GENERAL INFORMATION ON BANKRUPTCY

Donald J. Schutz, Esq.

Attorney at Law, Member of the Bar of California, Florida, and District of Columbia; 535 Central Avenue; St. Petersburg, FL 33701; 727-823-3222; Telefax 727-895-3222

Email: DSchutz@LawUS.Com

On this page, you will find general information about bankruptcy, including a discussion of the difference between state and federal courts, the difference between Chapters 7, 11, 12, and 13, and a discussion of the bankruptcy courts and filing procedures. At the bottom of the page, you may link to more specific information on each of the various types of bankruptcies.

INTRODUCTION TO BANKRUPTCY COURTS: THE DIFFERENCE BETWEEN FEDERAL COURTS AND STATE COURTS

In the United States, there are two separate court systems, state courts and federal courts. Both systems are established by a constitution. The United States Constitution establishes the Court system of the United States, also known as the federal system. Each state has its own constitution, and the constitution of the state establishes the state court system.

The United States Constitution provides that federal law is supreme to state law, also known as the "Supremacy Clause." This is the reason that state courts are obligated to follow decisions of the United States Supreme Court, and is also the reason that the United States Congress can pass laws that bind state governments. The bankruptcy laws are one class of these laws. The laws are passed by the United States Congress, and due to the supremacy clause of the United States Constitution, these laws override state contract laws. This is the reason that a person who actually owes someone money can file bankruptcy under the federal laws and receive a discharge that prevents the creditor from later collecting the money.

The highest federal court is the United States Supreme Court, located in Washington, D.C. Under this Court are the United States Circuit Courts of Appeals, and under these courts are the United States District Courts. The United States Bankruptcy Courts are divisions of the United States District Courts. The various United States Districts are sub divided into "divisions".

Every person or company in the United States resides within a United States District for which there is a United States Bankruptcy Division. For example, residents of Los Angeles, California, will file bankruptcy in the United States Bankruptcy Court for the Central District of California, Los Angeles Division, located at 312 Spring Street, Los Angeles, California. Residents of Washington, D.C., file bankruptcy in the United States Bankruptcy Court for the District of Columbia, located at 3rd and Constitution Streets, N.W., Washington, D.C. Each person or company has a United States District that has bankruptcy jurisdiction.

GENERAL DESCRIPTION OF CHAPTER 7, 11, 12, AND 13

The primary statutory laws of the United States are set forth in a set of books known as the United States Code. This Code is divided into Titles, which are in turn subdivided into Chapters.

Most metropolitan libraries, and all law school libraries, have complete sets of the United States Code.

Each general area of law is given its own numerical Title. For example, criminal laws are found in Title 18, and tax laws are in title 26. All bankruptcy laws are found in Title 11 of the United States Code (not to be confused with Chapter 11).

Title 11 is subdivided into Chapters. Chapter 1 contains general provisions applicable to all bankruptcy matters. Chapter 2 has not been used at this time. Chapter 3 provides laws on the administration of all bankruptcy matters. There is no Chapter 4 at this time. Chapter 5 contains specific statutes on creditors, debtors, and the estate, and there is no Chapter 6.

Chapter 7, titled "Liquidation", contains laws on liquidating the estates of corporations, individuals, and other business entities.

There is no Chapter 8.

Chapter 9 is a specific Chapter regarding the adjustment of debts of a municipality.

There is no Chapter 10.

Chapter 11, titled "Reorganization", contains laws on reorganizing corporations, individuals, and other entities.

Chapter 12 is for the adjustment of debts of a Family Farmer with Regular Annual Income.

Chapter 13 is for the Adjustment of Debts of and Individual with Regular Income.

Accordingly, the so-called "Chapter 7" is the nick name of the procedure for liquidation of the estate of a person or individual under the provisions of the laws found in Title 11, Chapter 7, of the United States Code. Similarly, Chapter 11 and Chapter 13 are nick names for corporate and individual debt reorganization and adjustment under the provisions of the laws found in Title 11, Chapter 11, and Title 11, Chapter 13.

