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1. WHAT IS BANKRUPTCY?

Bankruptcy is authorized by the United States Constitution without further definition. Most state legislatures have not legislated any pervasive debtor-creditor laws.

The present federal bankruptcy "law" took effect October 1, 1979, and is the final result of many previous legislative efforts. The entire substantive "law" appears in the United States Code as Title 11 and is subdivided into odd-numbered chapters. Chapter 1 contains definitions; Chapter 3 deals with case administration; Chapter 5 covers creditors, debtors, and the estate. Chapter 7 is the first operative, procedural chapter and describes liquidation or "straight bankruptcy"; Chapters 9 and 11 develop procedures for reorganizing municipalities and businesses respectively; Chapter 12 was added in 1986 to allow certain agricultural reorganizations; and Chapter 13 concerns the adjustment of the debts of an individual with regular income.

A person or business can obtain relief from creditors under the bankruptcy code by petitioning the United States Bankruptcy Court to become a debtor (no longer called a "bankrupt") under one of the four operative chapters.

Bankruptcy is commenced ("taken") by filing a federal lawsuit. The law, the procedure, the court system, and often the process itself are referred to colloquially as "bankruptcy".

 

2. ARE CREDITORS PAID BY THE GOVERNMENT WHEN A DEBTOR FILES BANKRUPTCY?

No. They are, furthermore, prevented by an automatic court order similar to an injunction, except it requires no notice, from contacting, harassing, commencing or continuing litigation against a debtor from the time bankruptcy is filed.

 

3. ARE CREDITORS PAID BY ANYONE IF A DEBTOR FILES BANKRUPTCY?

The only payment creditors receive is from the debtor's estate. The estate is property a debtor possesses (which is collected, liquidated and the proceeds disbursed by a trustee in straight or Chapter 7 bankruptcy or property that a debtor proposes to pay and pays out under a plan of reorganization). Many debtors have no non-exempt property, and thus no unsecured payout. Those that do have assets seldom pay allowed proven claims more than a small percentage of the total creditors' claims. It is possible, but unlikely, to have assets that equal or exceed liabilities.

 

4. WHY IS THERE A LAW THAT DAMAGES A CREDITOR'S BUSINESS IN A CAPITALISTIC SOCIETY?

The reason such a law exists is simply in recognition of the lesser of two evils. If a debtor is denied the ability to get a fresh start in life and to remain a useful productive citizen, even an honest person might be forced to less honorable extremes. It is better for society as a whole to allow a recognized, orderly means of liquidation and forgiveness than to have a debtor steal to pay debts or hide what assets he may have.

 

5. WHERE DO THE FEDERAL BANKRUPTCY COURTS HEAR CASES?

Bankruptcy courts sit in federal courthouses. In the author's district, the court currently sits in Cheyenne and Casper for Wyoming and only in Denver for Colorado. Trustees conduct meetings in various cities in each federal district.

 

6. WHO MAY FILE BANKRUPTCY?

An individual, corporation, partnership, or husband and wife can file straight bankruptcy.

 

7. ARE THERE THRESHOLD REQUIREMENTS TO BE ELIGIBLE TO FILE VOLUNTARY BANKRUPTCY?

See question and answer number 22 below for a discussion of the educational requirements imposed by BAPCPA of 2005.  There is now a pre-filing educational requirement for individuals in all chapters.  See also question number 23 below for a discussion of the "means test" requirement for consumer debtors. After October 17th, 2005 debtors with excess income may not be able to gain Chapter 7 relief, leaving Chapter 13 or perhaps Chapter 11 the only options

     A petitioner does not apparently even have to have debts to file bankruptcy. There is no minimum amount of debt that is necessary to file voluntarily. There is no limit to the total amount of debt that can be discharged in Chapter 7. A debtor need not have any property with which to satisfy creditors to qualify for relief in the bankruptcy court.

