Bankruptcy

Do you find yourself dreading going to the mail box, or answering the telephone, because of constant calls from creditors? With the state of today’s economy, many people find themselves trapped by seemingly insurmountable financial difficulties. There is a way out and a way to get your life and your peace of mind back. While the prospect of filing bankruptcy can be scary, it can also be a means to regain your tranquility and start you on the road to recovering your financial health and reputation. We are here to help. We can stop those creditor telephone calls. We can stop those collection letters. Call Greg Handevidt, at (507) 345-5500, for a free consultation. We can take away the sleepless nights, constant telephone calls, and anxious trips to the mail box.

Most people have heard of bankruptcy, but many people do not understand bankruptcy. Bankruptcy is a legal process which, under certain circumstances, allows individuals or business entities to be relieved of certain debts. Most people can file bankruptcy and keep necessary items of property which are “exempt” from the bankruptcy.

THERE ARE THREE MAIN KINDS OF BANKRUPTCY:

Chapter 7 Bankruptcy – This is the most common type of bankruptcy filing. In 2010, there were 1,572,597 bankruptcies filed in the United States. Out of those filings, 1,133,320 were Chapter 7 filings. It is often referred to as “straight” bankruptcy. The purpose of Chapter 7 is to give the debtor a "fresh start" by eliminating (discharging) the debtor's personal liability on most debts. Most individual Chapter 7 cases result in a discharge of all debts. However, some types of debts are not dischargeable, and a discharge does not extinguish valid, perfected liens on property. In rare cases a Chapter 7 can be dismissed if the court finds the debtor has the ability to pay a meaningful portion of debts owed to unsecured creditors (Conversion to Chapter 13 case – discussed below).

A Chapter 7 is started by filing a petition with the federal bankruptcy court in the federal district where the individual lives or where the business debtor has its principal place of business or principal assets. The debtor is required to file documents describing all assets and liabilities, including current income and expenses, and a statement of financial affairs (these are called schedules). A husband and wife may file a joint petition, or may file individually.

As soon as the petition is filed it "automatically stays" most creditor actions against the debtor and the debtor's property. That means that most creditors cannot continue collection actions without first getting permission from the bankruptcy court to continue (Relief from Stay). The stay is automatic, and it prevents creditors from initiating or continuing lawsuits, repossessions, or wage garnishments while the stay is in effect. There are only limited exceptions such as collecting a domestic support obligation/child support.

Federal bankruptcy law allows individuals, but not businesses, to retain certain property by claiming those assets as "exempt" under federal bankruptcy law or under state law. Married couples may only claim one set of exemptions.

When the case is filed, a bankruptcy trustee is appointed. The trustee's main duties are to examine and verify the accuracy of the debtor's bankruptcy papers and to identify assets which are not exempt. The trustee may collect and sell the non-exempt assets, and distribute the net proceeds to the creditors. If an asset has a loan against it, the debtor can usually keep the asset if the equity is exempt.

A "meeting of creditors" is held about 30 days after the petition is filed. The trustee runs the meeting, and the debtor must provide certain documents to the trustee in advance. The debtor must attend the meeting, and if a husband and wife file jointly, both must attend. Creditors may ask limited questions about the debtor's property, but creditors rarely come to the meeting.

If the case is successful, the bankruptcy clerk issues a discharge order, in as little as 60 after the first date set for the creditors meeting. A copy of the discharge is mailed to the debtor and all the creditors listed in the debtor's bankruptcy papers.

When a bankruptcy case is filed, a trustee is appointed to examine the assets of the estate, conduct the creditor meeting and liquidate non-exempt assets. In the most cases, all of the debtor's assets are exempt or subject to valid liens, so the trustee usually has no assets to sell. If the debtor has non-exempt assets, or if the trustee later recovers assets to liquidate, the creditors are given a deadline to file a claim form stating the basis of their debt against the debtor or the debtor's assets.

The filing of a bankruptcy petition creates a bankruptcy "estate," and the trustee becomes the temporary legal owner of the debtor's property. The estate consists of all the debtor's legal or equitable interest in property, including property in which the debtor has an interest which is owned or held by another person. The estate includes tangible and intangible assets, such as insurance claims or lawsuits for damages.

A discharge order releases the debtor from the obligation to pay the discharged debts and prevents the creditors from taking any further action against the debtor, or the debtor’s property, to collect the debts.

