DEBT RESOLUTION

We have the deep legal experience and intellectual firepower that is necessary to offer a complete and sophisticated solution to your debt problems. We start simple, of course, by looking at Chapter 7 bankruptcy. That’s where many lawyers end their practice. Not us. If Chapter 7 bankruptcy does not solve your problems, we’ll look at Chapter 13 bankruptcy. There are even fewer lawyers who offer Chapter 13 than lawyers who offer Chapter 13, but many lawyers who offer Chapter 13 end their practice there. Not us. If Chapter 13 does not solve your problems, we get ever more sophisticated. We’ll look into putting you into Chapter 7, followed immediately by Chapter 13. Or we’ll look into putting you into Chapter 7 first, followed later by putting your spouse into Chapter 7. We’ll look at a short year tax election, filing a preference claim to get money back from creditors, and lawsuits for damages against creditors who violate your rights. Very few lawyers offer this sort of complete and sophisticated bankruptcy solution. 

And if we can’t solve your problem in bankruptcy, we’ll move the fight outside of the bankruptcy court. For example, if we can’t discharge your taxes in bankruptcy (and we’ll certainly try if possible), we’ll try to resolve the matter administratively directly with the IRS. We’ll negotiate on your behalf for an offer in compromise, non-collectable status, or installment plan. Likewise, if we can’t discharge your student loans in bankruptcy (and we’ll certainly try if possible), we’ll try to discharge or otherwise resolve the matter administratively with the Department of Education.  On a handful of lawyers offer tax resolution and student loan resolution in addition to sophisticated bankruptcy solutions.

We are among the very few lawyers who have the experience and intellectual firepower to offer you a complete solution to your financial problems. We use a broad and sophisticated array of strategies and laws to get you the very best solution possible.

By an Act of Congress and the President of the United States, Thompson │Lossada is a federally designated Debt Relief Agency.

 

BANKRUPTCY
 

 
 

Firm attorneys handle the client’s bankruptcy case from start to finish. For the well-prepared and confident client, firm attorneys will limit representation to preparation of bankruptcy filing documents only, at a reduced fee.

We file personal, business (sole proprietor), and corporate Chapter 7 cases (though there are often better ways to liquidate a small business than bankruptcy), corporate Chapter 11 cases, and personal Chapter 13 cases. We analyze client debts, assets, income, tax status, and other financial information to help determine whether Chapter 7, Chapter 11, or Chapter 13 is best for the client, or whether a non-bankruptcy solution is best. We advise on the benefits and drawbacks of each chapter. We advise the client on the actions that the client himself or herself must take, such as the pre-filing credit counseling requirement, the post-filing debtor education requirement, and the meeting of creditors requirement.

We help the client strategically time bankruptcy; exercise exemption rights, redemption rights, and reaffirmation rights (rarely advisable); void preferences and liens; and decide upon a joint or single filing, and whether at the same or different time; deal with (usually) non-dischargeable debts such as drunk driving damages and study loan obligations; deal with priority and non-priority debt; develop Chapter 13 plans; and respond to debtor claims, objections to discharge, and trustee concerns.

We complete each and every form for the client, including the bankruptcy petition, statements about eviction (if applicable), declaration about schedules, asset and liability summary, personal property schedule, real property schedule, exemption schedule, scheduled of secured creditors, schedule of unsecured creditors, schedule or executory contracts, schedule of unexpired leases, schedule of co-debtors, income schedule, expense schedule, statement of financial affairs, statement of intention, Chapter 13 plan (if applicable), Chapter 7 statement of current monthly income (if applicable), Chapter 7 means test calculation (if applicable), Chapter 13 statement of current monthly income (if applicable), Chapter 13 means test and commitment period calculation (if applicable), Chapter 13 calculation of disposable income, proof of claim (if appropriate); and other forms.

We work on the cutting edge of bankruptcy law, and we do far more than the typical bankruptcy attorney and we do far more than simply file bankruptcy forms. In the right bankruptcy case, we can sue your creditors and put money in your pocket for violations of your rights under various state and federal consumer protection laws; if you are willing to give up your mortgaged home, we can help you stay in that home rent-free for as long as possible (sometimes years); if appropriate, file a proof of claim on behalf of your creditors (a cute but very effective technique that unfortunately not many attorneys use); and, in the right case, we will take on the two creditors that most attorneys are afraid to touch: we will take on the IRS to cancel and discharge your taxes, and we will take on your student loan lenders to cancel and discharge your student loans. We also accept clients who run business as sole proprietors, cases which are too small for corporate bankruptcy attorneys and too complex for most consumer bankruptcy attorneys.

In sum, we use bankruptcy law to cancel as much of your debt as the law allows and help you walk away with as much of your property and with as much money as the law allows.

 

QUESTIONS AND ANSWERS ABOUT CHAPTER 7

Press + to expand the answer!

What is a chapter 7 bankruptcy case and how does it work?

A chapter 7 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 7 of the Bankruptcy Code. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation. The Bankruptcy Code is a federal law that deals with bankruptcy. A person who files a chapter 7 case is called a debtor. In a chapter 7 case, the debtor must turn his or her nonexempt property, if any exists, over to a trustee, who then con¬verts the property to cash and pays the debtor’s creditors. In return, the debtor receives a chapter 7 discharge, if he or she pays the filing fee, is eligible for the discharge, and obeys the orders and rules of the bankruptcy court.

What is a chapter 7 discharge?

It is a court order releasing a debtor from all of his or her dischargeable debts and ordering the creditors not to attempt to collect them from the debtor. A debt that is discharged is a debt that the debtor is released from and does not have to pay.

How does a person obtain a chapter 7 discharge?

A chapter 7 discharge is obtained by filing and maintaining a chapter 7 bankruptcy case and being eligible for a chapter 7 discharge. However, not all debts are discharged by a chapter 7 discharge. Certain types of debts are by law not dischargeable under chapter 7 and debts of this type will not be discharged even if the debtor receives a chapter 7 discharge.

Who is permitted to file and maintain a chapter 7 case?

Any person who resides in, does business in, or has property in the United States is permitted to file a chapter 7 bankruptcy case except a person who has intentionally dismissed a prior bankruptcy case within the last 180 days. To be permitted to maintain a chapter 7 bankruptcy case a person must qualify for chapter 7 relief under a process called means testing.

What is means testing?

Means testing is a method of determining a person’s eligibility to maintain a chapter 7 case. Under means testing a person whose current monthly income from all sources multiplied by 12 exceeds the median annual income, as reported by the U.S. Census Bureau, for the person’s state and family size, must show that he or she is not able to pay a minimum of $124.58 per month for 60 months to his or her unsecured creditors from his or her disposable monthly income in order to be eligible to maintain a chapter 7 case. Disposable monthly income is a person’s current monthly income from all sources less the person’s permitted current monthly expenses. The chapter 7 case of a person whose disposable monthly income is such that he or she is deemed to be able to pay $124.58 per month or more to unsecured creditors for 60 months will be dismissed or converted to chapter 13 unless special circumstances exist.

+ How is means testing carried out?

Every person who files a chapter 7 case must file a document called Statement of Current Monthly Income and Means Test Calculation. This document, when completed and filed, shows the person’s current monthly income and the current monthly expenses that the person is allowed to claim. The person may also be questioned about his or her income and expenses at the meeting of creditors. From these sources a person’s current monthly disposable income is calculated. This figure is then used to determine the amount of the monthly payment that the person can afford to make to his or her unsecured creditors. If the amount of this monthly payment is above a certain figure (usually $124.58), the person will almost always be disqualified from maintaining a chapter 7 case and the case will be dismissed or, with the person’s consent, converted to chapter 13.

How is it decided whether a person is ineligible for chapter 7 under means testing?

The Statement of Current Monthly Income and Means Test Calculation filed by the person will initially show whether the person is able to make monthly payments to unsecured creditors in the amount required for ineligibility. If so, the clerk of the bankruptcy court will send a notice to all creditors that a presumption of abuse has arisen in the case. The United States trustee then has until 10 days after the meeting of creditors to file a statement as to whether a presumption of abuse exists in the case. Then the United States trustee or any creditor can move to dismiss the case. The bankruptcy judge will ultimately decide whether the case should be dismissed.

What is a presumption of abuse and how does it affect the case?

When a chapter 7 case is filed by an ineligible person, under bankruptcy terminology that person is said to have abused the chapter 7 laws. When a person whose current monthly disposable income is such that he or she can afford to make monthly payments to unsecured creditors in the required amount, a presumption of abuse is said to arise in the case. If a presumption of abuse arises in a case, the case will be dismissed or converted to chapter 13 unless the person filing the case can prove the existence of special circumstances, such as a serious medical condition.

Who is eligible for a chapter 7 discharge?

Any person who is qualified to file and maintain a chapter 7 case is eligible for a chapter 7 discharge except the following:

(1) A person who has been granted a discharge in a chapter 7 case that was filed within the last 8 years.

(2) A person who has been granted a discharge in a chapter 13 case that was filed within the last 6 years, unless 70 percent or more of the debtor’s unsecured claims were paid off in the chap¬ter 13 case.

(3) A person who files and obtains court approval of a written waiver of discharge in the chapter 7 case.

(4) A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the chapter 7 case.

(5) A person who conceals, destroys, or falsifies records of his or her financial condition or business transac¬tions.

(6) A person who makes false statements or claims in the chapter 7 case, or who withholds recorded infor¬mation from the trustee.

(7) A person who fails to satisfactorily explain any loss or deficiency of his or her assets.

(8) A person who refuses to answer questions or obey orders of the bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.

(9) A person who, after filing the case, fails to complete an instructional course on personal financial management.

(10) A person who has been convicted of bankruptcy fraud or who owes a debt arising from a securities law violation.

What types of debts are not dischargeable in a chapter 7 case?

All debts of any type or amount, including out-of-state debts, are dischargeable in a chapter 7 case except for the types of debts that are by law nondischargeable in a chapter 7 case. The following is a list of the most common types of debts that are not dischargeable in a chapter 7 case:

(1) Most tax debts and debts that were incurred to pay nondischargeable federal tax debts.

(2) Debts for obtaining money, property, services, or credit by means of false pretenses, fraud, or a false financial statement, if the creditor files a complaint in the bankruptcy case.

(3) Debts not listed on the debtor’s chapter 7 forms, unless the creditor knew of the bankruptcy case in time to file a claim.

(4) Debts for fraud, embezzlement, or larceny, if the creditor files a complaint in the bankruptcy case.

(5) Debts for domestic support obligations, which include debts for alimony, maintenance, or support, and certain other divorce-related debts, including property settlement debts.

(6) Debts for intentional or malicious injury to the person or property of another, if the creditor files a com¬plaint in the bankruptcy case.

(7) Debts for certain fines or penalties.

(8) Debts for most educational benefits and student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor and his or her dependents.

(9) Debts for personal injury or death caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated.

(10) Debts that were or could have been listed in a previous bankruptcy case of the debtor in which the debtor did not receive a discharge.

Who should not file a Chapter 7 case?

A person who is not eligible for a chapter 7 discharge should not file a chapter 7 case. Also, in most instances a person who has substantial debts that are not dischargeable under chapter 7 should not file a chapter 7 case. In addition, it is not usually advisable for a person with disposable income sufficient to make the required minimum payments to unsecured creditors to file a chapter 7 case, because a presumption of abuse will arise and the case will probably be dismissed or converted to chapter 13.

Is there anything that a person must do before a chapter 7 case can be filed?

