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.
