What is a Chapter 7 bankruptcy?
A chapter 7 bankruptcy is the type of bankruptcy most people think of when they think of bankruptcy. It is the most common type of bankruptcy filed. It is a liquidation bankruptcy. The concept is to give up your assets and in return get discharged or released from your debts. This is what gives you a financial fresh start. However, there is some property you do not have to give up, and there is some debt that will not be discharged . The property that you do not have to give up is called your exempt property or your exemptions. Your exemptions will depend in large part on the state you live in. For Colorado, common examples include 100% of your retirement benefits, up to $5,000 per debtor for one or more vehicles (increased to $10,000 per debtor if either spouse is over the age of 60 or is disabled) and the homestead exemption which protects the first $60,000 of equity in your home (increased to $90,000 if any owner is over the age of 60 or is disabled). The debt that is not discharged is called your nondischargeable debt. Examples include taxes less than 3 years old, child support, maintenance (alimony), and student loans.
What is a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy is sometimes referred to as a wage earner plan or a debt reorganization. It is a debt repayment program where some, but not necessarily all, of your debt will be repaid over a period of not less than 3 years and not more than 5 years. In a Chapter 13 you develop a plan, called your Chapter 13 Plan, that is approved by the Bankruptcy Court. The Plan provides for the amount you will pay to the bankruptcy trustee each month. You develop a budget that takes into account your income, your necessary living expenses and the amount that is then left over. The amount that is left over each month is paid to the bankruptcy trustee who will divide your payment among the creditors. The actual length of your plan will depend on many different circumstances and legal requirements. Because you are paying on your debt you have more flexibility in determining what property you will keep and what property you will give up. At the end of your Plan you will still get a bankruptcy discharge which will release you from remaining debt, but there will be some debt that will not be released just as in a Chapter 7 bankruptcy. This nondischargeable debt is not always the same as the nondischargeable debt in a Chapter 7 bankruptcy.
Can I keep my house?
In many cases the answer is yes. Of course there are many circumstances that will need to be taken into account, but if you are current on your mortgage payments, can continue to stay current on your mortgage payments, and have less than $60,000 equity in your home ($90,000 if you are over the age of 60 or are disabled) you are usually able to keep your home if you want to. If you are not current on your mortgage payments but believe you could get the past due amount caught up if you were not saddled with all of your other debt, you may be able to do just that in a Chapter 13, which will provide protection against foreclosure while you get those mortgage payments caught up. That option is not available in a Chapter 7, at least not without the lender voluntarily agreeing to some sort of modification of your mortgage.
What is secured debt?
Your secured debt consists of that debt where you have used something as collateral to secure the repayment of the debt, such as a car loan or a home loan. Sometimes store credit card agreements provide that the items you purchase with the use of that card, for example a big screen TV, are used as security for repayment of the debt. Although you will be discharged or released from your personal obligation to pay your secured debt, the lien against the property is not released. This means that unless you continue to make your payments, such as your monthly mortgage payments, the lender can still take collection action against the property (such as a foreclosure in the case of a home). The lender could not, however, come after you to pay any deficiency left owing after that foreclosure because your discharge releases you from your personal obligation to pay. Payments on secured debt can often be modified in a Chapter 13 to give you a better chance of keeping the property. These modifications typically will not be available in a Chapter 7 proceeding.
What is unsecured debt?
Your unsecured debt is that debt which has no collateral associated with it. In other words, you have not used any of your property to secure or guarantee repayment of the loan. Most credit card debt will fall into this category. Other common examples are medical bills, signature loans, and most civil court judgments. With some exceptions, unsecured debt is dischargeable in bankruptcy.
When will I receive my bankruptcy discharge?
In a Chapter 7 bankruptcy, your bankruptcy discharge is typically entered approximately 4 months after you have filed your case with the Bankruptcy Court. In a Chapter 13 bankruptcy the discharge is entered upon the successful completion of your Chapter 13 Plan. The length of your Chapter 13 Plan will depend on a variety of factors, however, a Chapter 13 plan can not be shorter than 3 years and cannot be longer than 5 years.
Will I have to go to court?
In the vast majority of cases the answer is no. Appearances in front of a bankruptcy judge usually only occur when there are matters contested by a creditor or the bankruptcy trustee which cannot be resolved outside of Court. These contested matters are rare. Contested matters are typically the result of a creditor or the trustee alleging that you did something wrong such as concealing assets or committing some sort of fraud. As long as everything is properly disclosed on your bankruptcy documents and you have committed no bad acts such as defrauding somebody, there is little need for any court appearances. The creditors and the bankruptcy trustee will have a deadline in which to file any such contested matters. That deadline will be 60 days after the date that is set for your meeting of creditors.
What is the meeting of creditors?