Yes. A person is not permitted to file a chapter 7 case unless he or she has, during the 180-day period prior to filing, received from an approved nonprofit budget and credit counseling agency an individual or group briefing that outlined the opportunities for available credit counseling and assisted the person in performing a budget analysis. This briefing may be conducted by telephone or on the internet, if desired, and must be paid for by the person. When the chapter 7 case is filed, a certificate from the agency describing the services provided to the person must be filed with the court. A copy of any debt repayment plan prepared for the person by the agency must also be filed with the court. In emergency situations, the required credit counseling may be conducted after the case is filed.

How much is the filing fee in a chapter 7 case and when must it be paid?

The filing fee is $335.00 for either a single or a joint case. The filing fee is payable when the case is filed. However, if the person filing can show that his or her income is less than 150 percent of the official poverty line and that he or she is unable to pay the filing fee, the court can waive payment of the filing fee. If the person filing is unable to pay the entire filing fee when the case is filed, it may be paid in up to four installments, with the final installment due within 120 days. The period for payment may later be extended to 180 days by the court, if there is a valid reason for doing so. Unless payment is waived by the court, the entire filing fee must ultimately be paid or the case will be dismissed and no debts will be discharged.

Where should a chapter 7 case be filed?

A chapter 7 case is filed in the office of the clerk of the bankruptcy court in the district where the debtor has resided or maintained a principal place of business for the greater portion of the last 180 days. The bankruptcy court is a federal court and is a unit of the United States district court.

May a husband and wife file jointly under chapter 7?

Yes. A husband and wife may file a joint case under chapter 7. If a joint chapter 7 case is filed, only one set of bankruptcy forms is needed and only one filing fee is charged. However, both husband and wife must receive the required credit counseling before the case is filed and both must complete the required financial management course after the case is filed.

Under what circumstances should a joint chapter 7 case be filed?

A husband and wife should file a joint chapter 7 case if both of them are liable for one or more significant dischargeable debts. If both spouses are liable for a substantial debt and only one spouse files under chapter 7, the creditor may later attempt to collect the debt from the nonfiling spouse, even if he or she has no income or assets. In community property states it may not be necessary for both spouses to file if all substantial dischargeable debts are community debts. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.

When is the best time to file a chapter 7 case?

The answer depends on the status of the person’s dischargeable debts, the nature and status of the person’s nonexempt assets, and the actions taken or threatened to be taken by creditors. The following rules should be followed:

(1) Don’t file the case until all anticipated debts have been incurred, because only debts that have been incurred when the case is filed are dischargeable and it will be another eight years before the person is again eligible for a chapter 7 discharge. For example, a person who has incurred substantial medical expenses should not file a chapter 7 case until the illness or injury has been either cured or covered by insurance, as it will do little good to discharge, say, $100,000 of medical debts now and then incur another $100,000 in medical debts after the case has been filed.

(2) Don’t file the case until the person filing has received all nonexempt assets to which he or she may be entitled. If the person is entitled to receive an income tax refund or a similar nonexempt asset in the near future, the case should not be filed until after the refund or asset has been received and disposed of. Otherwise, the refund or asset will have to be turned over to the trustee.

(3) Don’t file the case if the person filing expects to acquire nonexempt property through inheritance, life insurance or divorce in the next 180 days, because the property may have to be turned over to the trustee.

(4) If an aggressive creditor has threatened to attach or garnishee a person’s assets or income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a chapter 7 case (see Question 18, below). If a creditor has threatened to attach or garnishee the person’s wages or if a foreclo¬sure action has been filed against his or her home, it may be necessary to file the case immediately in order to protect the person’s interest in the property.

The filing of a chapter 7 case by a person automatically suspends virtually all collection and other legal proceedings pending against that person. A few days after a chapter 7 case is filed, the court will mail a notice to all creditors ordering them to refrain from any further action against the person. This court-ordered suspension of creditor activity against the person filing is called the automatic stay. If necessary, notice of the automatic stay may be served on a creditor earlier by the person or the person’s attorney. Any creditor who intentionally violates the automatic stay may be held in contempt of court and may be liable in damages to the person filing. Criminal proceedings and actions to collect domestic support obligations from exempt property or property acquired by the person after the chapter 7 case was filed are not affected by the automatic stay. The automatic stay also does not protect cosigners and guarantors of the person filing, and a creditor may continue to collect debts from those persons after the case is filed. Persons who have had a prior bankruptcy case dismissed within the past year may be denied the protection of the automatic stay.

How does filing a chapter 7 case affect a person’s credit rating?

It will usually worsen it, if that is possible. However, some financial institutions openly solicit business from persons who have recently filed under chapter 7, apparently because it will be at least 8 years before they can file another chapter 7 case. If there are compelling reasons for filing a chapter 7 case that are not within the person’s control (such as an illness or an injury), some credit rating agencies may take that into account in rating the person’s credit after filing.

Are the names of persons who file chapter 7 cases published?

When a chapter 7 case is filed, it becomes a public record and the names of the persons filing may be published by some credit-reporting agencies. However, newspapers do not usually report or publish the names of consumers who file chapter 7 cases.

Are employers notified of chapter 7 cases?

Employers are not usually notified when a chapter 7 case is filed. However, the trustee in a chapter 7 case often contacts an employer seeking information as to the status of the person’s wages or salary at the time the case was filed or to verify a person’s current monthly income. If there are compelling reasons for not informing an employer in a particular case, the trustee should be so informed and he or she may be willing to make other arrangements to obtain the necessary information.

No. Filing a chapter 7 case is not a criminal proceeding, and a person does not lose any civil or constitutional rights by filing.

May employers or governmental agencies discriminate against persons who file chapter 7 cases?

No. It is illegal for either private or governmental employers to discriminate against a person as to employ¬ment because that person has filed a chapter 7 case. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses (including a driver’s license), permits, student loans, and similar grants because that person has filed a chapter 7 case.

Will a person lose all of his or her property if he or she files a chapter 7 case?

Usually not. Certain property is exempt and may not be taken by creditors unless it is encumbered by a valid mortgage or lien. A person is usually allowed to retain his or her unencumbered exempt property in a chapter 7 case. A person may also be allowed to retain certain encumbered exempt property (see Question 34, below). Encumbered property is property against which a creditor has a valid lien, mortgage or other security interest.

What is exempt property?

Exempt property is property that is protected by law from the claims of creditors. However, if exempt property has been pledged to secure a debt or is otherwise encumbered by a valid lien or mortgage, the lien or mortgage holder may claim the exempt property by foreclosing upon or otherwise enforcing the creditor’s lien or mortgage. In bankruptcy cases property may be exempt under either state or federal law. Exempt property typically includes all or a portion of a person’s unpaid wages, home equity, household furniture, and personal effects. Your attorney can inform you as to the property that is exempt in your case.

When must a person appear in court in a chapter 7 case and what happens there?

The first court appearance is for a hearing called the “meeting of creditors,” which is usually held about a month after the case is filed. The person filing the case must bring photo identification, his or her social security card, his or her most recent pay stub and all of his or her bank and investment account statements to this hearing. At this hearing the person is put under oath and questioned about his or her debts, assets, income and expenses by the hearing officer or trustee. In most chapter 7 consumer cases no creditors appear in court; but any creditor that does appear is usually allowed to question the person. For most persons this will be the only court appearance, but if the bankruptcy court decides not to grant the person a discharge or if the person wishes to reaffirm a debt, there may be another hearing about three months later which the person will have to attend.

What happens after the meeting of creditors?

After the meeting of creditors, the trustee may contact the person filing regarding his or her property and the court may issue certain orders to the person. These orders are sent by mail and may require the person to turn certain property over to the trustee, or provide the trustee with certain information. If the person fails to comply with these orders, the case may be dismissed, in which case his or her debts will not be discharged. The person must also attend and complete an instructional course on personal financial management and file a statement with the court showing completion of the course.

What is a trustee in a chapter 7 case, and what does he or she do?

The trustee is a person appointed by the United States trustee to examine the person who filed the case, collect the person’s nonexempt prop¬erty, and pay the expenses of the estate and the claims of creditors. In addition, the trustee has certain administra¬tive duties in a chapter 7 case and is responsible for seeing to it that the person filing performs the required duties in the case. A trustee is appointed in a chapter 7 case, even if the person filing has no nonexempt property.

What are the responsibilities to the trustee of the person filing the case?

The law requires the person filing to cooperate with the trustee in the administration of a chapter 7 case, including the collection by the trustee of the person’s nonexempt property. If the person does not cooperate with the trustee, the chapter 7 case may be dismissed and the person’s debts will not be discharged. At least 7 days before the meeting of creditors the person filing must give the trustee and any requesting creditors copies of his or her most recent Federal income tax returns.

What happens to property that is turned over to the trustee?

It is usually converted to cash, which is used to pay the fees and expenses of the trustee, to pay the claims of priority creditors, and, if there is any left, to pay the claims of unsecured creditors.

What if a person has no nonexempt property for the trustee to collect?

If, from the bankruptcy forms filed, it appears that the person filing has no nonexempt property, a notice will be sent to the creditors advising them that there appears to be no assets from which to pay creditors, that it is unneces¬sary for them to file claims, and that if assets are later discovered they will then be given an opportunity to file claims. This type of case is referred to as a no-asset case. Most chapter 7 cases that are filed by consumers are no-asset cases.

How are secured creditors dealt with in a chapter 7 case?

Secured creditors are creditors with valid mortgages or liens against property of the person filing. Property that is encumbered by a valid mortgage or lien is called secured property. A secured creditor is usually per¬mitted to repossess or foreclose on its secured property, unless the value of the secured property greatly exceeds the amount owed to the creditor. The claim of a secured creditor is called a secured claim and secured claims are collected from or enforced against encumbered property. Secured claims are not paid by the trustee. A secured creditor must prove the validity of its mortgage or lien and must usually obtain a court order before repossessing or foreclosing on encumbered property. Encumbered property should not be turned over to a secured creditor until a court order to do so has been obtained, unless the property is encumbered only to finance its purchase. The debtor may be permitted to retain certain types of encumbered personal property (see Question 34, below).

How are unsecured creditors dealt with in a chapter 7 case?

An unsecured creditor is a creditor without a valid lien or mortgage against property of the person filing. If the person filing has nonexempt assets, unsecured creditors may file claims with the court within 90 days after the first date set for the meeting of creditors. The trustee will examine these claims and file objections to those deemed improper. When the trustee has collected all of the person’s nonexempt property and converted it to cash, and when the court has ruled on the trustee’s objections to improper claims, the trustee will distribute the funds in the form of dividends to the unsecured creditors according to the priorities set forth in the Bankruptcy Code. Domestic support obligations, admin¬istrative expenses, claims for wages, salaries, and contributions to employee benefit plans, claims for the refund of certain deposits and tax claims, are given priority, in that order, in the payment of dividends by the trustee. If there are funds remaining after the payment of these priority claims, they are distributed pro rata to the remaining unsecured creditors. In chapter 7 cases filed by consumers, unsecured creditors usually get nothing.

What encumbered property may a person retain in a chapter 7 case?

A person may retain (or redeem) certain encumbered personal and household property, such as household furni¬ture, appliances and goods, wearing apparel, and tools of trade, without payment to the secured creditor, if the property is exempt and if the mortgage or lien against the property was not incurred to finance the purchase of the property. A person may also retain without payment to the secured creditor any encumbered property that is both exempt and subject only to a judgment lien that is not divorce-related. Finally, a person may retain certain encumbered exempt personal, family, or household property by paying to the secured creditor an amount equal to the replacement value of the property, regardless of how much is owed to the creditor.

