Bankruptcy is a set of federal laws and rules that can help individuals and businesses who owe more debt than they can pay. Bankruptcy is handled in federal court. Bankruptcy cases cannot be filed in state court. Bankruptcy laws help people who can no longer pay their creditors get a fresh start by liquidating their assets to pay their debts, or by creating a repayment plan.
Bankruptcy laws help people who can no longer pay their creditors get a fresh start by liquidating their assets to pay their debts, or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation. These procedures are covered under Title 11 of the United States Code (the Bankruptcy Code). The vast majority of cases are filed under the three main chapters of the Bankruptcy Code, which are Chapter 7, Chapter 11, and Chapter 13.
On February 19, 2020, a new law went into effect known as the Small Business Reorganization Act of 2019, or SBRA. The new bankruptcy law is Subchapter 5 which will provide a more compact and easier version of Chapter 11 Reorganizations for small business corporate and individual debtors. SBRA or Subchapter 5 is designed for the small business debtors (not including single-asset real estate companies) who are engaged in commercial or business activity with a total non-contingent liquidated secured and unsecured debt of less than $2,725,625. As of March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act increased this threshold to $7,500,000.
An important difference between a Chapter 11 reorganization and a Subchapter 5 reorganization is that Subchapter 5 has no creditor committee. In a Chapter 11, a creditor committee could stop a reorganization plan approval. In a Chapter 11 filing, a single creditor can stop a reorganization plan from being approved. In Subchapter 5, there is no absolute priority rule and other than the initial filing fee, fees are essentially eliminated, making the process much less expensive to the petitioner.
To file under a Subchapter 5, the entity will require the business' most recent balance sheet, statement of operations, cash flow statement, a federal income tax return (or a sworn statement that such a document does not exist). The drawback to the Subchapter 5, if there is one at all, (and I personally don't believe there is), is that the process is much more advanced. The plan must be submitted for approval with 90 days, so in Subchapter 5 filings, much more of the detailed work would have to be completed between the client/petitioner and their attorney.
A bankruptcy case normally begins by the debtor filing a petition with the bankruptcy court. A petition may be filed by an individual. The debtor is required to file statements listing assets, income, liabilities, and the names and addresses of all creditors and how much each are owed. The filing of the petition automatically prevents, or "stays," debt collection actions against the debtor and the debtor's property. Creditors cannot bring or continue lawsuits, make wage garnishments. Creditors may not make personal demands or telephone calls.
The creditors receive notice from the clerk of court that the debtor has filed a bankruptcy petition. Some bankruptcy cases are filed to allow a debtor to reorganize and establish a plan to repay creditors, while other cases involve liquidation of the debtor's property. In many bankruptcy cases involving liquidation of the property of individual consumers, there is little or no money available from the debtor's estate to pay creditors. As a result, in these cases there are few issues or disputes, and the debtor is normally granted a "discharge" of most debts without objection. This would mean that the debtor is no longer personally liable for repaying the debts.
In other cases, however, disputes may give rise to litigation in a bankruptcy case over such matters as who owns certain property, how it should be used, what the property is worth, how much is owed on a debt, whether the debtor should be discharged from certain debts, or how much money should be paid to lawyers, accountants, auctioneers, or other professionals. Litigation in the bankruptcy court is conducted in much the same way that civil cases are handled in the district court. There may be discovery, pretrial proceedings, settlement efforts, and a trial.
Frequently Asked Questions
What are the consequences of filing for bankruptcy?
The consequences of filing for bankruptcy protection may outweigh the benefits depending on your financial situation and your reasons for filing. You should be aware of the following:
- Filing for bankruptcy protection is not free.
- Not all debts are dischargeable. Secured creditors retain some rights which may permit them to seize property, even after a discharge is granted. Alimony and child support obligations and IRS tax debts are not dischargeable.
- Within 15 days of the filing of a bankruptcy petition, schedules of the debtor's assets and liabilities must be filed within 15-days of filing the bankruptcy petition. Failure to timely file the appropriate schedules will result in dismissal of the bankruptcy.
- If your bankruptcy case is not dismissed and a discharge is entered by the court, the debtor is prohibited for eight years from getting another discharge in Chapters 5, Chapter 7 and 11.
