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Creditor's Response to Straight Bankruptcy

1. WHAT IS "STRAIGHT" BANKRUPTCY?

Traditionally, a petition for bankruptcy relief under Chapter 7 of the Code is called "straight bankruptcy" or just plain bankruptcy.

 

2. HOW DOES CHAPTER 7 BANKRUPTCY WORK?

The basic system gives a petitioning debtor relief (a temporary court order staying creditors, which is replaced after administration by a permanent injunction called a discharge) in exchange for the loss of all non-exempt property.

 

3.WHAT PROPERTY OF A STRAIGHT BANKRUPTCY DEBTOR IS AVAILABLE TO PAY HIS DEBTS?

As a condition for receiving a discharge in Chapter 7  bankruptcy, a debtor must turn over to an officer of the bankruptcy court -- called the "trustee" -- all property which the debtor owns which is not "exempt" by law. The property is liquidated by sale. It is used to pay costs of administration and creditors to the extent possible. Usually there is so little money realized, however, that creditors receive only a small fraction, if any, of the money owed them.

 

4.  HOW DOES THE TRUSTEE LIQUIDATE (SELL) THE DEBTOR'S PROPERTY?

Chapter 7 trustees must sell property consistent with state law. Most states require such sales to be in a "commercially reasonable manner." The exact technique depends on the kind of property involved. Many bankruptcy trustees hold public sales by auctions which are advertised locally. With a proper appraising procedure, private sales (to individuals who offer to buy estate property) are considered commercially reasonable.


5. WHAT PROPERTY IS EXEMPT?

Exemptions exist as a function of statutes passed by legislation. The Bankruptcy Reform Act of 1979 authorized certain "Federal Exemptions", but authorized the various states to take them away.(1) Over three-fourths of the states have eliminated the federal exemption option and provided state law alternatives.(2)

In Colorado, and  Wyoming, exemptions are provided exclusively by state law. Exemptions apply to all debtors whether in bankruptcy or as a judgment defendant. Click below to go to our exemption pages to see exemptions as they exist in 2002.

        Colorado                    Wyoming


6. SHOULD A DEBTOR GIVE AWAY OR HIDE PROPERTY TO KEEP FROM LOSING IT?

There are several reasons this does not work. Relief under the bankruptcy code can be denied a debtor if he is caught. A bankruptcy trustee has broad powers to set aside many such transfers. There are too many honestly obtainable benefits under the bankruptcy code to risk fraudulent or possibly criminal actions.

 

7. WHAT HAPPENS AFTER FILING STRAIGHT BANKRUPTCY?

The events that follow the filing are sequential:

    a. An interim trustee is named and appointed by the court.

    b. Notices - court orders advising creditors of the filing and its consequences are mailed to all         creditors (this happens in Wyoming usually in less than ten days).

    c. These notices also announce several very important settings.

        i. The 341 hearing is scheduled.

      ii. The last day for filing proofs of claim is fixed.

     iii. The last day for filing objections to discharge or an objection to the dischargeability of a particular debt is set.

d. If there is wasting property, the interim trustee is authorized to immediately deal with it.


8. WHAT HAPPENS AT THE FIRST MEETING OF CREDITORS?

Held pursuant to Section 341 of the bankruptcy code, these meetings are now frequently called "341 Meetings." The first meeting of creditors is presided over by the interim trustee or a representative of the United States Trustee's Office. The debtor is placed under oath and required to answer questions about the affairs necessary to the administration of his estate. The proceedings are clinical in nature. In the normal circumstance, no apologies or excuses are required. Only an honest disclosure of the debtor's current position and relevant property transactions are involved. Often no creditors appear.  In the unusual circumstance where hostilities exist, 341 meetings may become spirited. Good counsel is appreciated when the need arises.

 

9.  WHAT HAPPENS WITH ESTATE PROPERTY AFTER THE 341 MEETING?

The debtor's property is administered by a bonded representative of the court called the trustee. The trustee functions like a probate administrator, executor, or personal representative. It is the trustee's duty to collect the debtor's property, to liquidate it, and to distribute the proceeds to creditors. There is no time limit on this process. One of a debtor's few continuing duties is to assist in the trustee's efforts to liquidate property.

 

10. HOW ARE CREDITORS PAID?

Creditors are not paid automatically or simply because they are listed by the debtor on his original filings. They must file a written form called a proof of claim in order to be paid from estate funds. This form must be filed within ninety days of the first date set for the meeting of creditors or as extended by the court. The forms are sold by stationery stores, and often are included in notice mailings directly from the clerk of the bankruptcy court. If the creditor fails to file a claim, the trustee or a co-debtor may file a claim for the creditor.


11. ARE THERE OTHER COURT APPEARANCES IN A CHAPTER 7 CASE?

Only in unusual circumstances. Nearly all Bankruptcy Courts waive further hearings, and pass out discharges without a formal proceeding.