How may a person minimize the amount of money or property that must be turned over to the trustee in a chapter 7 case?

In a chapter 7 case the person filing is required to turn over to the trustee only the non¬exempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets are liquid in nature and tend to vary in size or amount from day to day. It is wise, therefore, to engage in some estate planning so as to minimize the value or amount of these liquid assets on the day and hour that the chapter 7 case is filed. The most common nonexempt liquid assets, and the assets that the trustee will be most likely to look for, include the following:

(1) cash, (5) accrued earnings and benefits, (2) bank accounts, (6) tax refunds, and (3) prepaid rent, (7) sporting goods. (4) landlord and utility deposits,

It is usually advantageous to take steps to insure that the value of each of these assets is as low as possible on the day and hour that the chapter 7 case is filed. By doing this the person will not be cheating or acting illegally; he or she will simply be using the law to his or her advantage, much the same as a person who takes advantage of the tax laws by selling property at the appropriate time.

Cash. If possible, the person filing should have no cash on hand when the chapter 7 case is filed. Further, if he or she has received cash or the equivalent of cash in the form of a paycheck or the closing of a bank account shortly before the filing of the case, the funds should be disposed of for valid purposes and receipts should be obtained when disposing of the funds in order to prove to the trustee and the court that the funds were validly disposed of prior to the filing of the case. Money possessed or obtained shortly before the filing of a chapter 7 case may be spent on such items as food and groceries, the chapter 7 filing fee, the attorney’s fee in the chapter 7 case, and the payment to creditors whose claims the person intends to reaffirm and continue paying after the filing of the chapter 7 case. Payments should not be made as gifts or loans to friends or rela¬tives, however, as the trustee may later recover these payments.

Bank Accounts. The best practice is to close out all bank accounts before filing a chapter 7 case. If a bank account is not closed, the balance of the account should be as close to zero as the bank will allow and all outstanding checks must clear the account before the case is filed. If the person filing has written a check to someone for, say, $50 and if the check has not cleared the account when the case is filed, the $50 in the account to cover the outstanding check will be deemed an asset and will have to be paid to the trustee.

Prepaid Rent. If a person’s rent is paid on the first day of the month and if the person’s chapter 7 case is filed on the tenth day of the month, the portion of the rent covering the last 20 days of the month, if not exempt, will be deemed an asset and will later have to be paid to the trustee. If possible, the person should make arrangements with the landlord to pay rent only through the date that the case is to be filed and to pay the balance of the rent from funds acquired after the case is filed. If this is not possible, the case should be filed near the end of the rent period.

Landlord and Utility Deposits. Unless they are exempt, the person filing should attempt to obtain the refund of all landlord and utility deposits before filing a chapter 7 case. Otherwise, the deposits, or their cash equivalents, will have to be paid to the trustee, unless the deposits are exempt.

Accrued Earnings and Benefits. In most states, and under the federal law, only a certain percentage (usually 75%) of a person’s earnings are exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25%) of any accrued and unpaid wages, salary, commissions, vacation pay, sick leave pay, and other accrued and nonexempt employee benefits. Normally, then, the best time to file a chapter 7 case is the morning after payday. Even then, if the pay period does not end on payday, the person may have accrued earnings unless special arrangements are made with the employer. If annual leave or vacation pay is convertible to cash, it should be collected before the chapter 7 case is filed, as should any other nonexempt employee benefits that are convertible to cash.

Tax Refunds. In most states, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the person prior to the filing of a chapter 7 case. Therefore, if a tax refund is expected, a chapter 7 case should not be filed until after the refund has been received and validly disposed of. Even if the case is filed before the end of the tax year, if the person filing later receives a refund, the trustee may be enti¬tled to the portion of the refund earned prior to the filing of the case. The best practice, then, is to either file the chapter 7 case early in the tax year (but after the refund from the previous year has been received) or make arrangements to insure that there will be no tax refund for that year.

Sporting Goods. If the person filing owns guns, fishing gear, skis, cameras, or similar items of value that are not exempt, he or she will later have to turn them, or their cash equivalent, over to the trustee. Such items should be disposed of prior to the filing of the case, especially if they are of considerable value.

May a utility company refuse to provide service to a person if the company’s utility bill is discharged under chapter 7?

If, within 20 days after a chapter 7 case is filed, the person filing furnishes a utility company with a deposit or other security to insure the payment of future utility services, it is illegal for a utility company to refuse to provide utility service to the person after the case is filed, or to otherwise discriminate against the person, if its bill for past utility services is dis¬charged in the person’s chapter 7 case.

What should a person do if he or she moves before the chapter 7 case is completed?

The person should immediately notify the bankruptcy court in writing of the new address. Because most com¬munications between the person filing and the bankruptcy court are by mail, it is important that the bankruptcy court always have the person’s current address. Otherwise, the person may fail to receive important notices and the chapter 7 case may be dismissed. Many courts have change-of-address forms for persons to use when they move, and one of these forms should be obtained if a move is planned.

How is a person notified when his or her discharge has been granted?

The person is usually notified by mail. Most courts send a form called “Discharge of Debtor” to the person filing and to all creditors. This form is a copy of the court order discharging the person from his or her dischargeable debts, and it serves as notice that the discharge has been granted and that creditors are forbidden from attempting to collect discharged debts. It is usually mailed about four months after a chapter 7 case is filed.

What if a person wishes to repay a dischargeable debt?

A person may repay as many dischargeable debts as desired after filing a chapter 7 case. By repaying one debt, a person does not become legally obligated to repay any other debts. The only dischargeable debt that a person is legally obligated to repay is one for which the person and the creditor have signed what is called a “reaffirmation agreement.” If the person was not represented by an attorney in negotiating the reaffirmation agreement with the creditor, the reaffirmation agreement must be approved by the court to be valid. If the person was represented by an attorney in negotiating the reaffirmation agreement, the attorney must file the agreement and other required documents with the court in order for the agreement to be valid. If a dischargeable debt is not covered by a reaffirmation agreement, the person filing is not legally obligated to repay the debt, even if the person has made a payment on the debt since filing the chapter 7 case, has agreed in writing to repay the debt, or has waived the discharge of the debt in a waiver that was not approved by the bankruptcy court.

How long does a chapter 7 case last?

A successful chapter 7 case begins with the filing of the bankruptcy forms and ends with the closing of the case by the court. If there are no nonexempt assets for the trustee to collect, the case will most likely be closed shortly after the person filing receives his or her discharge, which is usually about four months after the case is filed. If there are nonexempt assets for the trustee to collect, the length of the case will depend on how long it takes the trustee to collect the assets and perform his or her other duties in the case. Most chapter 7 consumer cases with assets last about six months, but some last considerably longer.

What should a person do if a creditor later attempts to collect a debt that was discharged in his or her chapter 7 case?

When a chapter 7 discharge is granted, the court enters an order prohibiting creditors from later attempting to collect any discharged debt from the person filing. Any creditor who violates this court order may be held in contempt of court and may be liable to the person for damages. If a creditor later attempts to collect a dis¬charged debt from the person, the person should give the creditor a copy of his or her chapter 7 discharge and inform the creditor in writing that the debt was discharged in the chapter 7 case. If the creditor persists, the person should contact an attorney. If a creditor files a lawsuit on a discharged debt, it is important to inform the court in which the lawsuit is filed that the debt was discharged in bankruptcy. The lawsuit should not be ignored because even though a judgment entered on a discharged debt can later be voided, voiding the judgment may require the services of an attorney, which could be costly.

How does a chapter 7 discharge affect the liability of cosigners and other parties who may be liable to a creditor on a discharged debt?

A chapter 7 discharge releases only the person or persons who filed the chapter 7 case. The liability of any other party on a debt is not affected by a chapter 7 discharge. Therefore, a person who has cosigned or guaranteed a debt for the person filing is still liable for the debt even if the person filing receives a chapter 7 discharge with respect to the debt. The only exception to this rule is in community property states where the spouse of the person filing is released from certain community debts by the chapter 7 discharge.

What is the role of the attorney for the person filing a chapter 7 case?

The attorney for the person filing performs the following functions in a typical chapter 7 consumer case:

(1) Analyze the amount and nature of the debts owed by the person filing and determine the best remedy for the person’s financial problems.

(2) Advise the person filing of the relief available under chapter 7 and the other chapters of the Bankruptcy Code, and of the advisability of proceeding under each chapter.

(3) Assist the person in obtaining the required prebankruptcy budget and credit counseling briefing.

(4) Assemble the information and data necessary to prepare the chapter 7 forms for filing.

(5) Prepare the petitions, schedules, statements and other chapter 7 forms for filing with the bankruptcy court.

(6) Assist the person filing in arranging his or her assets so as to enable the person to retain as many of the assets as possible after the chapter 7 case.

(7) Filing the chapter 7 petitions, schedules, statements and other forms with the bankruptcy court, and, if necessary, notifying certain creditors of the commencement of the case.

(8) If necessary, assisting the person filing in reaffirming certain debts, redeeming personal property, setting aside mortgages or liens against exempt property, and otherwise carrying out the matters set forth in the statement of intention.

(9) Attending the meeting of creditors with the person and appearing with the person at any other hearings that may be held in the case.

(10) Assist the debtor in attending and completing the required instructional course on personal financial management.

(11) If necessary, preparing and filing amended schedules, statements, and other documents with the bankruptcy court in order to protect the rights of the person.

(12) If necessary, assisting the person in overcoming obstacles that may arise to the granting of a chapter 7 dis¬charge.

The fee paid, or agreed to be paid, to an attorney representing the person filing in a chapter 7 case must be disclosed to and approved by the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. Most attorneys collect all or most of their fee before the case is filed.

 
 

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QUESTIONS AND ANSWERS ABOUT CHAPTER 11

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What is Chapter 11?

Chapter 11 is the chapter of the Bankruptcy Code that permits a person or business to reorganize while obtaining protection from creditors. Chapter 11 of the Bankruptcy Code is entitled “Reorganization.” The Bankruptcy Code is the name given to that portion of the federal laws that deal with bankruptcy.

Who may file under Chapter 11?

Legally, anyone except a governmental agency, an estate, a nonbusiness trust, a stockbroker, a commodity broker, an insurance company, a bank, or an SBA-licensed small business investment company may file under Chapter 11. An individual may not file under Chapter 11 if he or she has had another bankruptcy case dismissed upon certain grounds within the last 180 days. As a practical matter, Chapter 11 is available to virtually any business or person able to afford the expenses of the case.

Are there any financial or insolvency requirements for filing under Chapter 11?

No. There are no financial or insolvency requirements for filing a voluntary Chapter 11 case other than the good faith requirement that the case be filed primarily for purposes of reorganization. A voluntary Chapter 11 debtor may be solvent or insolvent, its assets may exceed its liabilities by any amount (or vice versa), and its income may be substantial or nonexistent. The only financial restriction is the practical one of whether the cost of the case to the debtor is justified by the intended benefit. A voluntary Chapter 11 case is a Chapter 11 case filed by the debtor. An involuntary Chapter 11 case is a Chapter 11 case filed against the debtor by its creditors.

What is a debtor?

A debtor is a person or business concerning whom a case under the Bankruptcy Code has been commenced. A person or business who files a Chapter 11 case is referred to as a debtor. A debtor who qualifies may be treated as a small business debtor in a Chapter 11 case.

What is a small business debtor?

A small business debtor is a debtor who chooses to be treated as a small business debtor in a Chapter 11 case. To qualify as a small business debtor, a debtor must be engaged in a commercial or business activity (other than one whose primary activity is the business of owning or managing real property and activities incidental thereto) and the total amount of the debtor’s noncontingent liquidated secured and unsecured debts must not exceed $2,490,925 when the case is filed.