- Fraudulent information or other acts by the debtor are grounds for denial of a discharge and may be punishable as a criminal offense.
- Bankruptcy is a serious and complicated legal process. You should seek legal counsel to discover how a bankruptcy filing may affect long term goals and objectives.
Do I Need an Attorney to Represent Me in My Bankruptcy Case?
Individually, you have a right to represent yourself (Pro Se Debtor) in a personal bankruptcy. A Pro Se Debtor is responsible for all proceedings of his/her case. Failure to comply with the Bankruptcy Code and Rules or with court orders may cause dismissal of the Debtor's case. It is recommended that all Debtors seek legal advice before filing bankruptcy. The use of an attorney is recommended. Ignorance of the law may cost you far more than an attorney's fee. By law, a Corporation is required to have an attorney. The bankruptcy clerk's staff are not prohibited to give you legal advice. Individuals who represent themselves will not be able to obtain legal advice from court personnel or from the trustee appointed to their case.
Can the Judge Advise Me of My Options During the Bankruptcy Case?
No. The Court cannot act as your legal counsel.
Can I speak to the Judge about my case?
No. Any communication with the judge without the presence of other parties is ex parte and not permitted.
What is a Chapter 7 Means Test?
A “means test” is used to determine whether a debtor is entitled to a Chapter 7 Discharge, or whether such debtor must convert the case to one under another Chapter of the Bankruptcy Code. The basic purpose of the means test is to compare monthly income and expenses to determine whether a Chapter 7 discharge would constitute an “abuse” of the provisions related to Chapter 7 in the Bankruptcy Code.
What is a matrix?
A matrix is a list of all creditors in a bankruptcy case, including the names and addresses of each creditor. This list is used for electronic noticing required during the course of your bankruptcy case. The matrix should be submitted at the time of the filing of your case.
Do I Need an Attorney to File a Bankruptcy Case?
While it is possible to file a bankruptcy case, pro se (without the assistance of an attorney), it may be difficult to do so successfully. Bankruptcy is a serious and often complicated legal process. It is strongly recommended that a person considering bankruptcy consult with a competent bankruptcy attorney prior to filing a case. With limited exceptions, corporations and other types of business entities that are formed under state law must be represented by an attorney.
What is a 341 Meeting?
This meeting is referred to as the “meeting of creditors.” The meeting is referred to as a “341 meeting” because the authority to conduct the meeting is found in Section 341 of the Bankruptcy Code. This meeting is presided over by the trustee assigned to the case and is held approximately 40 days after the petition is filed All creditors are notified and invited to the meeting. Their attendance is not required. Debtors must appear. The debtor must testify under oath and answer questions by creditors and the trustee. Debtors are required to provide photo identification and proof of social security number to the assigned trustee. A Debtor's failure to appear may result in dismissal of the case.
What are Bankruptcy Exemptions?
Debtors are permitted to keep certain property in bankruptcy. The exempt property cannot use used to pay creditors. For more information on exemptions, see Bankruptcy Code Section 522.
Where is the Meeting of Creditors Held?
No. Please pay close attention to the address of the location of the Meeting of Creditors. In Boston, the meetings are held in the same building as the Court but on a different floor. In Worcester and Springfield, the meetings are held in a separate building. Also, the Meeting of Creditors for certain chapter 7 cases in Eastern Massachusetts are held in Brockton.
The Bankruptcy Code prohibits the Court from attending or presiding over the meeting.
What is a Bankruptcy Trustee?
Under Chapter 7, an impartial trustee is appointed to administer the case by collecting and liquidating the Debtor's non-exempt assets in a manner that maximizes the return to the Debtor's unsecured creditors. Under Chapter 13, an impartial trustee is also appointed to administer the case. The primary roles of the chapter 13 trustee are to determine the feasibility of a Debtor's repayment plan for the court and to serve as a disbursing agent, collecting payments from Debtors and making distributions to creditors.
What is the Function of the U. S. Trustee?
