (6) aren’t automatically non-dischargeable. Creditors must ask the court to determine that these debts are excepted from discharge. If the creditor fails to make such a request, the types of debts set out in sections 523(a)(2), (4) and (6) will be fully discharged.

    A broader range of debts are dischargeable under chapter 13 bankruptcy, including debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations and debts arising from property settlements in divorce or separation proceedings. Although a chapter 13 debtor generally receives his or her discharge only after completing the payments required by the court, there are some limited circumstances under which the debtor may request the court to grant a “hardship discharge” even though the debtor has failed to complete plan payments. Such a discharge is available only for debtors whose failure to complete his or her chapter 13 plan payments is due to circumstances beyond his or her control. The scope of a chapter 13 hardship discharge is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available for family farmers and fishermen, under chapter 12 bankruptcy, if the failure to complete plan payments is caused by “circumstances for which the debtor should not justly be held accountable.”

    DO I HAVE A RIGHT TO MY DISCHARGE? OR CAN CREDITORS OBJECT?

    Under chapter 7 bankruptcy, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the US Trustee’s Office. Creditors receive a notice shortly after the case is filed that sets forth important information, including the deadline for objecting to the discharge. To object to the debtor’s discharge, a creditor must file a complaint in the bankruptcy court before the deadline stated in the notice. Filing a complaint starts a lawsuit referred to in the bankruptcy court as an “adversary proceeding.”

    The court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames before the date the petition was filed. If the issue of the debtor’s right to a discharge goes to trial, the objecting party has the burden of proving its case.

    In chapter 12 and chapter 13 bankruptcy, the debtor is usually entitled to a discharge upon completion of all payments under the plan. As in chapter 7, however, the debtor’s discharge may not occur under chapter 13 if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapter 13 if he or she received a prior discharge in another case commenced within the time frames discussed below. Unlike chapter 7 bankruptcy, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan but cannot object to the discharge if the debtor has completed his or her court-required plan payments.

    CAN I RECEIVE A SECOND DISCHARGE IF I FILE BANKRUPTCY AGAIN IN THE FUTURE?

    Yes – but the bankruptcy court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter 11 within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all “allowed unsecured” claims in the earlier case in full or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor’s plan was proposed in good faith and the payments represented the debtor’s best effort. A debtor is ineligible for discharge under chapter 13 if he or she received a prior discharge in a chapter 7, 11 or 12 case filed four years before the current case or in a chapter 13 case filed two years before the current case.

    CAN MY DISCHARGE BE REVOKED?

    The court may revoke a debtor’s discharge under certain circumstances. For example, the bankruptcy court-appointed trustee, a creditor or the US Trustee may request that the court revoke the debtor’s discharge in a chapter 7 case based on allegations that the debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the debtor’s discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.

    In chapter 11, 12, and 13 cases, if confirmation of a plan or the discharge is obtained through fraud, the bankruptcy court can revoke the order of confirmation or discharge.

    CAN I PAY A DISCHARGED DEBT AFTER MY BANKRUPTCY CASE IS CLOSED?

    A debtor who has received a discharge may voluntarily repay any discharged debt – even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it’s owed to a family member or because it represents an obligation to an individual for whom the debtor’s reputation is important, such as a family doctor.

    WHAT CAN I DO IF A CREDITOR ATTEMPTS TO COLLECT A DISCHARGED DEBT AFTER MY CASED IS CLOSED?

    If a creditor attempts collection efforts on a discharged debt, the debtor can file a motion with the court, reporting the action and asking that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of any lawsuit designed to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.

    CAN MY EMPLOYER FIRE ME BECAUSE I FILED BANKRUPTCY OR BECAUSE I FAILED TO PAY A DISCHARGED DEBT?

    The Bankruptcy Code and Colorado law prohibit any discriminatory treatment of debtors by both governmental agencies and private employers. A governmental agency or private employer cannot discriminate against a person solely because the person filed bankruptcy, was insolvent before or during the case or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.

    For more information, check out this previous blog post: Will I Lose My Job By Filing Bankruptcy in Colorado?

    HOW CAN I GET A COPY OF MY DISCHARGE ORDER?

    If you’ve lost or misplaced your discharge order, you can get another copy by contacting the clerk of Colorado’s bankruptcy court. The clerk will charge a fee for searching the court records and there will be additional fees for making and certifying copies. If the case has been closed and archived there will also be a retrieval fee and obtaining the copy will take longer.