How does a debtor get to be treated as a small business debtor?

A qualifying debtor who checks the appropriate box on the Chapter 11 petition will be treated as a small business debtor unless and until the court orders otherwise.

What are the advantages of being treated as a small business debtor?

Being treated as a small business debtor expedites the handling of a Chapter 11 case by dispensing with the necessity of a creditor’s committee, by shortening the period for filing plans, and by simplifying the procedures for obtaining acceptance of a plan.

Are there any restrictions on the size or type of business that may file under Chapter 11?

No. A business filing under Chapter 11 may be very large, very small, or anywhere in between. Under Chapter 11, a business may be a sole proprietorship, a partnership, a limited liability company or a corporation of any size. Only those entities listed in the answer to question 2 above are not eligible to file under Chapter 11.

Does a person have to be engaged in business to qualify for Chapter 11 relief?

A person does not have to be engaged in business in the traditional sense to obtain Chapter 11 relief. A consumer is legally eligible to file under Chapter 11. As a practical matter, however, the person filing under Chapter 11 must have something to reorganize, rehabilitate, or liquidate before Chapter 11 relief can be granted. A debtor with substantial personal investments or assets may use Chapter 11 to reorganize or liquidate his or her investments or assets, even if he or she is not engaged in business in the traditional sense.

What are the court costs in a Chapter 11 case?

The Chapter 11 filing fee is $1,717, which must be paid to the clerk of the bankruptcy court when the case is filed. In addition, there is a quarterly fee payable to the U.S. Trustee that is based on the amount disbursed during the quarter by the debtor during the Chapter 11 case until such time as a plan is confirmed. The amount of the quarterly fee varies from $325 to $30,000 per quarter, depending on the amount of money or property that is disbursed under the plan.

What is a United States Trustee and what does it do in a Chapter 11 case?

The United States Trustee is an employee of the United States Department of Justice and serves independently of the bankruptcy court. The function of the United States Trustee in a Chapter 11 case is to monitor the case, appoint one or more creditors’ committees, call and preside at meetings of creditors, appoint a trustee in the case if ordered to do so by the bankruptcy court, and collect the quarterly fee. Generally, the United States Trustee takes appropriate action to insure that all reports and documents are filed, that all fees are paid, and that there is no undue delay in the case. Most Chapter 11 debtors are required to make periodic financial and operating reports to the United States Trustee during the course of the case, at least until a plan is confirmed. The United States Trustee should not be confused with the trustee that is sometimes appointed in a Chapter 11 case to operate the debtor’s business and take possession of the debtor’s property. A trustee in a Chapter 11 case is appointed by the United States Trustee, and is discussed in the answers to questions 28 and 29 below.

How much are the attorney’s fees in a Chapter 11 case?

The amount charged by an attorney for handling a Chapter 11 case for a small business debtor varies greatly depending on such matters as the size of the business, the type and extent of relief needed by the debtor, the attitude of the debtor’s creditors, the type of reorganization needed or contemplated by the debtor, and whether the owners of the business are in agreement or disagreement as to how the business should be reorganized. Unless the case is a simple one, most attorneys charge on an hourly basis and require a retainer to be paid in advance. The total fee charged for handling a small business Chapter 11 case may vary from $7,500 or less for a simple case to several times that amount for a complex case. All fees charged or collected by an attorney in connection with a Chapter 11 case, whether prior to or after the case is filed, must be approved by the bankruptcy court as being reasonable in amount.

What type of relief from creditors may a debtor obtain by filing under Chapter 11?

The filing of a Chapter 11 case automatically stays all foreclosures, collection actions, civil litigation, and creditor action of any kind against the debtor or the debtor’s property. The only significant proceedings not stayed by the filing of a Chapter 11 case are criminal proceedings against the debtor, divorce-related proceedings, and proceedings by governmental agencies to enforce police or regulatory powers. All other proceedings and acts against the debtor or the debtor’s property, whether in or out of court, are stayed. Even telephone calls or the sending of letters or bills to the debtor, if for the purpose of collecting a prepetition debt, are precluded by the automatic stay. An act or proceeding that is stayed is held in abeyance, and no further action may be taken in the matter without the approval of the bankruptcy court. The automatic stay that accompanies the filing of a Chapter 11 case normally gives the debtor a moratorium of several months on the payment of many of its debts.

What type of long-term relief may a debtor obtain under Chapter 11?

Long term relief in the form of either a reorganization of the debtor’s business or an orderly, debtor-controlled liquidation of the debtor’s assets may be obtained under Chapter 11. If the debtor’s business is reorganized, it may continue to function either in its present form or in a revised form, and its present creditors will be permitted to satisfy their claims only to the extent provided in the debtor’s plan of reorganization. A reorganization may consist of anything from an extension of time for the repayment of debts to a total restructuring of the business.

How long does a Chapter 11 case last?

A Chapter 11 case must be broken down into two phases: the pre-confirmation phase and the post-confirmation phase. The first phase, which is the phase prior to the confirmation of a plan, normally lasts from six to twelve months, although the time may vary depending on the condition of the debtor, the type of plan proposed by the debtor, and the reaction of creditors to the plan. The second phase, which is the phase where the confirmed plan is implemented and carried out by the debtor, normally lasts from three to five years, although it, too, may vary in duration. See the answer to question 52 below.

When does the debtor receive a discharge in a Chapter 11 case?

In the Chapter 11 case filed by a corporation, limited liability company, or other nonindividual, the debtor receives a discharge when a plan is confirmed by the court. The order of the court that confirms the plan also contains the debtor’s Chapter 11 discharge. In a Chapter 11 case filed by an individual (i.e., a natural person), a discharge is granted by the court separately, after the completion of payments under the plan. A discharge is a court order relieving the debtor from liability for certain debts. A debt that is discharged is a debt for which the debtor is no longer liable, except as provided in the Chapter 11 plan.

What debts are discharged by a Chapter 11 discharge?

The debts discharged in a Chapter 11 case depend on whether the debtor is an individual (i.e., a natural person) or a nonindividual (i.e., a corporation, partnership, etc.). The discharge received by an individual debtor in a Chapter 11 case discharges the debtor from all pre-confirmation debts except those that would not be dischargeable in a Chapter 7 case filed by the same debtor. The discharge received by a nonindividual debtor in a Chapter 11 case depends on whether the plan confirmed is a plan of reorganization or a plan of liquidation. The discharge received in the confirmation of a plan of reorganization discharges a nonindividual debtor from all scheduled pre-confirmation debts without exception. However, if the plan confirmed is a plan of liquidation and if the debtor does not engage in business after consummation of the plan, a nonindividual debtor does not receive a discharge.

Is a Chapter 11 discharge valid if the debtor later fails to carry out the plan?

The validity of a Chapter 11 discharge granted to a nonindividual debtor is not affected by the subsequent failure of a debtor to carry out the plan. As long as the order of confirmation is not revoked by the court (which seldom happens), the discharge received by a debtor of this type is valid even if the debtor later fails to fulfill its obligations under the Chapter 11 plan. As explained in the answer to question 16 above, an individual debtor does not receive a discharge until the completion of payments under the plan. However, under certain circumstances an individual debtor who has not completed payments under the plan may also receive a Chapter 11 discharge.

How is a Chapter 11 case commenced?

A voluntary Chapter 11 case is commenced by filing a voluntary petition with the clerk of the bankruptcy court requesting relief under Chapter 11 of the Bankruptcy Code. A number of other documents are usually filed with the petition. However, if it is necessary to file the case before the other documents can be prepared, most of the other documents may be filed within 14 days after the petition is filed. The filing fee must usually be paid when the petition is filed, although an individual debtor may pay the filing fee in installments. As a practical matter, however, debtors who are unable to pay the filing fee when a Chapter 11 case is filed seldom succeed under Chapter 11.

Where is a Chapter 11 case filed?

A Chapter 11 case is filed with the clerk of the bankruptcy court in the district where the debtor either resides, has its principal place of business, or has its principal assets.

Is the public informed of the filing of a Chapter 11 case?

When a Chapter 11 case is filed, all of the debtor’s creditors, shareholders, partners, and other persons directly involved with the debtor are notified. Notice of a Chapter 11 case is not normally published in newspapers or trade journals unless the filing of the case is considered newsworthy by the newspaper or journal. Generally, only the creditors, owners, and employees of a small business debtor are aware that the debtor has filed a Chapter 11 case.

Does a person or business filing under Chapter 11 have to continue to pay its debts after the case is filed?

Most Chapter 11 debtors receive a moratorium on the payment of most of their general unsecured debts for the period between the filing of the case and the confirmation of a plan. This period usually lasts for six to twelve months. During this period, however, it may be necessary to pay secured creditors and creditors whose property, goods, or services are needed to continue the debtor’s business.

How does a Chapter 11 case proceed after it has been filed?

After a Chapter 11 case has been filed, the debtor must file documents with the court listing the names and addresses of all of its creditors and owners, describing all of its property and other assets, and disclosing its financial condition. The debtor, as a “debtor in possession,” is usually permitted to continue to operate its business during the course of the case, but must comply with the requirements of Chapter 11 and the bankruptcy court in so doing. A creditor whose collateral is threatened may apply to the court for relief from the automatic stay or for adequate protection of its security interest. The debtor must prepare a Chapter 11 plan and file it with the court, usually within 180 days after the case is filed if the debtor is a small business debtor. The debtor must also prepare, file, and obtain court approval of a disclosure statement that adequately informs its creditors and interest holders of its financial condition and of its reorganizational plans. After the disclosure statement has been approved by the court, copies of the statement and the Chapter 11 plan are distributed to creditors and interest holders, who may then vote on whether to accept or reject the debtor’s plan. If the plan is accepted by at least one class of creditors whose claims are impaired (i.e., not paid in full, see question 45 below) under the plan, the plan may be confirmed by the court. After the completion of voting, a confirmation hearing is held wherein the court must decide whether to confirm the plan. If the plan is confirmed by the court it becomes effective and must be carried out and consummated by the debtor. After the plan has been consummated, a final report is filed and the case is closed.

What is an interest holder and what is its role in a Chapter 11 case?

An interest holder is the holder of an equity interest in the debtor. In Chapter 11 cases interest holders are often referred to as equity security holders. A shareholder is an interest holder of a corporation and a member is an interest holder of a limited liability company. If the rights of interest holders are dealt with in a Chapter 11 plan, interest holders are treated like creditors and are permitted to file proofs of their interests, vote on the acceptance or rejection of a plan, and participate in distribution under the plan. However, most plans in small business Chapter 11 cases deal only with creditors and do not deal with the rights of interest holders.

What is a “debtor in possession” and what is required of it in a Chapter 11 case?

A “debtor in possession” is the debtor in a Chapter 11 case in which a trustee has not been appointed. As a debtor in possession, the debtor is legally charged with the rights, duties, and obligations of a trustee in dealing with the debtor’s property and operating the debtor’s business for the benefit of its creditors and interest holders. As a debtor in possession, the debtor must abide by the rules and standards of Chapter 11 and the orders of the bankruptcy court. The failure of a debtor in possession to perform its obligations and duties may result in the appointment of a trustee, a court order terminating the debtor’s business, the conversion of the case to Chapter 7, or the dismissal of the case. A debtor ceases to be a debtor in possession when a plan is confirmed by the court.

What is cash collateral?

Cash collateral is cash or property that is easily converted to cash. Property such as bank accounts, checks, securities, and other cash equivalents constitutes cash collateral. Because it is easily disposed of, the use or sale of cash collateral is subject to strict rules in Chapter 11 cases. The use or sale of cash collateral is discussed in the answer to question 30 below.