A U. S. Trustee is an agent of the Department of Justice who is responsible for monitoring the administration of bankruptcy cases and detecting bankruptcy fraud. It is separate from the Bankruptcy Court. The U.S. Trustee is also responsible for appointing and supervising interim trustees to administer Chapter 7 cases, overseeing the Debtor-in-Possession, and appointing a standing Trustee in Chapter 13 cases.
What Bankruptcy Chapter is Right for Me?
Your decision whether to file bankruptcy and under which chapter to file depends on your circumstances. Chapter 7 is appropriate when the Debtor has insufficient income to pay a portion of his/her debts, and the Debtor is not seeking to keep non-exempt property. Otherwise, Chapters 11 (with Subchapter 5 contained therein if applicable), 12, or 13 may be appropriate if the Debtor has an income or property and can afford to repay at least some of his/her debts. It also depends on whether the Debtor is an individual, partnership, corporation. The decision whether to file a bankruptcy case and under which chapter is an extremely important decision and has tremendous financial impact. This decision should be made after obtaining expert advice from a bankruptcy attorney.
What is the Automatic stay? When is it Effective?
The automatic stay protects the debtor from their creditors. It requires all collection efforts, any harassment, and all foreclosure actions be immediately stopped by creditors when the case is filed. It permits the debtor to attempt a repayment plan or simply to be relieved of the financial pressures that drove them into bankruptcy. The automatic stay also protects creditors. Without it, certain creditors would be able to pursue their own remedies against the debtor's property. Those who acted first would obtain payment of the claims and that would make it impossible for other creditors to collect anything. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors with equal rights are treated equally.
What Does It Mean If A Case is Dismissed?
A dismissal order ends the bankruptcy case before a discharge order enters. When the Court dismisses the case, the automatic stay ends and creditors may start to collect debts again. An order of dismissal does not free the debtor from any debt. Unless the debtor appeals the order or seeks reconsideration of the order of dismissal within 14 days, the Clerk will automatically close the case.
Will I have To Appear Before the Judge?
Every bankruptcy case is different, and every bankruptcy case has its own unique issues. Some debtors go through the bankruptcy process without ever seeing the Courtroom or the judge. Whether you can expect the same will depend on your case and the issues it presents.
What is A Reaffirmation Agreement?
This is a voluntary agreement between a creditor and a chapter 7 debtor. The debtor agrees to pay all or a portion of an otherwise dischargeable debt. To be enforceable, the agreement must be filed in the debtor's bankruptcy case before the entry of the discharge. The Court may schedule a hearing on a reaffirmation agreement, and the debtor and if represented, their attorney must attend. [11 U.S.C. Section 524]
What Is the Effect of A Reaffirmation Agreement?
The debtor is effectively waiving the discharge on a particular debt, which means that the debtor will have to pay it, even if there is a negative change in the debtor's financial circumstances in the months and years that follow the bankruptcy case.
What Is A Discharge?
A discharge order issued by the Court permanently prohibits creditors from taking action against a debtor personally to collect debts incurred before the filing of the bankruptcy petition. The discharge does not prevent secured creditors from seizing collateral if payments are not kept up. The discharge does not prevent collection of debts incurred after the filing of the bankruptcy. Some debts are not dischargeable, and some debts are not dischargeable under certain circumstances. If you have questions about your discharge, consult with an attorney.
Some examples of debts that may not be discharged include: certain taxes and fines, debts not listed in your bankruptcy, alimony, child maintenance or support, debts from willful and malicious injury to another, debts created through fraudulent conduct or by providing false information to a creditor. For a complete list of non-dischargeable debts, review 11 U.S.C. Section 523 (as it applies to all Chapters) and Section 1328 (for Chapter 13 cases).
Can I Be Denied A Discharge?
Yes. Under certain circumstances, 11 U.S.C. Section 727 provides the Debtor's discharge may be denied in a chapter 7 case. The grounds for denial exist when the Debtor: (1) failed to keep or produce adequate books or financial records; (2) failed to satisfactorily explain any loss of assets; (3) committed a bankruptcy crime such as perjury; (4) failed to obey a lawful order of the bankruptcy court; or (5) fraudulently transferred, concealed, or destroyed property that would have become property of the estate. The complete list of reasons may be found in Section 727 of the US Bankruptcy Code.