12. WHAT IS THE FINAL GOAL OF FILING AN INDIVIDUAL STRAIGHT BANKRUPTCY?

The immediate relief available from the automatic stay is made permanent. An individual obtains a final court order, a permanent injunction, called a Discharge, if he has not sought Chapter 7 relief by filing a petition in the six years preceding the current filing. It is this order which serves as a permanent barrier to harassment or continued litigation, just as the automatic stay does upon filing. A creditor cannot collect a debt without these processes.(3) Note that corporations and partnerships do not receive Chapter 7 discharges. They can be discharged in chapter 11 or 12.


13.  ARE SECURED DEBTS DISCHARGED?

Yes. Secured debts cannot be collected from a debtor after filing if a discharge is granted - they are discharged. The filing does not, however, affect the validity of the creditor's security interest (if it was properly recorded in the first place) against collateral. The property is available to the creditor first, then to the estate, so the trustee may exercise his discretion and conduct a sale while the property is in the estate, but the security interest attaches to the proceeds of sale, and a secured creditor receives the value of collateral that way.

 

14.  WHAT HAPPENS TO A DEBTOR'S INCOME AFTER FILING BANKRUPTCY?

Normally, any money earned by the debtor after the adjudication (date he filed his petition) is his to keep. There is a code provision which gives the trustee the debtor's right to property inherited or received in a divorce up to six months after filing.

 

15. WHAT BECOMES OF SECURED PROPERTY?

If a creditor has a mortgage or lien on a debtor's property, such as a house, car or furniture, the trustee must make a determination of the sale price the property will bring. If the trustee believes that the debtor has some equity in the property (that there will be money left over after the sale, and the security interest is paid in full), he may sell it and pay off the mortgage or lien.

If a trustee determines that there is no equity in the property for the bankruptcy estate, he may elect to abandon the property. An abandonment does not mean the property is given away. It simply means the estate takes no further interest in it. If the property is abandoned by the trustee, the secured creditor may then foreclose his security interest (repossess the property) by separate action in a state or county court, or he may petition for a foreclosure order in the bankruptcy court as an adversary proceeding. Any deficiency that the secured creditor suffers as the result of foreclosure may be claimed as an unsecured debt by filing an unsecured proof of claim.

To foreclose while the automatic stay is in effect requires permission from the Court. Permission is gained by applying for relief from the automatic stay. After notice to the debtor, debtor's counsel, and the trustee, the Court normally allows foreclosure. If equity could exist, the Court may impose a duty on the secured creditor to account for proceeds of any sale. Entry of a Discharge supplants the automatic stay and does not impede foreclosure.

 

16. DOES A DEBTOR LOSE EXEMPT PROPERTY TO A SECURED CREDITOR?

Almost all security agreements waive the debtor's ability to assert these exemptions. Where exemptable property has been pledged as collateral, it is lost to the secured creditor. If bankruptcy is filed, the secured creditor may take possession through a process called foreclosure. There is, however, an exception. A new bankruptcy code provision allows a debtor to void a nonpurchase money security interest in certain household goods and furniture to the extent of the exemption. The BAPCPA of 2005, did clarify what is and is not household goods.  The list is restrictive to say the least:

    (i) clothing;

    (ii) furniture;

    (iii) appliances;

    (iv) 1 radio;

    (v) 1 television;

    (vi) 1 VCR;

    (vii) linens;

    (ix) crockery;

    (x) kitchenware;

    (xi) educational materials and equipment for minor children;

    (xii) medical equipment and supplies;

    (xiii) furniture exclusively for the use of minor children, or elderly or disabled 

    dependents of the debtor;

    (xiv) personal effects including toys and hobby equipment of minor dependent children;

    (xv) 1 personal computer and related items.

The term 'household goods' does not include--

    (i) works of art unless by the debtor or a relative of the debtor;

    (ii) electronic entertainment equipment of more than $500 in value;

    (iii) antiques purchased for more than $500;

    (iv) jewelry worth more than $500;

    (v) other computers, motor vehicles including tractors or lawn tractors, boats, or motorized recreational devises, watercraft or aircraft.