Is the debtor permitted to operate its business during a Chapter 11 case?

Unless a trustee is appointed, the debtor may continue to operate its business during a Chapter 11 case as a debtor in possession. In operating its business during a Chapter 11 case, the debtor, as a debtor in possession, must abide by the requirements of Chapter 11 and the orders of the bankruptcy court.

What are the grounds for the appointment of a trustee in a Chapter 11 case?

There are three grounds for the appointment of a trustee in a Chapter 11 case: a trustee may be appointed for cause, if the appointment would be in the best interests of creditors, or if grounds exist to dismiss the case but the court determines that the appointment of a trustee, rather than dismissal, is in the best interests of creditors and the business. Cause for the appointment of a trustee includes substantial or continuing business or asset loss, gross mismanagement of the affairs of the debtor by current management, failure to comply with orders of the court, and several other grounds. A trustee is not appointed in most small business Chapter 11 cases.

What happens if a trustee is appointed in a Chapter 11 case?

If appointed, the trustee assumes most of the management functions of the debtor’s business and takes control of the debtor’s property. In effect, the trustee will replace the debtor’s current management in the operation of the debtor’s business during the course of the Chapter 11 case until a plan is confirmed. The trustee may also assume control over many aspects of the debtor’s Chapter 11 case. When a trustee is appointed in a Chapter 11 case, the debtor ceases to be a “debtor in possession.”

What limitations are placed on a debtor’s right to use, sell, or lease its property during a Chapter 11 case?

For purposes of use, sale, or lease during a Chapter 11 case, a debtor’s property is divided into two categories: cash collateral, and all other property. Until a plan is confirmed, the debtor, as a debtor in possession, may not use, sell, or lease cash collateral unless each creditor secured by the cash collateral consents to the proposed use, sale, or lease, or unless the court approves the proposed use, sale, or lease. Unless the court orders otherwise, the debtor may use, sell, or lease any of its property except cash collateral in the ordinary course of business during the case without prior notice to creditors or court approval. The debtor may use, sell, or lease property other than cash collateral outside the ordinary course of business during the case only after notice to any affected creditors and a court hearing.

May a debtor incur new debts and obtain new credit during a Chapter 11 case?

Yes. Unless the court orders otherwise, the debtor, as a debtor in possession, may obtain unsecured credit and incur unsecured debt in the ordinary course of business during a Chapter 11 case without court approval. Further, the unsecured credit or debt so obtained or incurred is payable as an administrative expense in the case, which means that those creditors get paid ahead of all other unsecured creditors. Court approval is required prior to obtaining or incurring any other type of credit or debt during the case. Thus, secured credit or unsecured credit not in the ordinary course of business may be obtained during the case only with the prior approval of the bankruptcy court.

May a debtor break its contracts or leases in a Chapter 11 case?

Yes. Under Chapter 11, the debtor, as a debtor in possession, may, at its option and without the consent of the other party, reject, assume, or assign most contracts or leases under which the debtor is obligated. This may be done either by motion during the Chapter 11 case or as part of a Chapter 11 plan.

What is a disclosure statement?

It is a document prepared by the proponent of a Chapter 11 plan that discloses financial and other information about the debtor and the proposed plan to the debtor’s creditors. A disclosure statement must contain information that is sufficient to enable creditors to make an informed decision on whether to accept or reject a proposed plan. A disclosure statement must be approved by the court before it is distributed to creditors. In a small business case, the debtor’s Chapter 11 plan may also serve as the disclosure statement if it contains adequate information about the debtor and the plan.

What is a Chapter 11 plan?

It is a written document that states the terms of how the debtor will deal with its creditors and, if necessary, interest holders. A Chapter 11 plan may be simple or complex, but it must comply with the legal requirements of Chapter 11. Most Chapter 11 plans are plans of reorganization, but a Chapter 11 plan may also be a plan of complete or partial liquidation, if desired.

How are secured creditors dealt with in a Chapter 11 plan?

Much depends on whether a creditor is fully secured or undersecured. The claim of a fully secured creditor must be paid in full in cash, and if deferred cash payments are made on the claim, interest must be paid to the creditor for not receiving its cash immediately. An undersecured creditor may elect to have its claim treated as being fully secured, and if such an election is made the claim must be paid in full in cash, but if deferred cash payments are made, interest does not usually have to be paid on the claim. If an undersecured creditor does not elect to have its claim treated as being fully secured, the secured portion of its claim must be paid in the same manner as a fully secured claim, while the unsecured portion may be paid as an unsecured claim.

What is the difference between a fully secured creditor and an undersecured creditor?

A fully secured creditor is the holder of a claim that is secured by property of a value that equals or exceeds the amount of the claim. An undersecured creditor is the holder of a claim that is secured by property of a value that is less than the amount of the claim. Suppose, for example, that the debtor has a truck valued at $10,000 that is subject to a $7,000 first mortgage held by Bank A and a $5,000 second mortgage held by Bank B. Because its $7,000 claim is secured by property valued at $10,000, Bank A’s claim is fully secured. Bank B’s $5,000 claim is undersecured because it is secured only by an interest in property valued at $3,000 (the $10,000 value of the truck less the $7,000 first mortgage lien against it). An undersecured creditor is treated as having two claims, one secured and the other unsecured. However, in a Chapter 11 case, an undersecured creditor may waive its unsecured claim and elect to have its claim treated as being fully secured by exercising what is called a Section 1111(b) election.

How are unsecured creditors dealt with in a Chapter 11 plan?

The answer depends on whether a creditor has a priority or a nonpriority claim. Priority claims must be paid in full in cash under a Chapter 11 plan, unless a creditor agrees otherwise. Further, all priority claims except tax claims must be paid when the plan is confirmed or shortly thereafter, unless a particular creditor agrees to accept payments under the plan. Tax claims may be paid in regular cash payments with interest over a period not exceeding 5 years from the date the case is filed. An unsecured creditor with a nonpriority claim must be paid at least as much as the creditor would have received had the debtor filed under Chapter 7, and the payments need not be in cash. Nonpriority claims may be paid in cash, property, or securities of the debtor or the successor to the debtor under the plan.

How does a priority unsecured claim differ from a nonpriority unsecured claim?

A priority unsecured claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. Priority unsecured claims include the following types of claims: the administrative expenses of the Chapter 11 case, wage claims of up to $12,475 per employee, wage benefit claims of employees up to certain limits, consumer deposit claims of up to $2,775 each, most divorce-related claims, and tax claims. Administrative expenses include the fees of the debtor’s attorney and unsecured debts incurred in the ordinary course of operating the debtor’s business during the case. A nonpriority unsecured claim is a general unsecured claim incurred against the debtor prior to the filing of the Chapter 11 case. The claims of most trade creditors are nonpriority unsecured claims.

May someone other than the debtor file a Chapter 11 plan?

Yes, but only under certain conditions. If the debtor chooses to be treated as a small business debtor, only the debtor may file a plan for the first 180 days after the case is filed and creditors then have 120 days in which to file a plan. Otherwise, the debtor has the exclusive right to file a Chapter 11 plan for the first 120 days after the filing of the case, unless a trustee is appointed during the 120-day period. If the debtor files a plan during the 120-day exclusive period, the debtor must gain acceptance of its plan by creditors and interest holders within 180 days after the case is filed in order to retain the exclusive right to file a plan. A party other than the debtor may file a plan if a trustee is appointed in the case, if the debtor fails to file a plan within the exclusive period, or if the debtor fails to gain acceptance of a plan within 180 days after the case is filed.

Who may file a Chapter 11 plan if the debtor fails to do so?

If any of the conditions described in the answer to the previous question occur entitling a party other than the debtor to file a Chapter 11 plan, any party to the case may file a plan, including a creditor, an interest holder, or a creditors’ committee. The United States Trustee may not file a plan.

What is a creditors’ committee?

It is a committee appointed by the United States Trustee that represents the interests of creditors in the case. A creditor’s committee must be appointed in a Chapter 11 case unless the debtor chooses to be treated as a small business debtor and requests that a creditors’ committee not be appointed. While other committees may be appointed upon request, the only committee, if any, appointed in most small business cases is the unsecured creditors’ committee, which represents the interests of nonpriority unsecured creditors in the case. The unsecured creditors’ committee is usually composed of the seven largest unsecured creditors who are willing to serve on the committee.

What must a creditor do to become entitled to payment in a Chapter 11 case?

For a creditor to be entitled to payment in a Chapter 11 case, the creditor’s claim must be filed and allowed by the court. If a creditor’s claim is listed in the schedules filed by the debtor in the case, and is not listed as being disputed, contingent, or unliquidated, then the claim is considered to be filed in the case in the amount and priority listed on the debtor’s schedules. Otherwise, a creditor must file a document called a “proof of claim” in order for its claim to be filed. Once a claim is filed, either by virtue of being included in the debtor’s schedules or by the filing of a “proof of claim,” the claim is automatically allowed by the court unless someone files an objection to the allowance of the claim, in which case the court must hold a hearing to determine whether to allow the claim. If a creditor’s claim is correctly listed in the debtor’s schedules and if no one files an objection to the claim, the claim will automatically be allowed in the case, even if the creditor does nothing. It is up to the creditor, however, to check and insure that its claim is correctly listed on the debtor’s schedules.

When do creditors vote on whether to accept or reject a Chapter 11 plan?

Voting on a plan begins after the court approves or conditionally approves a disclosure statement prepared by the party proposing the plan. Each eligible creditor is mailed a ballot for voting on the plan. The ballot is accompanied by a copy of the disclosure statement and a copy or summary of the proposed plan. The court sets a deadline for voting on the plan, and a creditor’s ballot must be filed with the court prior to the voting deadline in order to be counted.

What creditors are eligible to vote on the acceptance or rejection of a Chapter 11 plan?

Creditors must qualify both individually and by class in order to be permitted to vote on the acceptance or rejection of a plan. Individually, a creditor’s claim must be allowed by the court in order to be eligible to vote. The allowance requirements for claims for purposes of voting are the same as the allowance requirements for purposes of payment, and are described in the answer to question 42 above. Except for certain priority claims, a Chapter 11 plan must put each claim in a class. To be eligible to vote on the acceptance or rejection of a plan, a class of claims must be impaired by the plan and must receive something under the plan. For a class of claims to be impaired by a plan, at least one claim in the class must be impaired under the plan. Classes of unimpaired claims are presumed to have accepted the plan and classes of claims receiving nothing under the plan are presumed to have rejected the plan. Creditors in these classes of claims do not vote on the acceptance or rejection of a plan. Creditors with allowed claims in all other classes of impaired claims are eligible to vote on the acceptance or rejection of a plan.

What is an impaired claim?

An impaired claim is a claim that is impaired by the terms of a Chapter 11 plan. A claim is impaired by a plan if the rights of the creditor to enforce its claim are diminished or materially changed by the plan. A claim that is not paid in full under a plan is an impaired claim. Even if a claim is paid in full under a plan, the claim is considered to be impaired if the original maturity date or any other obligation contained in the agreement upon which the claim is based is not met under the terms of the plan. However, a debtor is permitted to cure a defaulted note, mortgage, or other obligation so that the creditor’s claim is no longer impaired. A defaulted obligation is deemed to be cured and not impaired by a plan if the obligation is made current, the creditor is compensated for any expenses incurred by reason of the debtor’s default, and the rights of the creditor under the obligation are thereafter unaltered.

How is it determined whether a plan is accepted or rejected by creditors?