What is the Difference Between A Discharge Being Denied and A Debt Being Declared Non-Dischargeable?
The court may deny the Debtor's discharge of all debts or determine that a particular debt or debts are non-dischargeable. If the court denies the discharge of all debts, then the Debtor will still be legally responsible for all the debts as if no bankruptcy petition had ever been filed. If only certain debts are ruled non-dischargeable, the Debtor will still receive a discharge order. However, the Debtor will remain legally responsible for those non-dischargeable debts. For a discharge to be denied, either as to a particular debt or as to all debts, someone must file an adversary proceeding (lawsuit) with the Bankruptcy Court. That party must then prove one of the grounds for denial of the discharge or for a debt to be declared non-dischargeable. If your discharge is not withheld or none of your debts is declared to be non-dischargeable, then all the debts listed in your petition will be discharged upon the entry of the order granting your discharge.
Do I Have to Enter into a Reaffirmation Agreement?
No. They are strictly voluntary. Debtors need not reaffirm a debt in order to repay it. The law does not prohibit a debtor from voluntarily paying a discharged debt; it only prohibits the creditor from attempting to collect it.
What Does It Mean To “Redeem” Collateral?
The Bankruptcy Code allows a debtor to "redeem" collateral. An individual chapter 7 debtor can keep certain kinds of collateral – tangible, personal property intended primarily for personal, family, or household use – by paying the holder of a lien on the property the amount of its "allowed secured claim." This amount is typically the lesser of the amount still owed to the creditor or the value of the property. The option to redeem applies only to property that a debtor has claimed as exempt or that the trustee has abandoned. With redemption, a debtor can often get liens released on personal household possessions for less than the outstanding debt. Unless the creditor consents to payments over time, a debtor must generally pay the redemption amount in one lump-sum payment to the creditor.
How Do I Know Which of My Debts Were Discharged?
The discharge order sent by the clerk's office will contain a general statement about the categories of debts that are discharged. The individual debts that are discharged will not be listed on the discharge order. Instead, the discharge order will provide that debts are discharged unless there has been a separate order denying a discharge of a specific debt. If there are no such orders, the debtor can assume that all debts have been discharged which fall into the categories indicated in the discharge order. See Bankruptcy Code Sections 523, 727(b), 1141 and 1328(a) and consult a bankruptcy attorney for more information on categories of debts that qualify for a discharge in chapter 7 or chapter 13 bankruptcy cases.
I Received A Discharge, But Creditors Keep Calling Harassing Me. What Can I Do?
If a debt has been discharged, a creditor attempting to collect the debt may be violating the discharge injunction. You should speak with attorney about the rights you may have.
When Will My Case Be Closed?
Since all cases have unique circumstances, it is difficult to pinpoint an exact time that your case will be closed. Many Chapter 7 no asset cases are closed within 90-days from filing if no disputes have arisen. Chapter 7 asset cases require that the trustee liquidate the assets which sometimes can take up to a year or longer. Chapter 13 cases remain open as long as the plan payments are being made, generally for three to five years after the plan has been confirmed. Chapter 11 reorganization cases are more complicated and may remain open longer than three years even if a plan has been confirmed.
How Can I Get My Bankruptcy Off My Credit Report?
The Bankruptcy Court has no jurisdiction over credit consumer reporting agencies and the court does not notify reporting agencies when a bankruptcy case is filed, nor can the court request that a specific record be changed. Information on your credit report has generally been reported by your creditors and is gathered from public sources by the reporting agencies. The Fair Credit Reporting Act, 15 U.S.C. Section 1681, is the law that controls consumer reporting agencies. The law states that reporting agencies may not report a bankruptcy case on a person's credit report after ten years from the date the bankruptcy case is filed. Generally, most negative credit information is removed after eight years.
If you have a complaint about a company or business practice, you may contact the Federal Trade Commission (FTC), Consumer Response Center, 600 Pennsylvania Ave. NW, Washington, D.C. 20580. The toll-free FTC help-line number is: 1-877-382-4357. That office can provide further information on reestablishing credit and may be able to help you in addressing other credit problems. Further information about your rights under the Fair Credit Reporting Act and corrections to credit reports is available on the FTC website.