The meeting of creditors is a meeting conducted by the bankruptcy trustee approximately 30 to 45 days after your bankruptcy petition is filed with the Court. Section 341 of the Bankruptcy Code requires that this meeting be held so it is often referred to as the 341 hearing by attorneys and bankruptcy trustees because that's the way we lawyers talk. Section 341 requires that the debtor appear and submit to examination by his or her creditors as to his or her financial circumstances. So a notice will be sent to all of your creditors advising them of the date, time and place of the hearing. For Colorado debtors residing in Larimer or Weld County those hearings are typically held in a meeting or conference room at the Courthouse Office Building in downtown Fort Collins. Everyone will have at least 20 days advance notice of the date, time and place of the hearing. While you, your attorney and the bankruptcy trustee will be there, it is rare that any creditors actually show up. You, your attorney and the bankruptcy trustee will sit at a table, the trustee will swear you in and then ask you a few questions, mostly to verify that the information in your bankruptcy documents is correct and to clear up any confusion that the trustee might have about your case. The proceeding will be recorded. Because creditors typically do not appear, most of these hearings last only a short time, often as little as 5 to 10 minutes. In the vast majority of cases this will be the one and only appearance that you will need to make after your case is filed with the Bankruptcy Court.
Who is the bankruptcy trustee?
The bankruptcy trustee is an attorney that has been selected by the U.S. Trustee's office to administer your bankruptcy estate. These trustees are called panel trustees. There are 4 panel trustees that are typically assigned to cases in northern Colorado. These trustees are randomly assigned and we do not know which trustee will be appointed to your case until after your case is filed. One of the primary duties of the trustee is to represent the interests of the unsecured creditors in your case. This can include making sure that all of your assets are disclosed and that any assets that are not exempt under the law are collected, sold, and the sales proceeds divided up pro rata among your unsecured creditors.
What is the bankruptcy estate?
Your bankruptcy estate is comprised of everything your own or have a legal right to as of the day you file your bankruptcy petition with the Bankruptcy Court. These are called your assets. In essence, the bankruptcy trustee, who is in charge of administering your bankruptcy estate, steps into your shoes and becomes you on the day of filing. Anything you own or have a right to, the trustee now owns or has a right to. Your assets become the trustee's assets. Some of your assets will be exempt, and if exempt will not have to be turned over to the trustee, but unless exempt the trustee has the right to take these assets, sell them and divide the sales proceeds among your creditors. Your assets include not only such things as your home or cars, but things you might not initially think of, such as money on deposit in your checking account (and money is on deposit until your check has cleared the bank), wages that you have earned but which have not yet been paid to you and income tax refunds that you are entitled to but which you have not yet received. Legitimate pre-bankruptcy planning includes a review of your assets and a determination of how your assets can be properly saved from being taken by the bankruptcy trustee as part of your bankruptcy estate.
Do I qualify for a Chapter 7 bankruptcy?
The determination of whether you can file a Chapter 7 bankruptcy is based primarily on the application of the Chapter 7 means test. This is a test developed by Congress to determine whether it is appropriate for a person to file for Chapter 7 bankruptcy relief or whether that person should be required to file a Chapter 13 bankruptcy and repay some debt before he or she gets a bankruptcy discharge. Unfortunately, the test is not always an accurate portrayal of one's financial condition. Under this test, all gross income received by all members of the household from all sources (except income received from Social Security) for the full six month period prior to the month of filing of the bankruptcy (for example all gross income from January 1 through June 30 would be considered for someone filing anytime during July) is added together and then multiplied by two to get an annual amount. This annual amount is compared to a chart created using figures from the US Census Bureau. The figures on the chart are based on the median income for families of different sizes in the state you live in. If the total gross income for a family of your size is lower than the number on the chart, then it is presumed that you are entitled to file a Chapter 7 bankruptcy, but if your gross income is more than the number on the chart it is presumed that it would be an abuse of the bankruptcy process for you to file Chapter 7 and that you should instead be filing a Chapter 13 bankruptcy where at least some of your debt is repaid before you receive your bankruptcy discharge. There are exceptions, however, to this presumption and there are occasions when the consideration of special circumstances or certain anticipated future expenses may result in meeting the conditions necessary to file Chapter 7.
What are the Chapter 7 means test annual income figures?
The means test figures are adjusted semi-annually in March and October of each year. The current means test annual figures for Colorado, as of March 1, 2012, are as follows:
Household of 1: $47,361.00
Household of 2: $62,431.00
Household of 3: $69,252.00
Household of 4: $79,905.00
If there are more than 4 members in the household, add an additional $7,500.00 for each additional member.
What will my payments be in a Chapter 13?