THE DIFFERENCE BETWEEN A CHAPTER 7 AND A REORGANIZATION

A chapter 7 bankruptcy serves to liquidate all nonexempt property of an individual or company, and extinguish all debts except for certain itemized debts which are not dischargeable.

Chapter 11, 12, and 13 bankruptcy provisions serve to reorganize and adjust the debts of individuals, corporations, and family farmers. The reorganizing debtor must pay some amount of money each month to the creditors, and in return, is allowed to keep all property, regardless of exemptions. In addition, a successful reorganization results in a requirement that creditors accept monthly payments over a period of time, often for an amount less than the total claim.

A Chapter 7 stops all lawsuits, but cannot be utilized to force a creditor to reinstate a loan or accept monthly payments. For example, in a case where an individual is facing the foreclosure of his home, a Chapter 7 will temporarily stop the lawsuit. However, the creditor may file a motion, called a Motion for Relief from the Automatic Stay, in which the creditor requests the Court to allow it to continue the foreclosure. There is generally no basis for a Chapter 7 debtor to force a creditor to take monthly payments, and the request of the creditor is routinely granted.

On the other hand, a reorganization not only stops the foreclosure, but provides a mechanism for the creditor to be paid monthly payments on the defaulted payments, and requires the creditor to reinstate the loan. For example, a person who is $2400.00 behind in home mortgage payments may file a Chapter 13 before the foreclosure sale, begin to make current monthly payments, and pay off the $2,400.00 arrearage at the rate of $100.00 per month for 24 months. At the end of the 24 month period, the loan will be fully reinstated.

A discussion of Exemptions

An "exemption" is a legal definition of property that creditors cannot take possession of to satisfy debts. In bankruptcy, the debtor is allowed to keep certain itemized assets, known as "exempt" assets. Exemptions vary from state to state. The reason that state law governs bankruptcy exemptions is again traced to the United States Constitution. Congress, in the bankruptcy laws, specifically gave states the right to opt in or out of the federal exemptions. Some states have opted to retain federal exemptions. Other states have opted out, and instead, apply their state exemptions.

For example, the State of Florida has opted out of all federal laws on exemptions. In Florida, the state Constitution provides that a debtor may keep a homestead regardless of the value. For this reason, a Florida resident who has a $100,000.00 home with no mortgage may file Chapter 7, discharge debts, and emerge from bankruptcy with full ownership of this $100,000.00 home, free of any claims of creditors. However, a New York resident in the same situation would lose the house, since New York law limits a homestead exemption to $25,000.00.

In a Chapter 7, the Trustee takes possession of all assets which are not exempt, sells them, and distributes the money to unsecured creditors. Often, debtors are able to repurchase non-exempt property from the Trustee. In a reorganization, there is no requirement that the Debtor surrender property. In return, the reorganizing debtor must pay to creditors at least the value of the property so retained in monthly payments. For example, let's say an individual owns a $10,000.00 car that is free and clear of any lien, and owes $20,000.00 in past-due credit card bills. In a Chapter 7 (assuming that in the particular state there is no exemption for this amount), the trustee would take possession of the car, auction it, and distribute the proceeds for expenses and to creditors. In a Chapter 13, the individual will keep the car, and will have to pay at least $10,000.00 in 36 equal monthly payments to the Trustee, along with administrative fees. The trustee will, in turn, pay the creditors a portion of the monthly payments during the 36 month term. This allows the individual to keep his car, and returns the same amount to the creditors that a Chapter 7 would return. Various courts treat the remaining $10,000.00 owed to the credit card companies differently. Some judges require individuals to pay the full amount due to creditors, by extending the number of months in the plan from 36 to up to 60. However, most judges allow the individual to reduce the total amount paid to the creditors, and the amount not paid is "discharged" just as it is in a Chapter 7.