All voting on the acceptance or rejection of a plan is by class. The creditors in each class of impaired claims vote on whether the plan will be accepted by that class of claims. To be accepted by a class of claims, a plan must be accepted by creditors holding at least two-thirds in dollar amount and one-half in number of the claims in the class that actually vote on the acceptance or rejection of the plan. At least one class of impaired claims must vote to accept a plan before the plan can be confirmed by the court.

What happens when a plan is confirmed by the court?

To become legally effective, a Chapter 11 plan must be confirmed by the bankruptcy court. A plan is confirmed by the bankruptcy court when the bankruptcy judge signs an order approving the plan and ruling that the debtor and all creditors and interest holders are bound by the provisions of the plan.

When and under what circumstances may a plan be confirmed by the bankruptcy court?

After creditors and interest holders have voted on whether to accept or reject a proposed Chapter 11 plan, the bankruptcy court will hold a hearing for the purpose of determining whether to confirm the plan. This hearing is called the confirmation hearing. At the confirmation hearing, the party proposing the plan, which is usually the debtor, must present evidence showing that the plan complies with the Chapter 11 confirmation requirements. A plan may be confirmed by the court either through the regular confirmation method or through what is called a “cramdown.” The regular method of confirmation is used when the plan has been accepted by the holders of every class of impaired claims and interests. The cramdown method of confirmation is used when the plan has been rejected by the holders of one or more classes of impaired claims or interests, but has been accepted by the holders of at least one class of impaired claims. A plan that has not been accepted by the holders of at least one class of impaired claims cannot be confirmed by the court.

How does confirmation of a plan under a “cramdown” differ from the regular method of confirmation?

When the holders of every class of impaired claims vote to accept a plan and confirmation is sought under the regular confirmation method, the plan will be confirmed by the court if the debtor proves that it has complied with the Chapter 11 confirmation requirements. When confirmation of a plan is sought under a cramdown, in addition to satisfying the Chapter 11 confirmation requirements, the debtor must show that the plan does not discriminate unfairly against any class of claims who have not accepted the plan and that the plan is fair and equitable with respect to each class of claims that has not accepted the plan. It is more difficult to obtain confirmation under a cramdown than under the regular confirmation method.

What happens if the court does not confirm a Chapter 11 plan?

If the court decides not to confirm a Chapter 11 plan, it will usually permit the party proposing the plan to modify the plan so that it can be confirmed. If a Chapter 11 plan is modified, it is usually necessary to hold another confirmation hearing on the modified plan. If the court refuses to confirm any plan, the Chapter 11 case must either be dismissed or converted to Chapter 7.

What happens after a Chapter 11 plan has been confirmed by the court?

After a Chapter 11 plan is confirmed by the court, the plan must be implemented and carried out, either by the debtor or by the successor to the debtor under the plan. If the plan calls for the debtor to be reorganized or for a new corporation to be formed, this function must be carried out first. If the plan calls for property to be transferred or for liens to be created or modified, this must also be done. And of course, the claims of creditors must be paid in the manner specified in the plan.

For how long a period may a Chapter 11 plan run?

There are no specified limits on the length of a Chapter 11 plan. A Chapter 11 plan must be long enough to convince the court and creditors that the debtor is making a good faith effort to pay as much of its debt as is realistically possible. On the other hand, the plan must not be so long that it does not appear feasible to the court. Typically, it takes from three to five years to carry out and consummate the Chapter 11 plan of a small business debtor.

What happens if the debtor is unable to comply with or carry out the provisions of a plan after it has been confirmed by the court?

If the debtor, or the successor to the debtor under the plan, is unable to comply with the provisions of a confirmed plan, the plan may be amended so that it can be complied with, if sufficient grounds exist for such an amendment. Otherwise, the Chapter 11 case may be dismissed or converted to Chapter 7. If the debtor, or the successor to the debtor under the plan, fails to carry out its obligations under the plan, creditors may sue, or foreclose on the property of, the debtor or its successor either in the bankruptcy court or in other courts.

What happens when all of the provisions and requirements of a Chapter 11 plan have been carried out?

When all of the provisions and requirements of a Chapter 11 plan have been fulfilled or carried out, the plan is said to have been consummated. When a plan has been consummated, a final report and accounting must be filed, and the case will be closed by the court.

 
 

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QUESTIONS AND ANSWERS ABOUT CHAPTER 13 CASES

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What is a chapter 13 bankruptcy case and how does it work?

A chapter 13 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 13 of the Bankruptcy Code. Chapter 13 is the chapter of the Bankruptcy Code which allows a person to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy Code is the federal law that deals with bankruptcy. A person who files a chapter 13 case is called a debtor. In a chapter 13 case, the debtor must submit to the court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the court to become effective. If the court approves the debtor’s plan, most creditors will be prohibited from collecting their claims from the debtor. The debtor must make regular payments to a person called the chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan. Upon completion of the payments called for in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.

How does a chapter 13 case differ from a chapter 7 case?

The basic difference between a chapter 7 case and a chapter 13 case is that in a chapter 13 case the debtor can force creditors to permit cure of payment defaults. For example, if the debtor is 12 months behind in mortgage payments, and his home is in foreclosure, the debtor can use Chapter 13 to force his bank lender to permit him to slowly (over as many as 5 years) get caught up on delinquent payments. In Chapter 7, it is much harder to force the bank lender to permit cure if the bank lender is unwilling. Also, as a purely theoretical matter, in Chapter 7 cases, the debtor’s nonexempt property (if any exists) is liquidated, while in chapter 13 cases a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is feasible. But as a practical matter, in most chapter 7 cases, all of debtors property is exempt and no property of the debtor is liquidated. A chapter 13 case is useful when the debtor has property that cannot be exempted, because in chapter 13 the debtor keeps all property, exempt and non-exempt. A chapter 13 case normally lasts longer than a chapter 7 case.

When is a chapter 13 case preferable to a chapter 7 case?

Chapter 13 is usually preferable for a person who - (1) wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time, (2) has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a chapter 7 case, (3) is not eligible under means testing to maintain a chapter 7 case, (4) is not eligible for a chapter 7 discharge, (5) has one or more substantial debts that are dischargeable under chapter 13 but not under chapter 7, or (6) has sufficient assets with which to repay most of his or her debts, but needs temporary relief from credi¬tors in order to do so.

How does a chapter 13 case differ from a private debt consolidation service?

In a chapter 13 case, the bankruptcy court can provide relief to the debtor that a private debt consolidation service cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor’s property, to force unsecured creditors to accept a chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.

What is a chapter 13 discharge?

It is a court order releasing a debtor from all of his or her dischargeable debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of chapter 13 discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan, and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not be held accountable. A full chapter 13 discharge discharges a few more debts than a chapter 7 discharge, while a partial chapter 13 discharge is similar to a chapter 7 discharge.

What types of debts are not dischargeable in chapter 13 cases?

A full chapter 13 discharge granted upon the completion of all payments required in the plan discharges a debtor from all debts except:

(1) debts that were paid outside of the plan and not covered in the plan,

(2) debts for domestic support obligations, which includes debts for child support and alimony,

(3) debts for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated,

(4) most tax debts,

(5) debts for restitution or criminal fines included in a sentence imposed on the debtor for conviction of a crime,

(6) debts for fraud, embezzlement or larceny,

(7) debts for student loans or educational obligations unless a court rules that not discharging the debt would impose an undue hardship on the debtor and his or her dependents,

(8) debts for damages caused by willful or malicious conduct by the debtor,

(9) installment debts whose last payment is due after the completion of the plan,

(10) debts incurred while the plan was in effect that were not paid under the plan,

(11) debts owed to creditors who did not receive notice of the chapter 13 case, and

(12) long-term debts upon which payments were made under the plan.

A partial chapter 13 discharge, which is granted when a debtor is unable to complete the payments under a plan due to circumstances for which he or she should not be held accountable, discharges the debtor from all debts except:

(1) secured debts (i.e., debts secured by mortgages or liens),

(2) debts that were paid outside of the plan and not covered in the plan,

(3) installment debts whose last payment is due after the completion of the plan,

(4) debts incurred while the plan was in effect that were not paid under the plan,

(5) debts owed to creditors who did not receive notice of the chapter 13 case,

(6) debts that are not dischargeable in a chapter 7 case, and

(7) long-term debts upon which payments were made under the plan.

What is a chapter 13 plan?

It is a written plan presented to the bankruptcy court by a debtor that states how much money or prop-erty the debtor will pay to the chapter 13 trustee, how long the debtor’s payments to the chapter 13 trustee will continue, how much will be paid to each of the debtor’s creditors, and certain other matters.

What is a chapter 13 trustee?

A chapter 13 trustee is a person appointed by the United States trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor’s plan, and administer the debtor’s chapter 13 case until it is closed. In some cases the chapter 13 trustee is required to perform certain other duties. The debtor is required to cooperate with the chapter 13 trustee.

What debts may be paid under a chapter 13 plan?

Any debts whatsoever, whether they are secured or unsecured. Even debts that are nondischargeable, such as debts for student loans or child support, may be paid under a chapter 13 plan.

Must all debts be paid in full under a chapter 13 plan?

No. While priority debts, such as debts for domestic support obligations and taxes, and fully secured debts must be paid in full under a chapter 13 plan, only an amount that the debtor can reasonably afford must be paid on most debts. The unpaid balances of most debts that are not paid in full under a chapter 13 plan are discharged upon the completion or termination of the plan.

Must all unsecured debts be treated alike under a chapter 13 plan?

No. If there is a reasonable basis for doing so, unsecured debts (or claims) may be divided into separate classes and treated differently. It may be possible, therefore, to pay certain unsecured debts in full, while paying significantly less on others.

Is there a difference between a debt and a claim?

No, not in a practical sense. They are different terms for an obligation owed by the debtor to a creditor. A claim is the right of a creditor to the payment of an obligation by the debtor. A debt is a liability of a debtor on an obligation to a creditor. For example, if the debtor owes $1,000 to the bank, the $1,000 obligation is viewed as a debt by the debtor and as a claim by the bank.

How much of a debtor’s income must be paid to the chapter 13 trustee under a chapter 13 plan?

Usually all of the disposable income of the debtor and the debtor’s spouse for a 3 or 5 year period must be paid to the chapter 13 trustee. Disposable income is income received by the debtor and his or her spouse that is not deemed to be necessary for the support of the debtor and his or her dependents.

When must the debtor begin making payments to the chapter 13 trustee and how are the payments made?

The debtor must begin making payments to the chapter 13 trustee within 30 days after the chapter 13 case is filed with the court. The payments must be made regularly, usually on a weekly, bi-weekly, or monthly basis. If the debtor is employed, some courts require that the payments to be made directly to the chapter 13 trustee by the debtor’s employer.

How long does a chapter 13 plan last?

The required length of a chapter 13 plan depends on the debtor’s income. If the debtor’s annual income is less than the median family income for the debtor’s state and family size, the length of the plan must be 3 years, unless the debtor can justify a longer period, which may not exceed 5 years. If the debtor’s annual income exceeds the median family income, the length of the plan must be 5 years unless all unsecured claims can be paid off in a shorter period. The debtor’s annual income is his or her current monthly income multiplied by 12.

Is it necessary for all creditors to approve a chapter 13 plan?

No. To become effective, a chapter 13 plan must be approved by the court, not by the creditors. The court, however, cannot approve a plan unless each secured creditor is dealt with in the manner described in the answer to Question 18 below. Also, unsecured creditors are permitted to file objections to the debtor’s plan, and these objections must be ruled on by the court before it can approve the debtor’s chapter 13 plan.

