Bankruptcy Basics
Bankruptcy Basics
Most Common Types of Bankruptcy
The first, and by far, most common type of bankruptcy is liquidation under Chapter 7 of the Bankruptcy Code, also referred to as a straight bankruptcy. In this type of bankruptcy all of the debtor’s (or, the person filing the bankruptcy) assets which are nonexempt are sold and the proceeds of the sales are distributed amongst creditors (everyone who is owed money by the debtor.) After doing so, the remaining debt is wiped out giving the debtor what is known as a “fresh start.”
The second commonly used type of bankruptcy is known as a reorganization under Chapter 11 or 13 of the Bankruptcy Code. Chapter 11 is most commonly used by companies and Chapter 13 is most commonly used by individuals. In this reorganization, the debtor still pays some or all of his or her debt under a 3-5 year agreed-upon plan.
In a Chapter 11 bankruptcy, creditors have the right to vote on or approve of the companies proposed reorganization.
Under Chapter 13 bankruptcy, the companies or individuals you owe money to don’t vote on or approve your proposed plan for paying back some of what you owe. And unlike Chapter 11, only you propose the plan for some or all of your debts. In Chapter 11, your creditors can also propose plans.
If you consider that Chapter 11 is most often used by large companies, it makes sense that creditors have the right to propose or vote on the plan to repay debt. Because very large sums of money that impact multiple companies are usually involved, creditors have a much larger stake in what happens in the bankruptcy.
Just as in Chapter 7 bankruptcy, at the end of payment plan period under Chapter 13 you will receive a discharge. This means you no longer have any personal responsibility to pay the debts included in the discharge.
When you are ready to move forward, we will walk you through the entire process and help you to choose which type of bankruptcy is right for your personal situation.
Who Benefits In A Bankruptcy Case?
Ideally, bankruptcy is intended to benefit every party involved; both debtors and creditors. 1) The aforementioned Fresh Start for the debtor and 2) repayment of at least some equity for the creditor. In reality, the debtor is by far more likely to benefit from bankruptcy because in most cases there are few assets to be distributed to creditors. The Supreme Court has described the fresh start as “a new opportunity in life, unhampered by the pressure and discouragement of pre-existing debt.” In this light, bankruptcy can be viewed as an opportunity to be free from the burden of past mistakes or misfortunes and begin again with a clean slate. For the creditors, the benefits are not insignificant considering the strong likelihood that the debt would never be recovered at all without the bankruptcy proceedings resulting in a win-win situation. It also discourages (and stops) creditors from rushing in to foreclose or repossess property owned by the individual.
What It Means For You
The question on the forefront of the mind of any individual considering bankruptcy must be: what can I keep and what must I let go of?
This is where we come to what is known as the bankruptcy estate. At the commencement of the bankruptcy proceedings, the bankruptcy estate is created and essentially becomes the legal owner of the debtor’s property rights and interests, with some exceptions and exemptions.
In every case under chapter 7 or chapter 13 of the Bankruptcy Code, a trustee will be appointed to represent the interests of the people and companies to whom you owe money, your creditors. Each state has trustees that are appointed by the court to your bankruptcy case. In Arizona, trustees usually specialize in handling Chapter 13 or Chapter 7 bankruptcies. Trustees live all over the state to serve individuals filing bankruptcy no matter where they are located in Arizona.
An important point to remember is that when you owe money on a house or other property such as a car (secured loans), the mortgage company or bank can’t come after you personally if that loan was discharged in the bankruptcy. However, the company has a right to the property itself unless you pay the debt, which means that it can foreclose or repossess the property if you can’t make the payments.
About the Trustee
As I stated in the last section, a trustee is appointed to every bankruptcy case under chapters 7 and 13 of the Code. The trustee’s basic role is to represent the interests of the creditors.