    The discharge order may be available electronically. The federal court’s PACER system provides the public with electronic access to selected case information through a personal computer located in many clerk’s offices. Users must set up an account to acquire access to PACER, and must pay a per-page fee to download and copy documents filed electronically. For more information about PACER, you can visit the site by clicking here.

    If you have questions about eliminating your debts by filing bankruptcy, contact us. Our experienced team can help you figure out whether bankruptcy can give you a debt free fresh start.

  • The McFarland Law Group LLC proudly announces Roy McFarland, Esq. is now a Rocket Lawyer! Click here to see his profile.

    Article I, Section 8, of the US Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” Under this grant of authority, Congress created the “Bankruptcy Code” in 1978. The Bankruptcy Code, which is codified in title 11 of the US Code, has been amended several times since its enactment. Because the Constitution grants this authority to the federal government, the Bankruptcy Code is a uniform federal law governing all bankruptcy cases in Colorado and elsewhere – including US territories.

    The bankruptcy process is governed by the Federal Rules of Bankruptcy Procedure (or the “Bankruptcy Rules”) and the local rules of each bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. There is a bankruptcy court for each judicial district in the country. Colorado’s bankruptcy court is located in downtown Denver in the US Customs House. For directions, click this link or check out this previous blog post: Where is Colorado’s Bankruptcy Court? by Roy McFarland, Esq. You can also visit court’s website directly by clicking here.

    The court official with decision-making power over federal bankruptcy cases is the US bankruptcy judge, a judicial officer of the United States District Court. The bankruptcy judge may decide any matter connected with a bankruptcy case, such as your eligibility to file or whether to grant your discharge of debts. Much of the bankruptcy process is administrative, however, and is conducted away from the courthouse. In cases under chapters 7, 12 or 13, and sometimes in chapter 11 cases, this administrative process is carried out by a trustee, who is appointed by the court to oversee the case.

    A debtor’s involvement with the bankruptcy judge is usually very limited. 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. A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the US trustee. This meeting is informally called a “341 meeting” because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.

    The fundamental purpose of bankruptcy is to give debtors a financial “fresh start” from overwhelming and burdensome debts. In fact, the US Supreme Court made this point in a 1934 decision: “[Bankruptcy] 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 (1934).

    A bankruptcy debtor’s fresh start is accomplished through his or her bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. Six basic types of bankruptcy cases are allowed under the Bankruptcy Code, each of which is described below. The cases are traditionally given the names of the chapters that describe them.

    CHAPTER 7

    Chapter 7, entitled Liquidation, outlines an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim 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. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible to file chapter 7 bankruptcy.

    For a in-depth discussion of chapter 7 bankruptcy in Colorado, check out this blog post: An Overview of Chapter 7 Bankruptcy in Colorado by Roy McFarland, Esq.

    CHAPTER 9

    Chapter 9, entitled Adjustment of Debts of a Municipality, provides for reorganization, much like a reorganization under chapter 11, of a “municipality” – including cities and towns, as well as villages, counties, taxing districts, municipal utilities and school districts.

    CHAPTER 11

    Chapter 11, entitled Reorganization, is used by companies to continue operating as a business while repaying creditors concurrently through a court-approved reorganization plan. Under a court-approved chapter 11 reorganization plan, the company 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. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business structure.

    CHAPTER 12

    Chapter 12, entitled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, provides bankruptcy protection to family farmers and fishermen. The chapter 12 process is very similar to that of chapter 13, under which the debtor proposes a plan to repay debts over a period of time – no more than 3-5 years. There is also a trustee in every chapter 12 case whose duties are very similar to those of a chapter 13 trustee. The chapter 12 trustee’s disbursement of payments to creditors under a confirmed plan parallels the procedure under chapter 13. Chapter 12 allows a family farmer or fisherman to continue to operate his or her normal business while the plan is being carried out.

    CHAPTER 13

    Chapter 13, entitled Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house and allows the debtor to propose a “plan” to repay creditors over time – usually 3-5 years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts, however. Instead, the debtor must complete his or her payments under the plan before the discharge is granted. The debtor is protected from lawsuits, garnishments and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.

    For a more detailed discussion of chapter 13, read this previous blog post: Benefits of Filing Chapter 13 Bankruptcy in Colorado by Roy McFarland, Esq.

    CHAPTER 15

    The purpose of Chapter 15, entitled Ancillary and Other Cross-Border Cases, is to provide an effective mechanism for dealing with cases of cross-border insolvency. This publication discusses the applicability of Chapter 15 where a debtor or its property is subject to the laws of the United States and one or more foreign countries.

    To learn more about filing bankruptcy, contact our offices today. Our experienced team canhelp you get a debt free fresh start.