What is the difference between a secured creditor and an unsecured creditor?

A secured creditor is a creditor whose claim against the debtor is secured by a valid mortgage, lien, or other security interest against property that is owned by the debtor. An unsecured creditor is a creditor whose claim against the debtor is not secured by a valid mortgage, lien or security interest against the debtor’s property. In other words, a secured creditor has collateral for its claim and an unsecured creditor does not. The basic difference is that a secured creditor may collect all or a portion of its claim from its collateral, while an unsecured creditor may not. It is common for the amount of a secured creditor’s claim to exceed the value of its collateral. This type of creditor is called a partially-secured (or undersecured) creditor. In chapter 13 cases the claims of most partially-secured creditors are divided into secured and unsecured portions. For example, a partially-secured creditor with a $2,000 claim against the debtor that is secured by collateral that is worth $1,500 has a $1,500 secured claim and a $500 unsecured claim. The only types of partially-secured creditors whose claim may not be treated in this manner are creditors secured by a mortgage on the debtor’s home and certain creditors who advanced funds for the purchase of automobile or other personal property of the debtor. It is important to differentiate between secured and unsecured claims because they are treated quite differently in chapter 13 cases. Secured claims must be paid in full with interest, while only amounts that the debtor can reasonably afford need be paid to the holders of unsecured claims (except priority claims – see Question 36, infra).

How are the claims of secured creditors dealt with in chapter 13 cases?

There are four methods of dealing with secured claims in chapter 13 cases: (1) the creditor may accept the debtor’s plan, (2) the creditor may retain its lien and be paid the full amount of its secured claim in equal monthly payments under the plan, (3) the debtor may surrender the collateral to the creditor, or (4) the creditor may be paid or dealt with outside the plan. It is important to understand that most partially-secured creditors have a secured claim only to the extent of the value of their collateral. If the debtor is in default to a secured creditor, the default must be cured (made current) within a reason¬able time.

How are cosigned or guaranteed debts handled in chapter 13 cases?

A cosigned or guaranteed debt is a debt of the debtor that has been cosigned or guaranteed by another person. If a cosigned or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debt from the cosigner or guarantor. However, if a consumer debt is not being paid in full under the plan, the creditor may collect the unpaid portion of the debt from the cosigner or guarantor. A consumer debt is a nonbusiness debt. Creditors may collect business debts from cosigners or guarantors even if the debts are to be paid in full under the debtor’s plan.

Who is eligible to file a chapter 13 case?

Any individual (i.e., natural person) is eligible to file a chapter 13 case if he or she - (1) resides in, does business in, or owns property in the United States, (2) has regular income, (3) has unsecured debts of less than $383,175, (4) has secured debts of less than $1,149,525, (5) is not a stockbroker or a commodity broker, (6) has not intentionally dismissed another bankruptcy case within the last 180 days, and (7) has received a briefing from an approved credit counseling agency within the last 180 days (unless this requirement is not in effect in the local bankruptcy court). Corporations, partnerships, limited liability companies, and other business entities are not eligible to file a chapter 13 case.

May a husband and wife file a joint chapter 13 case?

A husband and wife may file a joint chapter 13 case if each of them meets the requirements listed in the answer to Question 20 above, except that only one of them need have regular income and their combined debts must meet the debt limitations described in the answer to Question 20 above.

When should a husband and wife file a joint chapter 13 case?

If both spouses are liable for any significant debts, they should file a joint chapter 13 case, even if only one of them has income. Also, if both of them have regular income, they should file a joint case.

May a self-employed person file a chapter 13 case?

Yes. A self-employed person meeting the eligibility requirements listed in the answer to Question 20 above may file a chapter 13 case. A debtor engaged in business may continue to operate the business during his or her chapter 13 case.

May a chapter 7 case be converted to a chapter 13 case?

Yes. An existing chapter 7 case may be converted to a chapter 13 case at any time at the request of the debtor if the case has not previously been converted from chapter 13 to chapter 7.

Where is a chapter 13 case filed?

A chapter 13 case is filed in the office of the clerk of the bankruptcy court in the district where the debtor has lived or maintained a principal place of business for the greatest portion of the last 180 days. The bankruptcy court is a fed¬eral court and is a unit of the United States district court.

What fees are charged in a chapter 13 case?

There is a $310 fee charged when the case is filed, which may be paid in installments if necessary. In addition, the chapter 13 trustee assesses a fee of 10 percent on all payments made by the debtor under the plan. Thus, if a debtor pays a total of $5,000 under a chapter 13 plan, the total amount of fees charged in the case will be $810 (a $500 trustee’s fee, plus the $310 filing fee). These fees are in addition to the fee charged by the debtor’s attorney.

Will a person lose any property if he or she files a chapter 13 case?

Usually not. In a chapter 13 case, creditors are usually paid out of the debtor’s income and not from the debtor’s property. However, if a debtor has valuable nonexempt property and has insufficient income to pay enough to creditors to satisfy the court, some of the debtor’s prop¬erty may have to be used to pay creditors.

How does the filing of a chapter 13 case affect collection proceedings and foreclosures that are filed against the debtor?

The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor’s property. This stay is called the automatic stay. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors may be notified sooner, if necessary. Most creditors are prohibited from proceeding against the debtor during the entire course of the chapter 13 case. If the debtor is later granted a chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed. If the debtor has had a prior bankruptcy case dismissed within the past year, he or she may be denied the protection of the automatic stay.

May a person whose debts are being administered by a financial counselor file a chapter 13 case?

Yes. A financial counselor has no legal authority to prevent a person from filing any type of bankruptcy case, including a chapter 13 case.

How does filing a chapter 13 case affect a person’s credit rating?

It may worsen it, at least temporarily. However, if most of a person’s debts are ultimately paid off under a chapter 13 plan, that fact may be taken into account by credit reporting agencies. If very little is paid on most debts, the effect of a chapter 13 case on a person’s credit rating may be similar to that of a chapter 7 case.

Are the names of persons who file chapter 13 cases published?

When a chapter 13 case is filed, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers do not usually publish the names of persons who file chapter 13 cases.

Is a person’s employer notified when he or she files a chapter 13 cas

In most cases, yes. Many courts require a debtor’s employer to make payments to the chapter 13 trustee on the debtor’s behalf. Also, the chapter 13 trustee may contact an employer to verify the debtor’s income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments.

No. A chapter 13 case is a civil proceeding and not a criminal proceeding. Therefore, a person does not lose any legal or constitutional rights by filing a chapter 13 case.

May employers or government agencies discriminate against persons who file chapter 13 cases?

No. It is illegal for either private or governmental employers to discriminate against a person as to employ¬ment because that person has filed a chapter 13 case. It is also illegal for local, state, or federal governmental agen¬cies to discriminate against a person as to the granting of licenses, permits, student loans, and similar grants because that person has filed a chapter 13 case.

What is required for court approval of a chapter 13 plan?

The court will approve and confirm a chapter 13 plan if it finds that: (1) all required fees, charges and deposits have been paid, (2) all priority claims will be paid in full under the plan, (3) if the plan creates different classes of claims, it provides the same treatment for each claim within a particular class, (4) the plan was proposed in good faith, (5) each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed a chapter 7 case, (6) the debtor will be able to make the required payments and comply with the plan, and (7) each secured creditor is dealt with in one of the four methods described in the answer to Question 18 above.

What is a priority claim?

A priority claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. It is a claim that must be paid before other unsecured claims are paid. Examples of priority claims are tax claims, wage claims, and claims for alimony, maintenance or support. Claims for administrative fees, such as the chapter 13 trustee’s fee, the filing fee, and the fee of the debtor’s attorney, are also priority claims in chapter 13 cases.

When does the debtor have to appear in court in a chapter 13 case?

Most debtors have to appear in court at least twice: once for a hearing called the meeting of creditors, and once for a hearing on the confirmation of the debtor’s chapter 13 plan. The meeting of creditors is usually held about a month after the case is filed. The confirmation hearing may be held on the same day as the meeting of creditors or at a later date, depending on the scheduling practices in the local court. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary.

What if the court does not approve a debtor’s chapter 13 plan?

If the court will not approve the plan initially proposed by a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified so as become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to a chapter 7 case or dismiss the case.

How are the claims of unsecured creditors handled in chapter 13 cases?

Unsecured creditors, including those with priority claims, must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within that period are barred from doing so, and upon completion of the plan their claims will be discharged. The debtor may file a claim on behalf of a creditor, if desired. After the claims have been filed, the debtor may file objections to any claims that he or she disputes. When the claims have been approved by the court, the chapter 13 trustee begins paying unsecured creditors in the manner and in the amounts provided for in the debtor’s chapter 13 plan. Payments to secured creditors, priority creditors, and special classes of unsecured creditors may begin earlier, if desired.

What if the debtor is temporarily unable to make the chapter 13 payments?

If the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under a chapter 13 plan, the plan can usually be modified so as to enable the debtor to resume the payments when he or she is able to do so. If it appears that the debtor’s inability to make the required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to a chapter 7 case.

What if the debtor incurs new debts or needs credit during a chapter 13 case?

Only two types of credit obligations or debts incurred after the filing of the case may be included in a chapter 13 plan. These are: (1) debts for taxes that become payable while the case is pending, and (2) consumer debts arising after the filing of the case that are for property or services necessary for the debtor’s performance under the plan and that are approved in advance by the chapter 13 trustee. All other debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan. Some courts issue an order prohibiting the debtor from incurring new debts during the case unless they are approved in advance by the chapter 13 trustee. Therefore, the approval of the chapter 13 trustee should be obtained before incurring credit or new debts after the case has been filed. The incurrence of regular debts, such as debts for telephone service or utilities, do not require the trustee’s approval.

What should the debtor do if he or she moves while the case is pending?

The debtor should immediately notify the bankruptcy court and the chapter 13 trustee in writing of the new address. Most communications in a chapter 13 case are by mail, and if the debtor fails to receive an order of the court or a notice from the chapter 13 trustee because of an incorrect address, the case may be dismissed. Many courts have change-of-address forms that may be used if the debtor moves.

What if the debtor later decides to discontinue the chapter 13 case?

The debtor has the right to either dismiss a chapter 13 case or convert it to a chapter 7 case at any time for any rea¬son. However, if the debtor simply stops making the required chapter 13 payments, the court may compel the debtor or the debtor’s employer to make the payments and to comply with the orders of the court. Therefore, a debtor who wishes to discontinue a chapter 13 case should do so through his or her attorney.

What happens if a debtor is unable to complete the chapter 13 payments?

A debtor who is unable to complete the chapter 13 payments has three options: (1) dismiss the chapter 13 case, (2) convert the chapter 13 case to a chapter 7 case, or (3) if the debtor is unable to complete the payments due to circum¬stances for which he or she should not be held accountable, close the case and obtain a partial chapter 13 discharge as described in the answer to Question 6 above.

What is the role of the debtor’s attorney in a chapter 13 case?

The debtor’s attorney performs the following functions in a typical chapter 13 case:

(1) Examining the debtor’s financial situation and determining whether a chapter 13 case is a feasible alternative for the debtor, and if so, whether a single or a joint case should be filed.

(2) Assist the debtor in obtaining the required prebankruptcy briefing on budget and credit counseling.

(3) Assisting the debtor in the preparation of a budget.

(4) Examining the liens or security interests of secured creditors to ascertain their validity or avoidability, and taking the legal steps necessary to protect the debtor’s interest in such matters.

(5) Devising and implementing methods of dealing with secured creditors.