THE AUTOMATIC STAY

The immediate benefit to filing any bankruptcy is the automatic stay, found in Title 11, Chapter 362, of the United States code. This bankruptcy law basically provides that creditors who are pursuing collection action against debtors must immediately stop all collection action the day a bankruptcy is filed. Since Federal Courts are separate, and supreme, to state courts, Federal statutes can prevent state courts and individuals using state courts and state laws from taking actions to collect debts. For example, let's say a debtor is two months behind on car payments, and the repo man is roaming around, attempting to pick up his car. Repossessions are governed by state contract law and repossession statutes. The Federal law says that any creditor who is attempting to take action to collect a debt must immediately stop that collection effort upon the filing of the bankruptcy. For this reason, when the Debtor files a Chapter 7 or 13, the repo man must immediately stop trying to repossess the vehicle. If he has the car chained up and is ready to drive off, if the Debtor tells him he has filed bankruptcy, the repo-man must stop the truck and unchain the car. The failure to comply with the automatic stay exposes the creditor to extensive actual and punitive damages.

The automatic stay literally stops all collection activity. For example, let's say the car has been repossessed and is scheduled for auction. The automatic stay will stop the auction. It will stop foreclosure sales of houses, I.R.S. levies on wages, and all collection activity by any creditors. There are certain exceptions, including fines and criminal penalties, environmental enforcement regulations, and other exceptions located at 11 U.S.C. 362 (d).

A BRIEF DESCRIPTION OF THE COURT HOUSE AND THE PERSONNEL

The bankruptcy court is set up to administrate all of the bankruptcy filings within its division. Each bankruptcy court has a court clerk, and the Clerk's office is open to the public.

In the clerk's office, you will find the desk for filing the bankruptcy petition. Generally, clerk's will not provide any advice on filing, or any advice on filling out forms. If you ask any questions, you will probably be told to find an attorney.

In addition to the clerk's office, you will find rooms designated for holding the Meeting of Creditors, and courtrooms where the bankruptcy judges conduct hearings and trials.

FILING BANKRUPTCY: THE PROCEDURE

1. PREPARING THE INITIAL DOCUMENTS.

In order to file bankruptcy, the debtor must prepare and file a document known as a "Petition" and a mailing matrix with all creditors. Within 15 days of the filing, or in such other time as set by the court, the individual must file a complete list of all assets and liabilities, a statement of income and expenses, and answer a list of questions about events leading up to the filing. These documents are called the "Schedules" and the "Statement of Affairs".

2. FILING THE PETITION

After the documents are prepared, they are delivered to the appropriate bankruptcy court, along with 7 complete copies, and a filing fee of $160.00 for Chapter 12 and 13, $175.00 for Chapter 7, and $800.00 for Chapter 11, unless the court has established other payment terms. There is a procedure to pay the filing fee in monthly payments if the Debtor is unable to pay the monthly payment in full at the time the petition is filed.

3. THE MEETING OF CREDITORS

After a petition is filed, every creditor is notified by mail of a day and time for a meeting of creditors. The individual filing the petition will receive this notice. At this meeting, the individual filing the petition, known as the debtor, must appear. If a husband and wife file, they both must appear. Corporations appear through officers, generally the President.

These meetings of creditors are open to the public, and anyone my go to the meeting room before their meeting to listen and observe the procedures utilized by the Trustee in other cases.

The meeting of Creditors is conducted by a trustee. At the meeting, the trustee reviews the bankruptcy documents and in the case of a Chapter 12 or 13, the debtor's proposed plan to repay its creditors and reinstate mortgages in default. The trustee examines the income of the debtor, the assets and liabilities, and allows creditors to ask whatever questions they desire. In Chapter 11 cases, these meetings are generally more in depth, requiring an examination of tax issues and other issues designed to ensure that the debtor remains current on all obligations after the filing of the Petition.

