Bankruptcy Chapter Overview

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In this overview:

Introduction

Bankruptcy is an extremely complex subject. While there exists a general framework for procedures and requirements, a myriad of factors enter the equation making exceptions the rule. While all courts are governed by the United States Bankruptcy Code, each state is organized slightly differently. Making it more complicated is the fact that the different districts and courts within a state may vary in its requirements and practices. This is one reason it is so important to have counsel that is not only familiar with Bankruptcy law in general, but also with the intricacies and nuances of the individual courts and judges.

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In General

Bankruptcy is a system in place to aid individuals, corporation, or those who have found themselves in serious financial difficulty from which they cannot recover on their own. Title 11 of the U.S. Bankruptcy code is divided into Chapters, each with its own requirements, target group and intentions. The Chapters reflect the characteristics of the filers as well as the filer’s financial situation and intentions towards their creditors and their debt. Each Chapter has its own requirements as to who may file and their financial situation.

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Parties to a Case

  • The debtor: This person or entity files a bankruptcy petition with the court seeking relief from the collection of debt from creditors.
  • The creditors: People or institutions who have an interest in the financial well being of the debtor. These creditors can have a secured interest, an unsecured interest, or both. A secured creditor is one whose interest is backed by some collateral asset(s) of the debtor. An unsecured creditor is one whose interests are not protected by any collateral asset.
  • The trustee: A person appointed by the court to monitor the actions of debtor and his financial accounts. He or she monitors the bankruptcy plan ensuring compliance and protecting the interests of the creditors and debtor.

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Commencement of a Case

Filing a bankruptcy petition in the U.S. Bankruptcy Court commences a bankruptcy and immediately imposes an automatic stay. The stay prevents creditors from pursuing any collection type activities against the debtor or the debtor’s property. This applies regardless if the creditor is aware of the bankruptcy or not. Subsequently any property taken or money collected must be returned and any collection activities commenced while the stay was in place would be considered void.

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Automatic Stay

Filing a bankruptcy petition invokes the automatic stay; a blanket injunction against all creditor action to collect a debt or that may directly or indirectly interfere with the administration of the Debtor’s estate. The stay is intended to give the debtor a breathing spell and preserve estate property. A violation of the automatic stay is punishable conduct, resulting in fines for actual and punitive damages, as well as attorney’s fees incurred by the debtor. The stay enjoins any action to collect on a pre-petition debt, to take possession of collateral, or to further the creditor’s position.

Certain actions are exempt from the automatic stay. The automatic stay does not enjoin collection efforts on Chapter 7 or 11 cases against guarantors or co-debtors for debts on which the debtor is also liable, but does so in a Chapter 13.

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The Plan

Another element of a bankruptcy case is the plan, which spells out the details of the debtor’s financial situation and who will received what amounts at what intervals and for how long. Many requirements must be met for a proposed plan to be confirmed. Generally, they are:

  1. the Plan must be feasible, be proposed in good faith, and not extend beyond 5 years;
  2. all disposable income must be used to fund the Plan;
  3. the Plan must pay unsecured creditors at least as much as they would have received in a Chapter 7 liquidation, and pay secured creditors the “value” of their claim;
  4. the Plan must provide that the real estate mortgage arrears be cured within a “reasonable” period of time;
  5. the Plan must provide that the debtor remain current on all payments made outside of the Plan; and
  6. Plan payments must begin within 30 days of filing the case.

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Proof of Claim

Once aware of a bankruptcy filing, a creditor must file a Proof of Claim with the Bankruptcy court in order to be included in the bankruptcy plan and secure their interests. The Proof of Claim sets forth the amount of arrearages and total debt owed to the creditor as of the date of the bankruptcy filing. Both secured and unsecured creditors must file in order to ensure payment on their claims. Unless there is an objection to the claim, the claim is deemed allowed. An objection made by an interested party calls for a hearing in which the court determines the amount of the claim as of the date of the filing of the bankruptcy. The objection must be in writing, with notice and opportunity to respond afforded to the creditor. The proof of claim should include everything required to pay the debt in full as of the date the petition was filed.