In the event the application of the Chapter 7 means test results in a determination that you do not meet the conditions to file a Chapter 7 bankruptcy, you will be required to file under Chapter 13 in order to get a discharge of your debts. In a Chapter 13 it is necessary to determine the minimum amount you will be required to pay the Chapter 13 trustee through your Chapter 13 Plan. The minimum amount that you will be required to pay is calculated through application of the Chapter 13 means test. The Chapter 13 means test is a complex test. In many ways it is similar to the Chapter 7 means test but there are differences. Under the Chapter 13 means test, your current monthly income is considered to be the same as your average monthly income over the last full six months. This current monthly income is then reduced by certain permitted expenses. Some of these expenses are based on your actual expenditures but other expenses are based upon predetermined figures derived from government guidelines. These predetermined figures apply regardless of whether you are actually spending more or less than the amount of those predetermined expenses. Your current monthly income less the permitted expenditures is referred to as your monthly disposable income and this is the minimum amount that you will be expected to pay though your Chapter 13 plan. There are, however, other considerations that also must be taken into account that could raise the minimum amount of your payment in order to meet other legal requirements. A proper preparation of the Chapter 13 means test is vital to keeping your plan payment as low as possible. It is a very complex test and should only be prepared by an attorney experienced in the Chapter 13 process.
Do I need to do anything to prepare for bankruptcy?
In addition to legitimate pre-bankruptcy planning to protect your assets to the extent legally permissible, and providing your attorney with all necessary information to properly prepare your bankruptcy documents, you will be required to take a debt counseling course and obtain a certificate of completion of that course before you can file your bankruptcy petition. There are many online providers of this course, and you may take the course from any approved provider that you select. Most online courses cost between $25.00 and $50.00 and take an hour or less to complete. The certificate of completion you receive is good for 180 days. If your bankruptcy is not filed before that certificate expires you will have to retake the course to get an updated certificate. The bankruptcy case simply cannot be filed without a valid certificate of completion.
Do I need to do anything after filing the bankruptcy?
Of course you will need to cooperate with all legal requests of the bankruptcy trustee to turn over non-exempt assets and to provide information that the trustee may reasonably request, such as copies of tax returns or documentation that supports anything stated in your bankruptcy documents. In addition, you must do two things: (1) go to the meeting of creditors (341 hearing) discussed above and (2) take a financial management course. You must take this course, obtain a certificate of completion of the course, and file that certificate with the Court before the Court will give you a discharge of your debt. Just as with the initial debt counseling course, this course can be taken online. The cost is similar to that of the debt counseling course, and depending upon the provider you select the course will typically take one to two hours to complete. You cannot take the course until after the bankruptcy has been filed and you must complete the course and file your certificate of completion no later than 60 days after the date of your 341 hearing.
What is the difference between a personal bankruptcy and a business bankruptcy?
It is rare that a business entity such as a corporation or a limited liability company files for bankruptcy. Chapter 11 is rarely economically practical for most small business. It is a complex and very expensive process. A corporation or a limited liability company cannot file for Chapter 13 relief because Chapter 13 is limited to individuals. A corporation or a limited liability company can file a Chapter 7 bankruptcy but a corporation or limited liability company does not receive a bankruptcy discharge. Instead the company gets liquidated and ceases to exist so a discharge is not necessary. Because a company can be dissolved without filing bankruptcy, usually there is no need for the bankruptcy.
Instead, it is the owners of the business that may need to file bankruptcy in order to be relieved of their personal obligation to pay the business debt. In this sense it is a "business bankruptcy" because the debts arose out of business operations. But the bankruptcy is still a "personal bankruptcy" because it is the personal obligation of the individuals that are filing bankruptcy to pay that business debt. For individuals, essentially all bankruptcy is a "personal bankruptcy". It is better to think in terms of a "consumer bankruptcy" versus a "business bankruptcy" rather than in terms of a "personal bankruptcy" versus a "business bankruptcy".
Because all bankruptcy is therefore "personal", all debt of the person, including the personal credit cards, home mortgages, car loans and so on are included along with the business debt when a person files for bankruptcy relief as a result of a failed business.
Do I need to include all of my debt?
The short answer is yes. Even though there may be some debt that is not dischargeable or there may be some debt that a person may want to continue to pay, such as a home loan, all debt must be disclosed on the bankruptcy documents. It is required that a complete financial picture is presented to the Bankruptcy Court. Just as all assets are to be disclosed, all debt must be revealed. The "personal debt" (i.e. the "consumer debt") as well as the business debt must be listed, even though the reason for the bankruptcy may be to get rid of the business debt. The bankruptcy may eliminate the legal obligation to pay the debt, but a person is still free to voluntarily pay any debt after the bankruptcy that the person wants to pay. The person just can't be legally forced to pay that debt. So any debts owed to friends, family members and so on must be listed. Pay on the debt afterwards if you want, but the failure to disclose the existence of that debt is a violation of bankruptcy law.
For an initial consultation and to learn more about your rights, please call 970 493 0456 or contact me by e-mail. I am happy to take the time to review your rights and the legal options available to you. With my experience as a Fort Collins debt settlement lawyer, I am prepared to handle all aspects of your case.
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