4. THE CONFIRMATION HEARING

In a Chapter 11, 12, or 13, after the Meeting of Creditors, and after the Debtor has filed a proposed plan of reorganization, the court will hold a hearing, known as the confirmation hearing, at which time the judge considers the documents filed, the proposed plan of reorganization, and the recommendation of the trustee or any objections of creditors. If the judge approves the plan, the judge will enter an order of confirmation, which requires all creditors and the debtor to comply with the terms of the plan.

5. MOTIONS FOR RELIEF FROM STAY

After the Petition is filed, the debtor must make all monthly payments on secured claims that become due after the date of the petition, and keep the loan current. For example, if a bankruptcy is filed in May, the June payment will be due. Also, if the loan documents require insurance or other requirements, the individual must comply with those requirements. If the individual fails, the creditor has a right to file a motion for relief from the automatic stay. If this occurs, the individual will receive a copy of the document and a court hearing. At this hearing, the judge will decide whether to allow the creditor to proceed to repossess or foreclose on the debtor's property due to nonpayment. My book discusses methods for handling this hearing.

HIRE AN ATTORNEY

In every bookstore, and in the classified sections of most newspapers, paralegals and authors publish "kits" to file bankruptcy. For example, in Tampa, paralegals advertise the preparation of the required filing forms for about $75.00. There are several form kits available for $15.00 to $50.00. In contrast, attorneys often charge $300.00 to several thousand dollars to file bankruptcy.

In my opinion, no one should try to file any bankruptcy without an attorney. I have helped many debtors salvage improper bankruptcies. I have never seen an individual file a successful Chapter 13 without an attorney. I have seen people file Chapter 7 without an attorney, but I have also seen many people get into trouble. The main difficulty that Debtors encounter are exemptions and motions for relief from the automatic stay. For example, a Florida resident filed a bankruptcy without an attorney, listing as an asset a house he owned in New York with his New York spouse. He and his spouse had separated, and he had been living in Florida for several years. The paralegal told him that his "homestead" was exempt, not understanding that a "homestead" must be located in Florida to be exempt.

Upon the filing, the Trustee took the position that the New York property was not protected by the Florida homestead laws, and petitioned the court to sell the entire house, keep half of the money, and give the other half to the wife. Of course, the wife did not want the home sold, and had no money. Ultimately, I was able to save the home by assisting her with a refinancing, and making a settlement with the Trustee. Had the debtor obtained an attorney, he would have realized that his interest in the house was not protected. A $300.00 legal fee would have saved $30,000.00 in assets.

Generally, if a person cannot afford an attorney, the creditors cannot get anything anyway, and there is little reason to file bankruptcy. If the person has exempt property he or she desires to keep, trying to save a few hundred dollars in legal fees is the wrong objective. Indeed, most of the people I have seen in trouble filing bankruptcy without an attorney did so to save money, not because they had none.

The most dangerous bankruptcy to file without an attorney is a Chapter 13. They are easy to file, and will stop a foreclosure. However, under a new law, under most conditions a dismissed Chapter 13 will prevent a refiling for 6 months. For example, let's say a Debtor is facing foreclosure on his home. He has the income to catch up on the back payments, but instead of hiring an attorney, he files his own bankruptcy petition and stops the foreclosure. But he fails to get his schedules and plan filed properly, the creditor files a motion to proceed with the foreclosure, and the bankruptcy is dismissed. Barring some other court order, this debtor will not be able to refile a bankruptcy. An attorney would have been able to file the bankruptcy properly the first time, but by filing an improper bankruptcy, the Debtor loses the opportunity to try again, and the house is lost in foreclosure.

There are good lawyers and bad lawyers, honest and dishonest. Most bankruptcy lawyers are both honest and competent, and any prejudice against attorneys should not keep a sincere debtor from finding an attorney. The classified advertising in most newspapers, and yellow pages, have listings of bankruptcy attorneys. If you are in trouble, call one.

Good Luck.

Email: Dschutz@LawUS.Com