The trustee’s duties in carrying out this role can include:
– Collecting property of the bankruptcy estate
– Objecting to a claim of exemptions when appropriate
– Objecting to a discharge
– Liquidating all nonexempt property (meaning, selling nonexempt property and turning it into cash)
– Distributing cash to creditors with valid claims
– Making a final accounting to the court and to the United States trustee
– Sending notices to all alimony or spousal support creditors
In a chapter 13 case, the trustee must also:
– Attend all hearings on the value of property subject to liens or on confirmation or modification of a debtor’s plan
– Receive and disburse payments according to the debtor’s plan
– Make sure the debtor is making payments
– Advise the debtor on certain non-legal matters
– Assist the debtor in carrying out the plan
The Trustee’s Fee
You might be wondering, given the responsibilities of the trustee, how much they get paid and who pays them.
In a Chapter 13 bankruptcy, the trustee gets paid a percentage of the payment you make. Usually this percentage is between 4-10% of the total amount you pay into your case. From this payment, the trustees cover all their expenses, including any office costs or paying for additional staff to assist with the bankruptcy cases assigned to them.
In a Chapter 7 bankruptcy, the trustee gets paid out of the filing fee you pay when you file for bankruptcy. In addition, the trustee gets paid a percentage of any property that they convert into to cash (or liquidate). In many individual cases, because you’re able to keep much of your property through exclusions or exemptions, the trustee only gets paid the flat fee out of your filing fee.
Property Included In Your Estate
If you own property with another person, but only you file bankruptcy, it is only your portion of that property that is included in the estate as a general rule. However, this can be a complicated issue. If you have jointly owned property it is best to set up a free consultation with one of our attorneys to discuss the specifics of your case.
Examples of what is included in your bankruptcy estate would be rents from property owned by you that are included in the estate already. So if you have a rental property and collect rent, that money is included in the estate. If you filed an insurance claim for a car accident before you filed bankruptcy and then receive the money after bankruptcy started this is included in the bankruptcy estate.
Most of the time, if you get property after filing bankruptcy this will not be included in the estate. But, there are exceptions to this when you get the property within 180 days after filing bankruptcy. If you inherit money or property with 180 days, this will be included in the bankruptcy estate. And if you get a divorce and receive a property settlement, or you receive life insurance proceeds within 180 days, these are included in the estate.
Although it may be tempting to hold back information regarding property or even attempt to hide or give away assets, in a bankruptcy proceeding it is important to fully disclose all assets and for counsel to thoroughly identify and list a debtor’s various interests in property. Failure to properly list property of the estate be even be grounds to deny or revoke the debtor’s discharge and could make the unlisted property vulnerable to a creditor’s claims.
All this considered, most debtor’s will find that they can exempt all or nearly all property of their estate and even property which can not be exempted is often not worth what it would cost to liquidate and is therefore abandoned or sold back to the debtor.
Some Examples of Property Not Included
In general, all retirement plans are not included in the estate. Before the 2005 bankruptcy law changes, certain retirement plans were not included, but since 2005, most retirement plans are exempt from bankruptcy. If you have an IRA that has never been rolled over, this amount is capped at $1,095,000.
If you have started education savings accounts for your children, they are generally not included in the estate. There are some limitations on this. If you deposited money into an education savings plan within 1 year they are included in the estate. And if a deposit was made within 1-2 years before filing bankruptcy then you can only exclude $5475 per student/child.
In order to make sure that education savings accounts are not included in the bankruptcy estate, the money must be for a child, stepchild, grandchild, or stepgrandchild.
Most things are not cut in stone in regards to what is and is not included in the bankruptcy estate and, as I mentioned before, many decisions will be made on a case by case basis. When you are ready to take the next step, one of our attorneys will go over these details with you.
Your Fresh Start
Are you ready to begin working toward your own fresh start? I hope that, in this article, I have been able to demystify some of the basics of bankruptcy for you and to give you a better understanding of some of the terms and legal jargon involved in bankruptcy cases.
In order to serve you further, we encourage you to consider calling our office to set up your free consultation today. Whether it is protecting as much of your property as you are legally allowed or choosing whether chapter 7 or chapter 13 is your best course of action, at Trezza & Associates our representation of thousands of clients gives us the experience you can count on to ensure that you take full advantage of when and how to file your bankruptcy case. We will take the time to educate you on the information you need to make the best decisions to get your fresh financial start. Contact us today in Tucson or Phoenix to learn more about how the bankruptcy process can help you and your family out of financial distress.
