Chapter 7 Basics

Posted by Kevin on October 15, 2017 under Bankruptcy Blog | Be the First to Comment

The Bankruptcy Code is divided into chapters.  Chapters 1, 3, and 5 deal with basic concepts that apply to all the various types of bankruptcies.  Chapter 7 deals with liquidations for individuals or businesses.  Chapter 9 deals with municipalities.  Chapter 11 deals with reorganizations and/or planned liquidations of mainly businesses.  Chapter 12 deals with family farms (do not get many of them in northern New Jersey).  Chapter 13 deals with repayment plans for individuals.  For the average consumer, Chapter 7 and Chapter 13 are the two alternatives methods of filing bankruptcy.  For individuals, the object of any bankruptcy is to get a discharge of your debts.  In other words, wiped out.

Let’s look at Chapter 7.  This is sometimes called a straight bankruptcy or a liquidation.  Chapter 7 is basically an asset driven analysis.  You do not make payments, but a trustee can sell your non-exempt property, and pay out your creditors.  The repayment scheme is set out in the Bankruptcy Code.  Upon the conclusion, many of your debts are discharged.  Certain enumerated debts are not wiped out such as domestic support obligations, debts incurred by fraud, certain taxes and most student loans.

After the Bankruptcy Code went into effect, creditor groups complained for the next 25 years that it was too easy for debtors to file under Chapter 7, which in a vast majority of cases, translated into no payments to creditors.  Creditors wanted more debtors to file under Chapter 13 where monthly payments must be made to a trustee and certain creditors need be paid in full.  The 2005 revisions to the Bankruptcy Code considers a debtor’s income in whether he or she can file under Chapter 7.  If the debtor’s income is below the median income for the State based on family size, it is presumed that the debtor can file under Chapter 7.  If the income is above median, a debtor has to pass the “means test” to qualify for Chapter 7.  The means test looks at the debtor’s income for the 6 months prior to filing to arrive arrive at what is called current monthly income.  It then subtracts categories of expenses- some based on national or regional averages, and others based on actually cost.  If the net income is above a certain amount, the debtor cannot file under Chapter 7.

Assuming that you qualify for Chapter 7, the next issue is what property is exempt.  In New Jersey, we can use either the exemptions set forth in the Bankruptcy Code or the exemptions listed in New Jersey statutes.  The New Jersey statutes are mostly about 100 years old and have not been adjusted for inflation, so we almost always use the federal exemptions.

You file a Chapter 7 by filing with the Bankruptcy Clerk a Petition, Schedules of assets, liabilities, income and expenses, and various ancillary documents (over 40 pages).  A trustee is appointed to oversee the case.  If the exemptions cover the value of all of your assets, the case is called a no-asset case.  That means no assets go to the Trustee-you get to keep them subject to any security interests (mortgages and the like).

About 4 weeks after filing, the debtor (and legal counsel) appear before the trustee.  The debtor is required to answer questions from the trustee and any creditors.  Creditors rarely appear at this hearing.  If the trustee believes that your filing is in order and no further action is necessary, a discharge order will be issued within about 6 weeks.  The whole process takes about 4 months.  You cannot file another Chapter 7 and obtain a discharge for 8 years from filing date of the first Chapter 7.

Clearly, Chapter 7 is a bit more complex, but as the title states, these are Chapter 7 basics.

Bankruptcy Basics

Posted by Kevin on October 3, 2017 under Bankruptcy Blog | Be the First to Comment

Over the last couple of years, this blog has dealt with many Chapter 7 and Chapter 13 issues.  Some simple, some complex.  Every once and awhile, however, it is good to go back to the basics.  So, in the next few blogs, that is what we will do.

We will begin with an overview.  Many people are skittish about filing bankruptcy.  Yes, they are in a bad financial situation.  Not enough money coming in, debts are mounting, creditor calls are becoming more than annoying, and maybe there are lawsuits.  In society, we are brought up to be responsible and honor our obligations.  It is part of being an adult.  For many, the thought of bankruptcy is equated with failure.   But I take a different point of view.  Bankruptcy should be looked as a vehicle for a new start, a fresh start.

Many people do not know this, but the right to file bankruptcy is in the Constitution.  Congress is given the right to establish uniform laws concerning bankruptcy.  The first bankruptcy law was adopted by Congress in 1800.  It was clearly pro-creditor.  There were subsequent bankruptcy acts in 1841, 1867, 1898 and 1938.

The next major revision was the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code.  The Bankruptcy Code marked a significant change in the point of view of bankruptcy laws.  It was decidedly more pro-debtor compared to prior law.   It allowed a vast majority of debtors to file Chapter 7  where debtors are not required to make cash payments to creditors and keep most, if not all, of their assets.

Creditor groups complained that the Bankruptcy Code was too pro-debtor and lobbied Congress for changes.  This led to minor revisions in the 1980’s and 1990’s.  The lobbying continued.  In 2005, Congress adopted the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA).  Although this was a major overhaul of  many areas of the Bankruptcy Code, from a consumer’s point of view, BAPCPA tries to force more debtors into Chapter 13 where monthly payments must be made by the debtor for periods ranging from 36 months to 60 months.  All in all, BAPCPA has made the bankruptcy process more complex and more costly to a prospective debtor.

If there is anything that you should take from this blog, it is that bankruptcy is a right that you have under the Constitution of the United States.  It gives you an opportunity to deal with your debts and get a fresh start.