If a creditor wants to oppose the discharge, there are two options: 1) file a complaint objecting to the debtor's discharge; or 2) file a complaint to determine whether the creditor's debt is excepted from the discharge. A creditor may pursue one or both of these remedies by filing a complaint with the bankruptcy court, called an “Adversary Proceeding.”

The grounds for objecting to a chapter 7 discharge are limited, and the creditor or trustee objecting to the discharge has the burden of proof. In general, the grounds for denying a discharge are:

1. The debtor failed to keep and produce adequate financial records;
2. The debtor failed to explain satisfactorily a loss of assets;
3. The debtor committed a bankruptcy crime;
4. The debtor failed to obey a lawful order of the bankruptcy court; or
5. The debtor fraudulently transferred, concealed, or destroyed property.

Once a discharge is granted, the trustee, a creditor, or the U.S. Trustee may later file a complaint to revoke a Chapter 7 discharge if the trustee can prove that the discharge was obtained through the fraud of the debtor; or that the debtor acquired property that is the property of the estate AND knowingly and fraudulently failed to report the acquisition of the property or to surrender the property to the trustee. Generally, this complaint must be filed within a year after the discharge was granted.

Certain types of debts may not be discharged in a chapter 7 such as alimony and child support, most taxes, student loans, debts for death or personal injury caused by the debtor's operation of a boat or motor vehicle while intoxicated from alcohol or other substances, and debts for criminal restitution orders. To the extent that these types of debts are not fully paid in the chapter 7 case, the debtor is still responsible for them after the bankruptcy.

Debts for money or property obtained by false pretenses, debts for fraud while acting in a fiduciary capacity, or debts for willful and malicious injury to another or to the property of another will be discharged unless the creditor timely files an adversary complaint. The creditor must file the complaint within 60 days from the first date of the creditors meeting. In such cases the presumption is in favor of the discharge, and the creditor normally has the burden of proof to show the debt should be excepted from the bankruptcy discharge.

Secured creditors normally retain the right to seize their collateral after a discharge is granted. The debtor must decide whether to keep the asset. If a debtor returns the collateral, and if a discharge is granted, the debtor will have no further liability to the creditor.

A debtor wishing to keep the asset, such as an automobile, may "reaffirm" the debt or redeem the property. A reaffirmation is an agreement between the debtor and the creditor where the debtor promises to pay all or a portion of the money owed. The reaffirmed debt will still be owed after the discharge. In return, the creditor promises as long as payments are made, the creditor will not repossess the automobile or other property. If the debtor defaults on the payments, the creditor may repossess and sell the collateral. Unfortunately, if the sale price is not enough to pay off the debt, the debtor will still owe a deficiency to the creditor.

A debtor may opt to redeem an asset by paying the fair market value in a lump sum. For example, if the balance on a car loan is $18,000 but the car is only worth $10,000, it may be sensible to redeem the car for its market value. However, most debtors who file bankruptcy do not have ready cash [or a rich relative] to pay the market value in one lump sum. There are companies who provide redemption financing. Their interest rates are high, but if the gap between the loan balance and the value of the car is large enough, a redemption loan may be less expensive than the existing loan on the car.

Chapter 11 Bankruptcy – This type of bankruptcy proceeding is generally used by businesses, or by debtors with substantial assets that would be lost in straight liquidation Chapter 7 bankruptcy. In a Chapter 11 bankruptcy proceeding the creditors are temporarily stopped from taking any action against the debtor while he or she tries to work out a bankruptcy plan of reorganization that suggests a method of paying or settling the debts. The creditors vote on the plan, and it also must be approved by the court. This is a complicated proceeding, generally used by large businesses. If you are a business entity or an individual with substantial assets, please call us to arrange a consultation in order to discuss your options.

Chapter 13 Bankruptcy – Chapter 13 bankruptcy is available to individuals with regular income from any source, not just wages. It is also available to self-employed sole proprietors. Chapter 13 allows a debtor to reorganize financial obligations by paying creditors through a plan that requires monthly payments for a minimum of three and no more than five years. Unsecured debts must be $336,900, or less, and secured debts $1,010,650, or less, to qualify for chapter 13.

Like Chapter 7, Chapter 13 is started by filing a petition with the federal bankruptcy court in the federal district where the individual lives or where the debtor is domiciled. The debtor files schedules of assets and liabilities, a schedule of current income and expenditures, and a statement of financial affairs. A husband and wife can file a joint petition or may file individually. If only one spouse files, the income and expenses of the non-filing spouse must be disclosed in the debtor's schedules.