In Chapter 7 cases, a creditor is not required to file a claim unless there are assets available for distribution. If assets are later discovered, the Court notifies the creditor of when and where to file the claim. In Chapter 13 cases, creditors must file the claim by the bar date, usually set around 120 days after the filing of the case. Nevertheless, it is advisable to have the claim filed prior to the initial meeting of creditors, which is held around 30 days after the case filing. A Chapter 11 creditor is only required to file a claim if the Debtor in Possession fails to list the creditor’s claim, or if the claim is listed as disputed, contingent, or unliquidated. Nevertheless, filing a Proof of Claim evidencing the correct amount of indebtedness is suggested and there is no harm in filing it.

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Amendments

Claims may generally be amended or withdrawn at any time prior to the payment thereof in a Chapter 7, the completion of the Plan payments in a Chapter 13, or the confirmation of a Plan in a Chapter 11 case. An amendment will generally be permitted as long as it relates to the old claim and does not constitute an entirely “new” claim.

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Meeting of Creditors

A Meeting of the Creditors, also known as the 341 meeting, is scheduled for every bankruptcy case. It is a valuable source of information for creditors. Here, the trustee and creditors question the debtor about assets, liabilities, intentions regarding secured property, as well as other related bankruptcy issues. The creditor can determine its position with respect to other creditors and the debtor as well as analyze the terms and conditions that will be acceptable under the plan. Should the creditor determine that his claim would be treated unsatisfactorily in the plan, the creditor can find remedy in the objection to confirmation of the case. The court should confirm a plan only if the plan is feasible. A creditor may object to confirmation on the basis that the plan is not proposed in good faith. In analyzing the debtor’s good faith, the Court will consider a number of factors, including the debtor’s motivation in filing previous cases and the presence of debts which would be non-dischargeable in a Chapter 7.

A creditor whose claim is not fully secured will generally be damaged if the debtor claims exemptions for more property than is permitted. This is because exempted property is not liable during the case or after the case for any debt owed general unsecured creditors. Therefore, it is worthwhile to examine the debtor’s schedules to assure that the property claimed as exempt is properly exempted. If the debtor has exempted more property than is allowed, the creditor or trustee may file an objection to the list of property no later than 30 days after the conclusion of the 341 Meeting of Creditors. The burden of proof lies with the objecting party.

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Proceeding – Chapter 13

The bankruptcy case should proceed with the debtor making scheduled payments to the court or to the Trustee for disbursement. Only in a small number of cases does the case proceed to conclusion with all creditors being paid according to the plan and the case closing. More often, certain events cause disruption in the case. A creditor dissatisfied with the treatment of its claim may consider other remedies. The options are limited and different situations give rise to different courses of action.

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Modifications of Plan – Chapter 13

The bankruptcy Code permits post-confirmation modifications of Chapter 13 plans by the debtor, Trustee, or unsecured creditor for the following reasons:

  • to increase or reduce the amount of payments on claims of a particular class provided for by the plan;
  • to extend or reduce the time for such payments;
  • to alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any such payment claim other than under the plan. In addition to these specific requirements for a modification, the movant must show a substantial change in a circumstance that was not anticipated at the time of confirmation.

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Conversion or Dismissal

Another remedy is to file a motion to convert a case from one chapter to another. The requirements for this will vary depending on the original case.

A creditor may move to dismiss a Chapter 7 case for

  1. unreasonable delay by the debtor that is prejudicial to creditors, or
  2. nonpayment of any required fees or charges. A creditor may move to convert the Chapter 7 case to a case under Chapter 11 only so long as the debtor is eligible to be a debtor under Chapter 11. Only the debtor may request conversion to a case under Chapter 12 or 13.

A creditor or other interested party may move to convert a Chapter 11 case to a Chapter 7 or to have it dismissed whichever is in the best interest of the creditors and the estate, for cause. Only if the debtor is eligible to be a debtor in a Chapter 7 will the conversion be permitted. A creditor may move to convert a Chapter 13 case to a case under Chapter 7, or to have it dismissed whichever is in the best interest of the creditors and the estate, for cause.

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