Bankruptcy Newsletter
Title 11 * Federal Bankruptcy Code
Bankruptcy
Law is federal statutory law contained in Title 11 of the United States
Code. Individual States may not govern bankruptcy laws; however they
may pass laws which control other aspects of the debtor-creditor
relationship.
Title 11 is currently subdivided into eight chapters:
- Chapter 1. General Provisions, Definitions and Rules of Construction
- Chapter 3. Case Administration
- Chapter 5. Creditors, the Debtor, and the Estate
- Chapter 7. Liquidation
- Chapter 9. Adjustment of the Debts of Municipality
- Chapter 11. Reorganization
- Chapter 12. Adjustment of the Debts of a Family Farmer with Regular Annual Income
- Chapter 13. Adjustment of the Debts of An Individual With Regular Income
United
States Bankruptcy Courts are a part of the District Courts of The
United States. Columbus, Ohio is in the Southern District of Ohio.
The
United States Trustee program is a component of the Department of
Justice. Trustees are part of the process to ensure proficiency and
protect the integrity of Federal Bankruptcy Courts. The primary
responsibility of the trustee is to confirm that the bankruptcy case is
handled efficiently and administrative duties are performed lawfully.
Chapter 7
Chapter
7 is the chapter of the Bankruptcy Code which results in liquidation. A
chapter 7 bankruptcy does not involve the filing of a repayment plan.
Instead of a repayment plan, the bankruptcy trustee gathers and sells
the debtor’s non-exempt assets, and uses the profit from the sale 6to
pay off holders of claims (creditors) in accordance with the provisions
of the Bankruptcy Code. Chapter 7 allows the debtor to keep certain
“exempt” property. There is a possibility that part of the debtors
property may be subject to liens and mortgages that pledge the property
to other creditors.
A chapter 7 debtor
may obtain a discharge order that covers their exempt property. A
discharge releases individual debtors from personal liability for most
debts, and prevents collection actions.
Chapter 13
A
chapter 13 bankruptcy plan allows debtors to develop a repayment plan.
Chapter 13 is also known as a wage earners plan. It enables the debtor
upholding a job with regular income the opportunity to repay all or
part of their debts. Normally the repayment plan spans a period of
three to five years depending on where the debtor’s income places them
within the applicable state median.
Property Settlement Claims
Depending
upon the circumstances of the case a property settlement may or may not
be dischargeable. A debt or a portion of a debt no longer has to be
paid if a discharge order is issued due to bankruptcy.
New
laws were established in 1994 to protect former spouses of persons who
declared bankruptcy following divorce. In cases where the debtor is
technically bankrupt, but still has the means of paying many debts, a
discharge may not be issued. In cases which the bankrupt debtor has
enough property and income to pay the debt to the ex-spouse, he or she
will be entitled to do so. If a debtor truly does not have enough money
or assets to pay the debt owed to an ex-spouse or dependents, then all
or a portion of the debt may be discharged in bankruptcy.
This
ruling will only apply to debt owed in a property settlement; the court
cannot discharge past-due payments for alimony or child support.
To determine whether or not the debtor qualifies for a discharge the court uses a means test to determine disposable income.
Means Test
An
important change in the bankruptcy code by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 is a definition of
“current monthly income.” Certain individual debtors in chapter 7 and
all individual debtors in chapter 11 and 13 are required to calculate
their current monthly income.
Individual debtors who file under chapter 7 (liquidation) are subject to a “Means Test” to determine their disposable income.
The
“Means Test” is a Form 22A Statement of Current Monthly Income for
chapter 7 or Form 22C for chapter 13 used to determine if a presumption
of abuse exists. This form compares the debtor’s Current Monthly Income
from the past six months (excluding SSI benefits) with the state median
for the debtor’s household size. If the debtor’s income is higher than
the state median, then the debtor must complete a full means test to
determine Disposable Monthly Income, which is the debtor’s income after
necessary expenses.
Necessary Expenses:
- IRS standards for living expenses,
*Clothing, food, housekeeping, personal care
- IRS standards for housing and transportation
- Taxes and Child Care
- Insurances, home energy costs
- All secured payments
- All past due amounts on claims
- All priority claims
If
the Disposable Monthly Income is sufficient to repay a significant
portion of these debts, the case may be referred to a chapter 13 rather
than a chapter 7.
Certain cases may be
reevaluated even if the means test proves the debtor to be above the
state median if substantial medical debt can be proven to be cause for
chapter 7 bankruptcy.
Non Exempt/Exempt Property
Property
exemptions are the one place that the law varies from state to state.
The good news is that every state and every case allows for some
exemptions. In most bankruptcy cases these exemptions include:
- A portion of the value of the debtor’s residence
- If the debtor does not own a home, they may keep a personal property allowance
- A portion of the value of insurance policies
- Immediate personal possessions
- Clothes, kitchen utensils, a limited amount of furniture, and sufficient provisions to support their family for six months
Chapter 7 Trustee
Debtors
filing for a chapter 7 bankruptcy will be appointed a trustee by the
court. The trustee’s job is to set up a meeting between the debtor and
creditors. Creditors must file their claims within 90 days of this
meeting or they will not be able to obtain any of the debtor’s assets.
The trustee sells all non-exempt property of the debtor and uses the
proceeds to pay the creditors.
Chapter 13 Trustee
The
trustee schedules a meeting for all creditors with the debtor. A
payment plan is submitted to the court and creditors for approval. The
bankruptcy court may over-ride the objection of creditors in some
cases. The court also has the right to convert a chapter 13 case to a
chapter 7 if funds are not sufficient to pay creditors an agreeable
settlement. If the plan is approved the debtor’s monthly disposable
income is paid to the trustee for distribution to the creditors. The
payment plan must allow creditors holding liens on the debtor’s
property at least the fair market value of the security loan. The
trustee must ensure that the creditors receive at least the amount of
money that they would have received with a chapter 7 bankruptcy case.
Retirement Plan Exemptions
Pension
rights and 401(k) plans are assets which are not the property of the
bankruptcy estate. When retirement plans are not part of the estate the
debtor does not have to exempt them to keep them. IRA’s and other
retirement savings plans may be part of the bankruptcy estate, however
in most cases are still deemed exempt.
The
ideal of filing for bankruptcy is for the debtor to make a fresh start.
Thus, exemptions are important so that the debtor has enough assets to
start over with.
This
website is intended for educational purposes only. It is not legal
advice, nor does it form a lawyer/client relationship. For legal
advice, you should contact a licensed attorney to discuss your
particular situation.