    Generally speaking, most petitioners have debts in excess of their ability to pay  with disposable income.  Remember, filing is not free. Legally recognized entities may petition for chapter 7 relief. They include individuals, partnerships, corporations, and husband and wife units. Noticeably absent are trusts. There are some limits on Chapter 13 eligibility. Only single and married people may file chapter 13 (no partnerships or corporations). The petitioner (or petitioners in the case of husband and wife) must have "regular income" to fund a plan. Chapter 13 only applies if noncontingent unsecured debts are less than $307,675 and noncontingent secured debts are less than $922,975. The bankruptcy code places no limits on entities wishing to file Chapter 11. People, partnerships or corporations may file Chapter 11. Chapter 11 by its very complexity is practically limited to enterprise where the cost of filing (usually over $10,000.00) is not prohibitive. It takes significant assets to make Chapter 11 worth considering. Chapter 12 also has threshold criteria. It is limited to certain agricultural entities.(1)

 

8. WHAT DOES IT COST TO FILE BANKRUPTCY?

Currently, the court filing fee per petition under Chapter 7 is $200;  Chapter 13 is $185.00; the Chapter 12 filing fee is $400.00; Chapter 11 requires $830.00 in filing fees. The law authorizes the payment of filing fees in installments, if necessary. Installment payments are not allowed if the debtor's attorney has been paid anything, and most attorneys who file bankruptcy petitions require some payment in advance. As a consequence of the economics of representation, few filing fees are paid in installments by other than clients of free legal service clinics. In addition to court fees, attorneys charge fees to represent debtors.

 

9. CAN AN INDIVIDUAL OR BUSINESS BE FORCED INTO FILING BANKRUPTCY?

Yes. An involuntary petition can be filed against a person or business. If the debtor is failing to pay bills as they come due and has the required debt (there are minimums here), property can be liquidated in an orderly fashion provided for under the bankruptcy code. These filings are infrequent.

 

10. WHAT IS INVOLUNTARY BANKRUPTCY?

Occasionally, a creditor (often a competing minor stock shareholder) wishes to take advantage of the orderly, equal treatment of creditors under bankruptcy and avoid the debtor disappearing with assets. Under the current law, only Chapter 7 and Chapter 11 cases can be commenced involuntarily.

Placing an entity into bankruptcy requires three or more petitioners if there are more than 12 creditors (only one if there are less) whose aggregate claims exceed collateral by $5,000. They may file bankruptcy for the debtor if they can prove the debtor is not paying his bills as they become due. If that is done, the case is adjudicated at an adversary court hearing and treated thereafter the same as a voluntary case. It is a rarity in the districts where the author practices law. Less than one percent of the cases filed in Wyoming are involuntary.

As far as non-petitioning creditors are concerned, there is no distinction between voluntary and involuntary cases. As a consequence, the balance of this text considers bankruptcy, whether voluntarily or involuntarily, the same.(2)

 

11. WHEN WOULD INVOLUNTARY BANKRUPTCY BE USED?

Its main advantage is the public administration of assets associated with the orderly court process bankruptcy involves. Often, involuntary bankruptcy avoids improper liquidation, even squandering that may occur when a debtor gives up hope of controlling his affairs successfully.

 

12. WHEN DOES BANKRUPTCY TAKE EFFECT?

Everything happens at the time the petition is filed. Notices are mailed out by the court as soon as possible thereafter, but the protection given the debtor is effective even prior to notices being received by creditors. The clerk's office stamps a bankruptcy petition with a date and time of day when received.

 

13. WHAT HAPPENS WHEN THE BANKRUPTCY PETITION IS FILED?
The petition filing gets the ball rolling. The scheduling of future hearings and appearances and notice mailings are all done by the court clerk when the petition is received. In addition to the mechanical process, there are immediate legal consequences. The petition automatically entitles the debtor to a "stay" (a federal injunction - - without notice being required! - - stopping creditors from calling, harassing and suing the petitioner). The petition filing also triggers the legal separation of the debtor and his property. It creates a new entity, the debtor's estate, which is administered for creditors. The automatic stay is the primary immediate benefit a debtor receives from filing bankruptcy.(3)

 

