Bernard E. Brooks L.C.

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Types of Bankruptcy Filing's

General Bankruptcy Information

A person and/or entity filing a bankruptcy petition in the federal courts is required to list all of his or her assets and all of the people and companies they owe money. It is a bankruptcy crime to not list all of the personal property that is owned by a Debtor. A Debtor does not have the right to pick and choose which creditors they will list on their and/or its bankruptcy schedules. If money is owed to a creditor and/or if a claim could be filed in the Debtor's bankruptcy, that person and/or company should and must be listed. That includes debts that may or may not be discharged by the bankruptcy court. Many people have the misconception that they will lose all of their property when they file bankruptcy. When a person or entity files bankruptcy all of his, her or its property becomes the property of the bankruptcy estate. In Texas, in deciding which property he wants to have excluded from being taken by the bankruptcy trustee, a Debtor has the right to choose between the State and Federal Exemptions. It is the role of the bankruptcy attorney filing the bankruptcy to properly advise the Debtor as to which exemption to select in each bankruptcy case. Due to the extremely generous exemptions provided Debtors under the Texas Property Code, it is unusual for a Debtor to lose any personal or real property in bankruptcy. These are generally three(3) classes of creditors in every bankruptcy. These are secured creditors, priority creditors and unsecured creditors. Generally, if a secured creditor has properly perfected its lien prior to the bankruptcy filing, the secured creditor must be paid in order for Debtor to keep his or her property after the bankruptcy is discharged. That means that a Debtor will have to continue paying for a loan on his or her home and automobile if he or she wants to keep these assets. The term secured creditor means what is says. A secured creditor has as security for its debt, personal or real property that was pledged by the Debtor to secure the loan and/or debt. Priority creditors are those that have a priority for the repayment of their debt before the unsecured creditors are paid. Income taxes, wages, child support, and administrative expenses incurred in the bankruptcy are normally classified as priority creditors. Unsecured creditors are those creditors that do not have any security for the repayment of theses debts. Credit cards, medical bills, personal loans and other debts incurred by the Debtor are usually classified as unsecured creditors.

Chapter 7:

Chapter is commonly referred to as a “liquidation” proceeding because the trustee is entitled to seize and sell all non-exempt assets owned by the Debtor and distribute the proceeds from these sales to creditors. Not everyone qualifies for a Chapter 7 discharge. If the debtor’s income exceeds his or her expenses to a degree that the Debtor would be able to repay his unsecured creditors some repayment over a three (3) year period, the trustee of the court, and/or the Office of the U. S. Trustee, may move to dismiss or convert the case to a Chapter 13. When this occurs the term most commonly used by the trustee is “substantial abuse”. In most Chapter 7 cases the Debtor receives a discharge of most unsecured debts within several months of filing the case. In Texas, due to the broad exemptions granted under State law, it is uncommon for a Debtor to lose any of his or her property. Certain debts are not dischargeable in a Chapter 7 proceeding. These debts include recent tax debts, child support, student loans, drunk driving judgments, criminal fines or restitution, or debts incurred by fraud or intentional wrong-doing. If a debtor has had a judgment entered in a civil case in which the debtor was found to have committed fraud, and the fraud finding is contained in the judgment, the creditor who has received this judgment award and damages can object to the discharge of this judgment in the bankruptcy court. If a Debtor in a Chapter 7 signs and files with the court a Reaffirmation Agreement with a particular creditor, this debt will survive the discharge and the Debtor will still remain liable for the repayment of this debt. If the debt in question is a secured debt and the Debtor does not execute a Reaffirmation Agreement on this secured debt prior to discharge, the debt will be discharged but the lien on the asset secured will survive the discharge and the Debtor must pay this debt if he or she wishes to retain this asset.

Chapter 13:

Chapter 13 is frequently referred to as a Wage Earner Plan. To be eligible for Chapter 13, the Debtor must have regular income and debts below a certain level. Chapter 13 Bankruptcy applies when the income of the Debtor exceeds the Debtor’s monthly personal overhead expenses to some extent such that the Debtor is able to pay his secured debt and priority debt in full and some portion of the unsecured debt is repaid. Chapter 13 is usually a better alternative than Chapter 7 when the Debtor is behind on his mortgage and car payments.

A big advantage of Chapter 13 over Chapter 7 is that some debts that are not dischargeable in a Chapter 7 can be discharged in Chapter 13. The only debts that are not dischargeable in a Chapter 13 are family support fines, student loans. and drunk driving judgments. Tax debts that are a priority must be provided for in the Chapter 13 Plan. Full repayment of these taxes is required during the plan duration. In a Chapter 13 case each debtor is required to attend an orientation class before his or her plan is confirmed by the court.

One big advantage in filing a Chapter 13 over a Chapter 7 is the ability to “cram down” certain debts. For example, if the Debtor has a loan on his automobile, and the fair market value of the automobile is substantially less than the outstanding balance due the creditor, the Debtor has the option of cramming down this debt. The creditor only receives the fair market value of the collateral over the plan duration. During the plan duration the Debtor is limited to the amount of money he can put in his retirement and 401K plans. Some judges will not confirm a Chapter 13 Plan where the Debtor has luxury vehicles for which he must make large monthly payments and the unsecured creditors receive a small percent of the total payments made by the Debtor during the Plans duration.

