The third blog in a four part series about filing for a Chapter 7 or 13 bankruptcy.
By Sara E. Cook
By the time you file the Petition, the Petition Date, you have elected one of two possible Chapters under the Bankruptcy Code, either Chapter 7 or 13. By filing the Petition, under either chapter, you have caused an Automatic Stay to be put in place that requires that all creditors stop contacting you or trying to collect while your case is pending. This gives you relief from these actions while the Court considers your petition under either chapter and decides what relief is proper for you. Creditors who do not honor the Automatic Stay, even if they were unaware of it, will be required to stop contact immediately and participate in the bankruptcy proceeding instead.
If You Filed A Chapter 7
If you filed a Chapter 7, you will lose most of your assets, except property the law allows you to keep, as of the Petition Date. On the Petition Date a “trustee” in bankruptcy will be appointed and they will become the owner of your non-exempt property as of the Petition Date. This is known as the Bankruptcy Estate. Very often, after applying exemptions, Petitioners own few if any assets that the Trustee can take into the Estate. The job of the Trustee is to liquidate assets for the benefit of unsecured creditors who do not have collateral or enough collateral to cover the amount you owe them. If there are no real assets the Trustee will declare the Bankruptcy Estate to be a “no asset estate.”
Most often, debtors have two types of secured creditors: mortgage lenders and vehicle lenders. Often, the Debtor can retain their home and car in a Chapter 7 depending on the size of the liens against the home or vehicle. The Trustee may not take them. These issues will have been considered in detail in deciding whether to file a Chapter 7 or 13.
Within 60 days of the filing of the Petition Date, the trustee will hold a Creditors Meeting where the Trustee will examine your Petition and other documents. The Trustee will ask you questions about what led to the bankruptcy and explore whether there are assets in the estate to pursue. This can include actions to “clawback” certain payments on debts you may have made before filing that give one creditor more repayment than others. The trustee will also question and seek to recover loans repaid and gifts to family members made on the eve of bankruptcy.
Student loans and certain tax debts may not be able to be erased. But almost all credit card, medical bills, and other bills that do not involve liens on property will be erased. There are two exceptions. The first exception is if a creditor files a complaint to determine if their debt should be discharged. The complaint has to allege misrepresentation, fraud, or conversion with very specific types of conduct that make a discharge of a specific debt unjust. Creditors generally do not undertake these actions, they are expensive and have a substantial burden of proof. But once in a while, if your intentional conduct meets the criteria for these allegations, and enough money is involved they might file.
The second exception is if a trustee or creditor thinks that the bankruptcy was filed with certain intentional defects that make a discharge of any debt unjust. The Bankruptcy Code lists specific circumstances where this can be done, including the failure to file a thoroughly accurate Petition.
For either exception the Creditor or Trustee must file a suit within the bankruptcy to contest discharge of debt or discharge in general within 60 days of the conclusion of the Creditors Meeting unless they ask the Court for an extension of time within that period. If no suit is filed contesting discharge, the Court will generally grant a discharge of debt within the next 30 days. For the Debtor, the ‘fresh start” is obtained. Generally , then between 90 and 120 days of the Petition Date, the Debtor may be free of most, if not all, debt.
If You Filed A Chapter 13
If the appropriate bankruptcy for you was a Chapter 13, the relief obtained is called an “adjustment of debts.” This means that you were able to repay certain defaults in payment on debts with liens, like mortgages, car loans or taxes, and retain the property (i.e. home, vehicle) while paying nothing or only a percentage on unsecured debt-credit cards, medical bills and other bills with no liens involved. A plan of payment is proposed to the Court that lasts between 3 and 5 years. The payment amount is initially determined by assessing income and reasonable monthly expenses. During the plan, the property of the estate-the property owned by the Debtor-remains in the Debtor’s possession and does not transfer to the Trustee. After three to five years, if the plan is paid according to the Court approved terms and the secured debt is current, then the balances due on the other debts are discharged, that is, erased.
The Trustee will have a creditors meeting and exam you about why you filed, what your plan proposes, and the documents you have provided. The Trustee will either support your plan or ask you to revise it. Generally, a plan supported by the Trustee will be submitted to the Court and usually will be approved.
During the time of repayment under the Plan, the Automatic Stay remains in place and creditors cannot come to you for repayment. Their only remedy is to review your proposed repayment plan, object if they have a basis, or file a complaint about discharge of debt just like in the Chapter 7. Once the Plan is approved, the Creditors just wait for whatever payments are scheduled.
Under both chapters, you can achieve a discharge of some or all debts. Chapter 7 is much faster, but some of your assets may have to be turned over to the Trustee to be liquidated for creditors. Under a 13, you will retain your assets, but pay some portion of your debts back.
At McKenna. Storer we offer up to a free hour consultation, currently by Zoom or telephone, to go over the issues that face you so you can make an informed decision about bankruptcy or alternative strategies. After the initial consultation, if a bankruptcy is decided upon, a comprehensive package of worksheets will be given to you to complete and to begin the process. An initial pre-bankruptcy meeting, again by Zoom, follows to go over and sign the retention agreement, the mechanism for payment of fees and the information for the preparation of bankruptcy schedules. The time line and projected time frame from start to finish will be outlined for you, and you will be on your way to relief from debt. A second pre-filing meeting will confirm the bankruptcy filing information and signing of the petition for bankruptcy. Please contact us at 312.558.3900 for a consultation to see if bankruptcy is right for you.