(6) Assisting the debtor in devising a chapter 13 plan that meets the needs of the debtor and is acceptable to the court.

(7) Preparing the necessary pleadings and chapter 13 forms.

(8) Filing the chapter 13 forms and pleadings with the court.

(9) Attending the meeting of creditors, the confirmation hearing, and any other court hearings required in the case.

(10) Assisting the debtor in obtaining court approval of a chapter 13 plan.

(11) Checking the claims filed in the case, filing objections to improper claims, and attending court hearings thereon.

(12) Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case.

(13) Assisting the debtor in attending and completing the required instructional course on personal financial management.

(14) Assisting the debtor in obtaining a discharge upon the completion or termination of the plan.

The fee charged by an attorney for representing a debtor in a chapter 13 case must be reviewed and approved by the bankruptcy court. This rule is followed whether the fee is paid to the attorney prior to or after the filing of the case, and whether it is paid to the attorney directly by the debtor or by the chapter 13 trustee. The court will not approve a fee unless it finds the fee to be reasonable.

What will happen to the credit of the person filing a chapter 13 case?

The credit score of most persons will go up (increase) shortly after bankruptcy. There are a couple of reasons for this. First, when a person completes a bankruptcy case, new lenders know that in most cases the person cannot thereafter file bankruptcy for another eight years. This fact protects new lenders. Also, when a person completes a bankruptcy case, the person has more disposable income (since most or all debt was discharged) to pay new lenders. This fact also protects new lenders. Persons filing for bankruptcy should be able to get credit cards fairly quickly after bankruptcy. Persons filing for bankruptcy should also be able to get a car loan fairly quickly after bankruptcy, often at very good interest rates. Persons filing for bankruptcy should be able to get a home loan about two years after bankruptcy. Do not make the mistake of accepting credit cards that you secure with your own cash or low limit credit cards, because this may actually hurt your credit score.

 
 

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TAX RESOLUTION

We always first determine if we can discharge your taxes in bankruptcy. Tax discharge in bankruptcy is incredibly and notoriously complex. If you have tax debts that you think might be dischargeable in bankruptcy, be sure to hire a bankruptcy attorney with expertise in tax discharge. To begin to understand how complex it can be to discharge taxes in bankruptcy, look here and here. We at Thompson │ Lossada are expert in bankruptcy tax discharge.

If we can’t discharge your student loans in bankruptcy, we will seek non-bankruptcy remedies. We will investigate the possibility of administrative discharge, closed school discharge, disability discharge, false certification discharge, unpaid refund discharge, Perkins Loan cancellation and discharge, borrower defense discharge, loan rehabilitation, teacher and other loan forgiveness, deferment and forbearance, and if possible, we’ll advise strategic default and defend against any collection lawsuits. In sum, we have several tools to help you manage and possibly discharge your student debt. Please call us if you need help.


QUESTIONS AND ANSWERS ABOUT TRADEMARK

1. What is tax resolution?

Tax resolution is the area of law dealing with taxpayer rights to get tax relief.

2. Why should I hire a lawyer rather than accountant?

There are two reasons. First, in order to get tax relief, you or your representative must argue your case to the IRS. Lawyers are trained to argue and make a client’s case in an adversarial setting. Tax accountants are not trained to do this – tax accountants are trained to prepare tax returns. Second, and importantly, with a lawyer you have the benefit of the attorney-client privilege. This means you can strategize with your lawyer/representative and be confident that your conversations will forever be confidential.

3. In live in Colorado, can you still help me even though your office is in Los Angeles?

Yes, because IRS law is federal law.

4. I have not filed my tax returns for several years. Can you help me?

Yes, we will prepare and file your tax returns for you. In fact, in order to get tax relief from the IRS, you must file all past due tax returns.

5. Can the IRS pursue me in my personal capacity if my corporation owes taxes?

Yes, especially in the case of payroll taxes. The IRS takes a very dim view of corporate employers who do not withhold and forward payroll taxes. Congress has given the IRS enhanced powers to recover payroll taxes. If the IRS is after you for payroll taxes, you should seek professional help immediately.

6. Can I be held responsible even though my husband prepared and filed our tax returns?

Maybe. If you were generally aware of household income and expenses, then you are probably responsible. But if your spouse hid income from you and the IRS, or committed income tax fraud without your knowledge, you might be able to claim the “innocent spouse” defense.

7. Can I discharge my taxes in bankruptcy?

In some cases, yes, but you must meet very detailed and technical requirements. You need a bankruptcy attorney that specializes in tax discharge. We here at Thompson │Lossada are experts at tax discharge in bankruptcy, and we will get your taxes discharged in bankruptcy if you meet the requirements.

8. Can I pay less than I owe to the IRS and have the matter settled?

Yes, with an Offer in Compromise. In 2013, the IRS accepted about 31,000 offers in compromise, about 620 per state, so this is not an easy process, and you are likely best off finding a professional to help you with this.

9. What are the 4 different types of notice that the IRS sends?

The 4 types are: • Reminder, CP 501. The purpose of this notice is to simply remind you that you have a balance due. • Important, CP 503. The purpose of this notice is to let you know that immediate action is required. • Urgent, CP 504. This notifies you of the IRS’s intent to levy your assets. • Final Notice, CP 504 or LT 11 or LT 1058. The IRS will seize your assets and levy your bank accounts without further notice.

10. If an IRS officer shows up at my home, what are my rights?

• You have the absolute right to refuse entry. Many agents will try to intimate you and force you into believing that they have the right to enter. No IRS agent can ever enter your home without permission unless they have a warrant signed by a federal judge. • You have the absolute right to refuse to sign any documents. Many agents will brings documents for you to sign. You do not have to sign, and if you do, you may be signing away important rights. • You have the absolute right to refuse settlement terms offered by an IRS agent. Many agents will try to pressure you into accepting his or her settlement. If you do, you are likely accepting a settlement that is less attractive than the settlement that you could have gotten with legal representation.

11. What is the difference between “doubt as to liability” and “doubt as to collectability”?

“Doubt as to liability” means that you do agree that you even owe the IRS money. “Doubt as to collectability” means that you agree that you owe the money, but you are unable to pay what you owe. When you make an offer in compromise, you must claim as the basis for that offer either “doubt as to liability” or “doubt as to collectability”, but not both.

12. Can I be fired if the IRS garnishes my wages?

No, the Consumer Credit Protection Act prohibits this practice for all debts, including IRS debts.

13. What is a tax lien?

A tax lien is a legal claim against your property. Your property, including your home, cannot be sold until the lien is removed, either by paying the tax due or otherwise by agreement with the IRS.

14. Can I receive a tax refund if I am currently under an installment agreement with the IRS?

Unfortunately, no. The IRS will seize your refund and apply it to taxes due.

15. Can I resolve my tax debt for less than I owe.

Yes, you can, if you meet the requirements.

 

STUDENT LOAN RESOLUTION

We always first determine if we can discharge your student loans in bankruptcy. In the famous case of Brunner v. New York State Higher Educational Services Corp., the 2nd Circuit Court of Appeals held that student loans are dischargeable in bankruptcy only if non-discharge would result in undue hardship. Under Brummer, in bankruptcy, undue hardship means that, based on the debtor’s current income and expenses, the debtor and his or her dependents cannot maintain a minimal standard of living, if force to repay the student loan, that such circumstances are likely to continue for a significant portion of the repayment period, and that the debtor has made a good faith effort to repay the loan. The Brummer test is often difficult to meet.

If we can’t discharge your student loans in bankruptcy, we will seek non-bankruptcy remedies. We will investigate the possibility of administrative discharge, closed school discharge, disability discharge, false certification discharge, unpaid refund discharge, Perkins Loan cancellation and discharge, borrower defense discharge, loan rehabilitation, teacher and other loan forgiveness, deferment and forbearance, and if possible, we’ll advise strategic default and defend against any collection lawsuits. In sum, we have several tools to help you manage and possibly discharge your student debt. Please call us if you need help.


QUESTIONS AND ANSWERS ABOUT STUDENT LOAN RESOLUTION

1. Are idea theft claims viable only in the entertainment industry?

Do answer this question visit the website of the National Student Loan Data System (NSLDS).

2. What is the difference between FFEL and Direct loans?

Direct loans (William D. Ford loans) are made directly from the department of education to students, whereas FFEL loans are made from private lenders, guaranteed by the federal government.

3. What is the difference between federal and private loans?

Federal loans are funded or guaranteed by the federal government, and are tightly regulated, whereas private loans are neither funded nor guaranteed by the federal government, and are not as tightly regulated.

4. Why are private loans more expensive than federal loans?

Because federal loans are guaranteed by the federal government. Because the federal government is on the hook for federal loans, Congress has the right to set federal loan interest rates, and sets the rates much lower than market rate for private loans.

5. Should I consolidate?

This is a personal choice that is to be made after considering the pros and cons of consolidation. Consolidation rolls multiple loans into a single loan, make loan management easier. On the other hand, consolidation can lengthen the repayment period, and can have a higher interest rate. It is usually a bad idea to consolidate federal loans into a private loan, because if you do so, you will lose your rights under federal loan regulations and laws.

6. Is it possible to discharge a student loan?

It is possible to do so in bankruptcy, but it is difficult. There are other types of discharge available, such as administrative discharge, closed school discharge, disability discharge, false certification discharge, unpaid refund discharge, Perkins Loan cancellation and discharge, and borrower defense discharge.

7. Is there a military discharge?

Yes, military service qualifies as public service, so, for Perkins loans, you can get a military student loan discharge.

8. Will collection stop while I apply for a discharge?

In most cases, yes.

9. What are the differences between rehabilitation and consolidation?

You can often rehabilitate a loan by making 9 payments on time during a 10 month period. In contrast, with consolidation, you take out a new loan to pay off the old, defaulted student loans. Payoff, of course, cures the default.

10. Will default or delinquency appear on the report of credit reporting agencies?

Usually, yes.

11. Can student loans be discharged in bankruptcy?

Yes, but often it is difficult to do.

12. How can I challenge government collection actions?

You can request an administrative hearing, where you can suspend collection if you show that collection is causing hardship.

13. What are the collection powers of the government and what are the collection powers of private lenders?

The government has to right to go to court to collect, but rarely does so because there are so many ways that the government can collect without going to court. The government can also garnish wages, seize tax refunds, seize your social security payments, all without going to court.

14. What is a guaranty agency?

These are federal agencies that guarantee federal student loans and administer federal student loans.

15. Can I switch repayment plans?

Yes, but it the frequency and type of switch depends on the type of loan.

16. What is a grace period?

It is the period after graduation during which you are not required to make payments.

17. What is a deferment?

Deferment is the postponement of repayment. You can get a deferment only in you are not in default and if you meet other requirements. Deferments exist for economic hardship, military service, and unemployment. Interest does not accrue on federal loans during deferment.

18. What is a forbearance?

This is also a temporary postponement of repayment, but unlike some deferments, interest accrues during a forbearance.

19. What is the different between default and delinquency?

Delinquency simply means that you are late on payments, whereas if you are in default, the entire balance will have come due.

20. What happens if I am in default?

If you are default on a private loan, the lender can take you to court to collect. If you are in default on a federal loan, the government can take you to court to collect, but the government can also garnish wages, seize tax refunds, seize your social security payments, all without going to court.

21. How many missed payments will put me in default?

Typically, 6-9 missed payment will put you in default.

22. How do I cure a default?

You might be able to cure default in Chapter 13 bankruptcy. You might also be able to cure default with consolidation or rehabilitation. Discharge, either administrative of bankruptcy, is of course is the ultimate cure.