14. ARE CRIMINAL COURT PROCEEDINGS STOPPED BY FILING BANKRUPTCY?

No. Only if the proceedings are solely for the purpose of collecting a civil debt is there even a possibility that the bankruptcy court will consider extending the otherwise nonapplicable stay. It is, however, a felony in most states to use the threat of criminal prosecution to attempt to collect a civil debt. A creditor is better off exhausting his noncriminal remedies and letting the county attorney worry about criminal cases.(4)

 

15. WHAT MUST A DEBTOR FILE IN A BANKRUPTCY PROCEEDING?

Filings that accompany a bankruptcy are detailed to say the least. The bankruptcy "petition" must be accompanied by detailed schedules of the debtor's financial affairs. The debtor must list any transactions that could cause problems with his affairs, give current address information and, of course, list all his debts and all of his property. In addition to these lists, which are open to the public at the courthouse, his attorney must disclose the fee arrangement that has been made. There are certain rights a debtor has, like the right to choose exempt property, which must also be listed. The lists can be amended after filing. There is often a small additional filing fee when amendments involve further notice mailing. The 2005 Law change added the requirement that a debtor file pay stubs covering the 60 days pre filing and an extensive analysis of income and expenses to meet the means test requirement based on the preceding six months of earnings.  After filing, seven days prior to a scheduled 341 meeting a debtor must provide the trustee the most recently filed federal tax return. Extra copies of these extensive filings are provided to court offices, but they are not mailed to all creditors unless the creditor requests and pays for copies from the federal court or the debtor's attorney. Creditors receive only abbreviated mailings without requesting more.

 

16. WHAT HAPPENS WHEN A DEBTOR SCHEDULES A DEBT IN THE WRONG AMOUNT?

The amounts are merely advisory on the debtor's schedules. The important figures are the amounts on the creditors' proven claims. The claims filed by creditors determine the amounts distributed in most circumstances.

 

17. CAN A CREDITOR COLLECT FROM A CO-SIGNER AFTER A DEBTOR FILES BANKRUPTCY?

Careful here.... a creditor may collect from a Chapter 7 debtor's co-signer, but to attempt collections from a Chapter 13 consumer debtor's co-signer requires permission of the bankruptcy court first.(5)


18. WHAT EFFECT DOES BANKRUPTCY HAVE ON A DEBTOR'S CREDIT RATING?

A debtor's credit rating is very definitely damaged by bankruptcy. If you have heard otherwise, you have received incorrect information.

Credit bureaus report the fact that bankruptcy has been filed for ten years or more. Most credit applications ask if the applicant ever filed bankruptcy. Foreclosures and repossessions, as well as judgments and garnishments, hurt credit, too. Many creditors pay particular attention to a debtor's record after bankruptcy is filed.

"Good credit" is a function of history. Sometimes bankruptcy helps a debtor start fresh and build a clean history. To some creditors, a debtor is a better credit risk after bankruptcy than before because he cannot file straight bankruptcy again until after six years have passed. A multiple bankruptcy history is indicative of the poorest credit risk possible.

 

19. DOES A DEBTOR HAVE TO TAKE BANKRUPTCY AGAINST ALL CREDITORS?

Yes. All creditors must be listed, and all are treated equally within their respective class. There no pointing a bankruptcy at, for instance, medical bills.  I liken it to an atom bomb not a pistol shot. This principle of treating all creditors equally (prorated on the total value of their claim) is fundamental in the bankruptcy code! Special arrangements with landlords and secured creditors are possible after filing if the personalities involved will negotiate (e.g., see reaffirmations).


20. WHAT IF A DEBTOR WANTS TO PAY ONE CREDITOR AND NOT THE OTHERS?

After bankruptcy there is no law against paying any or all creditors. Bankruptcy is simply an official way to keep from being required or forced to pay debts. Many debtors, for moral or family reasons, do pay some debts after filing bankruptcy. The only reward for paying a debt after filing bankruptcy is the moral satisfaction. No official sanction or record for credit purposes for this voluntary conduct is maintained.

