Bankruptcy is debtor protection provided by the federal government to help businesses and individuals repay their debts or eliminate them by means of liquidations or reorganizations. The Bankruptcy code is divided by chapters and that is how bankruptcies are referenced. A Chapter 13 bankruptcy is a bankruptcy where debt repayment plans are reorganized in a manner that allows the debtor the ability to repay those debts; however, that type of bankruptcy isn’t ideal for everyone and they made need to file a Chapter 7 bankruptcy. A Chapter 7 Bankruptcy is a liquidation bankruptcy where the debtor is only allowed to keep a certain amount of property, as described below, and all the other assets belonging to the debtor is sold off in an attempt to repay the creditors, the companies and people the debtor owes. A person is only allowed to file a Chapter 7 Bankruptcy every 8 years.
When a person files a bankruptcy petition, a Bankruptcy Estate is created. The Bankruptcy estate contains everything that the debtor owns and all of their equitable interests. This is then under the control of the Bankruptcy Trustee. The chapter 7 trustee is an individual appointed by the courts to administer the estate and is entrusted to try to find and liquidate all the assets of the debtor’s and repays the creditors as much as they can from the sale of the assets.
Before the decision to file a Chapter 7 petition is done, a Disposable Income Test and a Means Test should be done to determine if the debtor meets the requirements necessary to file. The Disposable Income Test is used to determine whether the debtor has enough income left over after paying necessary monthly expenses, to pay off at least a portion of their unsecured debts. If the disposable income adds up to more than the statutory amount set for the debtor’s location, they will fail the means test and cannot file for Chapter 7 bankruptcy. The Means Test is the method used to determine if the debtor makes more than the median income level for their geographic location. If their income is less than the median amount, they are allowed to file; however, if they do make more than the median amount, then the Disposable Income Test must be used.
At the same time the Bankruptcy Estate is created, an automatic stay is put into place to protect the debtor from any other collection efforts by their creditors. This protects the debtor from creditors proceeding with lawsuits, garnishments, and even initiating foreclosure proceedings against the debtor. Creditors cannot send the debtor collection letters or assess other charges and fees to their accounts. This is good for both the creditors and the debtors. The debtor no longer has the stress of collections while the creditors can be reasonably assured that an effort will be made to pay each and every creditor an equitable distribution of the assets rather than one creditor having the ability to take all the assets. This Automatic Stay remains in effect until the bankruptcy is dismissed or discharged.
An individual debtor under Chapter 7 is allowed to keep some of their assets through exemptions allowed under the Bankruptcy code. Exemptions are statutorily defined properties that an individual debtor may protect from administration in the bankruptcy estate. Some states offer their own exemptions though and the debtor is allowed to choose to use their states exemption laws or to use the federal exemption laws. In Indiana, the homestead exemption is currently at $7,500 for an individual filing and $15,000 if filing as a married couple. A debtor is also allowed to keep up to $8,000 in personal property or $16,000 is filing married. Indiana has scattered the statutes pertaining to all of a debtor’s possible exemptions all over the place. Some are under title 34, some under title 27, and yet you should always look for any other possible exemptions under § 522 of the Federal Code. There are exemptions of varying amounts for whole life insurance policies, automobiles, business partnership property exemptions, exemptions for crime victims’ benefits, unpaid wages still due to the debtor, earned income tax credits, health aids, jewelry, household goods, tools of the trade like uniforms, personal injury claims, retirement accounts, and government benefits like Social Security. There are many exemptions available depending on your state and your circumstances. It is the duty of the debtor’s bankruptcy attorney to find all those exemptions applicable.
One of the primary concerns for the debtor is, “How long will this take?”
There is a deadline of 15 days after filing the petition to file certain financial “schedules” with the court-documents declaring your assets, liabilities, expenses, income, and a statement of your affairs. These schedules are typically filed with your initial petition. About 15 days after a petition is filed, the courts will mail the Notice of Commencement of Case to the debtor and to all of the creditors listed in the petition. This notice will inform the debtor of the date set by the court for the meeting of your creditors, and the deadlines for your creditors to object to your case and file their claims against you. Within 30 days after filing a petition, or before the meeting of creditors (also called a 341 meeting), you are required to file a Statement of Intention whereby the court is informed if the debtor intends to keep their secured property that serves as collateral for their secured debts, or if the debtor plans to surrender the property. A debtor can reaffirm the debts and continue to make payments on those debts if they wish to keep the property or it can be sold for fair market value. Within 45 days after the Statement of Intention is filed, the debtor must surrender or keep the property as indicated in the Statement.
Sixty to ninety days after filing the bankruptcy petition, there will be a Meeting of the Creditors or 341 Meeting as it is typically called. The trustee will ask the debtor to testify under oath as to the accuracy of the statements in their petition. It is vital that the client, debtor, attends the 341 hearing. If the debtor is not there, the petition will be dismissed. Within 45 days after filing, evidence of any payments received from any employer within 60 days of filing, an itemized statement of monthly income, and an estimate of any increase income or expenditures expected over the next 12 months must be submitted.
Within 60 days of the 341 hearing, the trustee and any creditors must file any objections they have to any of the exemptions in the petition. Creditors can object to the discharge of a debt if the debt was obtained through fraud or theft, personal injury claims from a DUI or DWI, or assigned debt through a divorce. Another debt that cannot be discharged is a federally backed student loan without typically being permanently unable to repay it typically due to indigency or handicap. Orders for child support or alimony cannot be discharged as well. Creditors can also object to the discharge if it is found that there was any bankruptcy fraud, spoliation of necessary records, failure to explain losses, or failure to respond to interrogatories. Proofs of claim must be filed within 90 days after the first date set for the 341 hearing if they wish to share in the payments from your case if any assets are available for liquidation even though there typically are not any assets to divide in a Chapter 7 bankruptcy.
It is important to address certain times for the debtor, such as the 341 meeting again. The trustee will be asking some questions of the debtor like, “Have you paid off any debts to family members recently?” or “How did you get your unsecured debt?” It is important that the debtor is prepared to answer questions pertaining to their finances going back at least 180 days and that they bring any financial documents that may help to explain their situation and a copy of their most recent tax return. They should also bring their identification and social security card. The trustee is trying to make sure there has not been any preferential transfers (paying off one creditor to benefit them more than another creditor) or fraudulent transfers (transfer of assets to another without consideration to hinder, delay, or defraud creditors). If it is found that there has been a preferential transfer, the trustee is entitled to take that money back from the preferred creditor to more equitably divide among the other creditors. If it is found that there has been any fraudulent transfers, the petition may be dismissed and the debtor may not be allowed to file for bankruptcy and even be sent to prison. Make sure your debtors are honest in the preparation of their bankruptcy. It is also important to include certification of debtor counseling in the petition by the due date so the case isn’t dismissed. Debtor counseling is a new requirement since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect. This certification is often overlooked by debtors especially if they had filed previously before the BAPCPA. After all, the purpose of bankruptcy is to give the debtor a fresh start, so that counseling may be the first time they were ever given any tips to stay out of debt.