As in all bankruptcies, the filing of the petition under Chapter 13 automatically stays most actions against the debtor or the debtor's property. While the "stay" is in effect, creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession, or wage garnishment. In addition, Chapter 13 provides a "co-debtor" stay which stops creditors from attempting to collect a "consumer debt" from other individuals who may be jointly liable for the debt. A consumer debt is a debt which arises from personal or “consumer” purposes, rather than for business purposes.

Chapter 13 can be a powerful tool in dealing with foreclosure. A person facing foreclosure can stop the foreclosure sale by filing chapter 13. Under Chapter 13, a plan permits the debtor to cure defaults on real estate debts by repaying the arrears within a reasonable period of time; typically within 36 months.

Upon filing the petition, a trustee is appointed to administer the case. The chapter 13 trustee's role is to collect plan payments from debtors and make distributions to creditors according to the debtor's plan. The debtor must file a plan with the court and begin making plan payments to the trustee. The plan provides for regular monthly payments to the trustee but must be confirmed by the court. The debtor must commit all projected "disposable income" during the time the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income excludes those sums necessary to pay ordinary operating expenses.

Once the court confirms the plan, the trustee begins distributing funds, under the plan, to creditors according to the terms of the plan. The plan will often provide unsecured creditors less than full payment of their claims.

In each case, a meeting of creditors is held, and the debtor is examined under oath. Just as chapter 7, the meeting is held approximately 30 days after the petition is filed. The trustee conducts the meeting and asks questions about the debtor's financial affairs and the proposed plan. Creditors may attend and ask questions. Debtors must attend, and if a husband and wife filed jointly, both must be present. If there are problems with the plan, they are typically resolved during, or shortly after, the meeting. If there are no objections to the plan, a confirmation order is submitted at the creditors' meeting.

If the trustee or a creditor objects to confirmation of the plan, a hearing will be scheduled before the court. The bankruptcy judge will determine whether the plan meets the legal requirements for confirmation. A variety of objections may be made, but the most frequent objections are: the total plan payments are less than creditors would receive if the debtor's assets were liquidated; or the debtor's plan does not commit all of the debtor's projected disposable income for the necessary period of time.

If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee begins distributing funds to creditors according to the plan. If the plan is not confirmed, the debtor may attempt to modify the plan, convert the case to a chapter 7, or let the case be dismissed. New limits on multiple filings make it unwise to allow the case to be dismissed.

On occasion, changed circumstances will affect a debtor's ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to a motion by the debtor. The trustee may also request plan modifications.

The provisions of a confirmed plan are binding on the creditors. Once the court confirms the plan, it is the responsibility of the debtor to make certain the plan is consummated. Chapter 13 is not designed to solve financial problems that arise after the case is filed. The debtor must make regular payments to the trustee, which will require living on a fixed budget for the length of the case.

The debtor's employer may be required to withhold the amount of the plan payment from the debtor's paycheck and send it to the chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property, the debtor may not incur any significant new debt without consulting the trustee, and a court order may be appropriate. Failure to make plan payments may result in dismissal of the case.

Upon making all payments under the plan, the Chapter 13 debtor is entitled to a discharge. The discharge releases the debtor from all debts dealt with in the plan or claims disallowed by the court. It is the creditor's duty to file a claim in the case. Those creditors who were provided for in full or in part under the chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged debts.

The debtor will not be released from debts that are proven to be the result of fraud or breach of a fiduciary duty or from debts for spousal support (alimony) or child support, student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. To the extent that these types of debts are not fully paid pursuant to the chapter 13 plan, the debtor will still be responsible for the unpaid balance on these debts after the chapter 13 case has concluded.

OTHER OPTIONS

In addition to Bankruptcy, overwhelming debt can sometimes be resolved through creditor workouts (negotiated plans for repayment) that can resolve debts for less than the actual amount owed. Creditors are often interested in negotiating the payment of a debt on terms which can allow the creditor to recover a significant portion of the amount owed.

FOR THE ANSWERS TO YOUR QUESTIONS, AND FOR THE RELIEF YOU NEED, DON’T WAIT ANOTHER MINUTE. CALL (507) 345-550 FOR A FREE CONSULTATION. WE CAN HELP. WE SERVE ALL OF SOUTHERN MINNESOTA.