 

21. HOW DOES THE BANKRUPTCY CODE CLASSIFY CREDITORS FOR DISTRIBUTION?

There are certain creditors who are given priority in payment (paid ahead of others) from proceeds collected and assets liquidated by the trustee. The  BAPCPA OF 2005,  re-wrote the rules big time here.

 

They are, in order of priority:

 

Trustees fees and expenses

1) Allowed unsecured claims for domestic support obligations to individuals.

    Allowed unsecured claims for domestic support assigned to a governmental agency.

2) Administrative expenses of the estate.

3) Allowed unsecured claims incurred while an involuntary petition was pending prior to an order for relief.

4) Claims for wages, salaries, or commissions , including vacation, severance, and sick leave, owed to an employee by the debtor at the time of filing which were earned with in 180 days for filing up to $10,000.

    Claims for sales commissions with the same dollar and time limits if the recipient is an individual or sole stockholder in a sales company if that entity earns 75%or more of its gross from the debtor.

5) Contributions to an employee benefit plan up to $10,000 per employee.

6) Return of layaway deposits (up to $2225.00).

7) Monies owed for the purchase of grain or fish .

8) Tax claims of several verities.

9) Commitments to maintain capital deposits at a Federal depository institution.

10) Death or personal injury claims arising as the result of the debtor's drunken operation of a vehicle.(6)

 

These priorities trump an agreement to subordinate claims in class 1, 4, 5, 6, 7, 8, and 9.

 

22.  What are the educational requirements imposed for cases filed after October 17th, 2005?

All individuals must now attend a briefing by an approved agency within 180 days of filing for any Chapter of Bankruptcy relief.  See 11 USC 109(h)  Individual debtors in Chapter 7 and Chapter 13 cases must attend an instructional course concerning personal financial management prior to receiving a discharge.  See 11 USC 727 )(A)(11) and 11 USC 111 for details as well as go to this site's page devoted to these requirements  EDUCATION

 

23.  What is the  "MEANS TEST?"

Congress decided in conjunction with the year 2005 bankruptcy reform laws that we needed smarter debtors--see question number 22-- and that people who make more than the mean income in any given state should have to pay at least something to their creditors.

All individual debtors were subject to a motion pursuant to Code Section 707( b) by the U.S. Trustee or the court to dismiss a Chapter 7 Bankruptcy for abuse which includes having  "excess disposable income." The solution was  to file a Chapter 13 and make monthly payments to gain a discharge. The new Act gives all interested parties, (i.e. every creditor) the right to bring  a section 707(b) motion if debtor's earnings are above median income. The solution --Chapter 13 still works but the time period was raised from 36 to 60 mandatory months of payout.  The mean incomes used to calculate this test are set by the U.S. Census Bureau every ten years and are adjusted by the cost of living index. 

They appear to be:

Family Size         Wyoming             Colorado

        1             $ 38,518.00          $ 40,044.00

        2            $ 50,957.00           $ 54,187.00

        3            $ 52,181.00           $ 58,565.00

        4            $ 62,014.00           $ 66,664.00

Add $6,300.00 for each additional family member 

AND, a  707(b) loser or a voluntary means test failure seeking Chapter 13 relief becomes involved in a mandatory 60 month Chapter 13 Plan as opposed to a normal 36 month payment plan.

In every case, a schedule is filed calculating the means numbers.  If a party fails the test, the notice sent to everyone announcing the filing must state that "there is a presumption of abuse in this case" if the debtor elects to seek Chapter 7 relief.  If a party challenges an abusive filing and is successful gaining a dismissal or conversion debtor's counsel may be charge with that party's attorney fees and other costs unless a good faith showing can be made as to why there was an attempt to file other than a chapter 13.  

 

Do you have a question about 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.

 

___________________________

1. 1See 11 U.S.C. 109

2. 2See 11 U.S.C. 303

3. 3See 11 U.S.C. 362(a)

4. 4See 11 U.S.C. 362(b)(1) and (4)

5. 5See 11 U.S.C. 1301

6. 6 see 11 U.S.C. 502

 

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