 

17. DOES CHAPTER 7 BANKRUPTCY DISCHARGE ALL DEBTS?

No. Certain debts are not discharged by bankruptcy. Nondischargeable debts include: (1) taxes(4) based on income owed on a timely filed return within three years of filing; (2) money, property or services obtained by false pretenses or fraud; (3) debts not listed by the debtor on his schedules unless the creditor has notice or actual knowledge of filing; (4) debts for fraud, embezzlement, larceny or defalcation in a fiduciary capacity; (5) alimony or child support; (6) willful and malicious injury by the debtor to the person or property of another; (7) fine, penalty or forfeiture payable to and for the benefit of a governmental unit; (8) an educational loan guaranteed by a governmental unit or nonprofit institution of higher education (with an exception payment would impose an undue hardship on the debtor and the debtor's dependents); : (9) certain debts that arise in divorce proceedings; or (10) a debt that was or could have been scheduled by the debtor in a prior proceeding. An attorney reviewing a debtor's claim can usually anticipate non-dischargeability issues.(5)


18. IS CURRENT CHILD SUPPORT DISCHARGED?

No. The collection process is not even enjoined other than as against property of the debtor's estate. The same is true of alimony, although the bankruptcy court looks at each case to see if the obligation is truly "alimony" and not just a property division called "alimony". The issue of dischargeability of child support and alimony can be raised anytime.(6) The BAPCPA of 2005 took away the Chapter 7 dischargability of property settlement claims by classifying all domestic payment obligations as domestic support orders or DSO's.


19. ARE DEBTS INCURRED WITH NONSUFFICIENT FUND CHECKS DISCHARGED?

Yes and no. It depends on the circumstance and the action of the creditor. If a creditor takes the initiative to challenge an NSF check debt, in the civil court process which is bankruptcy, it may be held nondischargeable if it was used to procure goods and services. If the dischargeability is not raised within the time limit set by the court on its first order after filing, the issue cannot be raised later. The criminal court process may involve restitution. Criminal court process is not stayed by bankruptcy. NSF check laws differ according to state law and procedure.


20. DOES A DEBTOR NEED AN ATTORNEY TO REPRESENT HIM IN THE BANKRUPTCY PROCESS?

Nearly all debtors do.  The cost of not having counsel in nearly all cases exceeds the fees paid. Competent counsel can advise a perspective debtor about so many potential problems that seldom are bankruptcies filed pro se.


21. HOW DOES A POTENTIAL CLIENT PAY FOR AN ATTORNEY'S SERVICES IN A BANKRUPTCY PROCEEDING?

Up front, over time with payments, from the estate, or any other way the parties can agree. Bankruptcy counsel survive only if they get paid. All payments are disclosed by the debtor and by counsel and supervised by the court to avoid giving away the store.

 

22. DOES AN ATTORNEY NEED TO BE A SPECIALIST TO REPRESENT DEBTORS IN BANKRUPTCY?

Life grows ever more complicated. Some jurisdictions formally recognize specialities, and others do not. Most attorneys that do bankruptcy work successfully, do it on a frequent or routine basis. Bankruptcy Courts have their own rules, customs, procedures, and are not the best place to learn creditor and debtor law.

 

23.  WHAT IS INVOLVED DISCHARGING STUDENT LOANS?

Unlike most debts that automatically are effected by a Chapter 7, 11, 12, or 13 discharge, student loans are excepted now from all routine discharge orders.  The Code provides a procedure that a deserving debtor can invoke, however to extend the discharge to student loans.

    This requires an adversary proceeding (a separate law suit brought in the bankruptcy court). The debtor must convince the bankruptcy judge that to repay the student loan constitutes and undue hardship on the debtor or the debtor's family.  Repaying any loan is a hardship.  "Undue" is the key word as repaying any loan is a hardship.

 

24.  WHAT IS YOUR SUCCESS RATE TRYING STUDENT LOAN CASES?

High.  This firm only takes clients for student loan adversaries that have a decent shot at success. We would rather you not waste the money it costs to commence a voluntary proceeding if your chances are not good.  Given a welfare mother of three with monthly food stamps and no benefit from the education she received, or not much chance for job improvement and the case is a lock.  It takes fixed circumstances without reasonably probable improvement on the horizon.  Being temporarily unemployed is poor strategy.  The judges in our district employ a totality of the circumstances analysis and predicting the close cases is difficult.  There are fees involved that must be paid win or loose and no guarantees of success. 

 

Do you have a question about Chapter 7 or any aspect of bankruptcy?

Click here to e-mail your question to the firm.  QUESTION   Responses of general interest may be used to update Plain Talk, all inquiries from Wyoming and Colorado will receive a reply. 

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1. 1See 11 U.S.C. 522

2. 2See WS 1-20-109

3. 3See 11 U.S.C. 727

4. 4See 11 U.S.C. 507(a)(7)(A)(i). Different rules apply if a return is filed late, two years, (see 11 U.S.C. 523(a)(1)(B)) or for taxes based on an "assessment", 240 days (see 11 U.S.C. 507(a)(7)(ii). Trust fund withholding taxes are never discharged. BAPCPA cases no longer allow old and cold taxes due without returns to be discharged in Chapter 13, which is a significant tightening of the benefits.

5. 5See 11 U.S.C. 727(b)

6. 6See 11 U.S.C. 362(b)(2)

 

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