In a Chapter 13 the Debtor must begin making his plan payments to the Chapter 13 Trustee within 30 days from the date the Voluntary Petition is filed. The monthly payment can vary during the duration of the plan to allow the Debtor to increase his plan payment over the life of the plan. The Chapter 13 Plan must provide for full repayment of all secured and priority claims during the plans duration. The Debtor has the right to object to a secured claim filed by a creditor, and this objection must be concluded before the Chapter 13 Plan is confirmed.

The Debtor is entitled to keep property in a Chapter 13 that is not exempt, as long as the creditors receive as much as they would receive in a Chapter 7 liquidation. For example, if the Debtor has a boat and the boat has a fair market value of $5,000.00, the unsecured creditors would have to receive an additional $5,000.00 during the plans duration in order to keep his or her boat. At the initial 341 meeting, the Debtor is required to bring with him or her a Social Security card, and/or another original document with the social security number on it, and their drivers license. In addition, each Debtor is also required to bring a recent pay stub to verify the income listed on Schedule I of the Debtor’s schedules.

Chapter 11:

Chapter 11 bankruptcy allows a business to reorganize its affairs without undue pressure from creditors. This chapter allows the debtor (business) to continue normal business activities while reorganizing (Like chapter 13) its finances so that it may pay its employees, reduce obligations to its creditors and produce a return for its stock holders. During this chapter the debtor in most cases will retain possession of assets and continue its day to day operation. A Chapter 11 Plan may last up to 6 years. In some cases the debtor in a Chapter 11 will elect to sell its primary assets and liquidate its business. When this occurs the Chapter 11 Debtor will need to obtain court approval to sell its assets. Chapter 11 Debtors are required to make payments to the U. S. Trustee’s Office and to file reports of the income and expenses of the Debtor while they are in a Chapter 11.

Compared to a small business debtor in a Chapter 13, a Chapter 11 is much more costly to administer and maintain. If the secured creditor objects the Debtor in a Chapter 11 must obtain court approval for the use of “cash collateral.” Over the last few years many large national retail chains have filed for Chapter 11 protection. When a large chain files Chapter 11 they will usually move to terminate leases on stores that are unprofitable.

There is also a Chapter 11 for a Small Business Debtor. A Small Business Debtor is one whose debts exceed the limits of Chapter 13 (Unsecured $250,000 and secured $750,000) and has an aggregate non-contingent secured and unsecured debts of $2,000,000.00 or less (excluding one who owns or operates real estate). If qualified the debtor can be fast-tracked and treated differently than a large Chapter 11 corporation. Repayment of debts by a Chapter 11 Debtor is made from future profits, sale of some assets, mergers or recapitalization.

Credit Cards:

Most Chapter 7 and Chapter 13 Debtors will have incurred debts for credit card charges and cash advances made before filing bankruptcy. It is important for each Debtor and his attorney to review his statements to determine if these charges are for recent purchases and/or cash advances. The reason that this is important is that cash advances and credit card charges for luxury goods or services made within 60 days of a bankruptcy filing and exceeding $1,000 for a single creditor are presumed to be fraudulent. The 60 day presumption provided for in the bankruptcy code makes it easier for a creditor to prove that credit card charges or cash advances were fraudulent. If the charges are incurred more than 60 days from the bankruptcy filing the creditor has the burden to prove fraud.

The presentation of a credit card to a merchant constitutes an implied promise that the purchaser will repay the debt. Credit card debts and other loans are considered fraudulent if, at the time the debt was incurred, the debtor either (1) did not intend to repay the debt, or (2) did not have a reasonable possibility of repaying the debt. The court will look to the following factors to determine if the credit card charges in a particular case were fraudulent:

1. Time Between Card-use & Bankruptcy Filing. The general rule is that charges are more likely to be considered fraudulent if they are made within several months before the debtor files for bankruptcy.

2. Consultation With Bankruptcy Attorney. When the Debtor first met with his or her bankruptcy attorney to discuss the bankruptcy filing is important to determine the intent of the Debtor. Any debt incurred after the debtor considers filing or bankruptcy, or consults with a bankruptcy attorney will usually be considered fraudulent, regardless of the circumstances.

3. Number of Charges. The charges are more likely to be considered fraudulent if the debtor makes a large number of charges.

4. Dollar Amount of Charges. The charges are more likely to be considered fraudulent if the dollar amounts of the charges are large and/or cash advances were made by the Debtor.

5. Exceeding Credit Limit. The charges are more likely to be considered fraudulent if the debtor exceeds his credit limit when he makes the charges.

6. If Debtor Was Employed. Whether or not the Debtor was employed when he incurred the charges is very important. If employed the Debtor can argue that he intended to use future income to pay these debts. If the Debtor is unemployed but has good prospects for future employment, the charges are less likely to be considered fraudulent.

Credit After Bankruptcy:

The biggest fear facing most Debtors is will they be able to obtain credit after filing for bankruptcy. The answer for a majority of these people is yes. The credit may be more expensive but it is available. There are numerous credit card companies who will extend credit on an unsecured basis to persons who have filed bankruptcy. There are also some good publications that provide a good guide to credit recovery after personal bankruptcy. It is important for the Debtor to send a copy of his bankruptcy discharge to each credit bureau and request that the credit bureau remove all items that were discharged in his bankruptcy from the credit file. In some cases Debtors have been able to obtain mortgages at reasonable interest rates within 1 year after they received their bankruptcy discharge.