There are two primary types of personal bankruptcy
Chapter 7 and Chapter 13
Chapter 7 is called a liquidation. Chapter 7 typically discharges unsecured debts such as credit cards, personal loans, medical bills, and debts relating to loans on surrendered property.
Chapter 13 allows individuals to reorganize their debts through a Chapter 13 repayment plan. Some debtors pay back much or all of their debt through the plan. Many repayment plans provide for reorganization for secured debt and tax debt, but pay little or nothing to unsecured creditors. Bankruptcy can erase debt, stop foreclosure, repossessions, and other debt collections. Bankruptcy does not typically erase most taxes, student loans, or domestic support obligations. (Please see more detailed explanations of Chapter 7 and Chapter 13 below) Please note: Barlow & Niffen, PC is a debt relief agency as defined by the Bankruptcy Code. Barlow & Niffen, PC help people file for relief under the Bankruptcy Code. Please see more detailed explanations of Chapter 7 and Chapter 13 below
DEBT COLLECTION GENERALLY
Prior to filing suit, creditors typically will send past-due notices, collection letters, and make collection calls. Many creditors do not collect their own debts, but hire professional collection agencies to do so. The right to collect a debt may also be sold to a “debt buyer.” Debt buyers often do not have supporting documentation to prove the validity of the debt and can be successfully challenged in court. Some collection agencies and debt buyers will resort to repeated and harassing phones calls, calls at work, and threats of legal action. Collection actions by collectors other than the original creditor are governed by the Fair Debt Collection Practices Act (FDCPA). Delinquent debt may also be reported to the three credit reporting agencies: Trans Union, Equifax, and Experian. When creditors are unsuccessful by utilizing typical non-judicial collection actions, they will turn to judicial action (filing suit).
To avoid file bankruptcy, individuals should explore non-bankruptcy options. Some creditors are will to negotiate repayment terms at reduced interest rates. Debt consolidation is also an option. Typically, the debts will be consolidated by utilizing a consolidation service such as Consumer Credit Counseling Services to pay the debts back over a period of 3-5 years at reduced interest rates. This is a true debt consolidation as opposed to a consolidation in which debts are settled. Settlement of debts can cause tax consequences if a 1099 is issued for cancellation of debt. In addition, many creditors will refuse to participated in the consolidation program.
COLLECTION OF DEBTS SECURED BY PERSONAL PROPERTY
When creditor loans money and takes a security interest in property (collateral), it is known as a secured creditor. The term also applies to a security interest in real estate. A security interest may be created by a creditor loaning funds to purchase specific property and the security interest being created contemporaneously. This is known as a purchase money security interest (PMSI). Car loans and the purchase of household goods such as furniture and electronics are common PMSIs. A security interest may also be created when an individual pledges property to borrow money such as title loans and pawn loans. If the borrower fails to make payments to the creditor, the creditor may repossesses the property. The creditor is not allowed to repossess the property if a breach of the peace is likely to occur. If the creditor is unable to obtain possession of the property, it may file a lawsuit to recover the property. This is known as a replevin action. If the creditor obtains possession of the property, it has the right to sell the property. If the property sells for less than the balance owed, the creditor may collect the difference of the “deficiency.”
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In the 12-year span from October 1, 2005 to September 30, 2017, about 12.8 million consumer bankruptcy petitions were filed in the federal courts. … Nonbusiness filings (i.e., filings involving mainly consumer debt) constituted 97 percent of all Chapter 7 bankruptcies and 99 percent of all Chapter 13 bankruptcies.
USCourts.Gov Mar 7, 2018
REAL ESTATE FORECLOSURE
Foreclosure is when a the holder of a debt secured by real estate (mortgagee), after a default in payments required pursuant to the Note, acquires title to the property or sells it to a third party by foreclosing the borrower’s legal interest in the property. At the conclusion of the foreclosure process, the borrower no longer owns the real estate and no longer has the right to possess the property.
In Missouri, the lender forecloses on the deed of trust (mortgage) in a non-judicial foreclosure action. The lender only has to satisfy the legal notice requirements (typically publishing a Notice of Trustee’s Sale for three consecutive weeks in a local newspaper). The Trustee’s Sale is typically held on the courthouse steps in county in which the property is located and sole to the highest bidder.
In Kansas, the foreclosure process is a judicial proceeding. In order for a creditor to foreclose, it must file a lawsuit alleging a default in mortgage payments. As with other lawsuits, the borrower must receive notice of the legal proceeding, usually, by service of a summons and petition. The borrower may file and “Answer” to the foreclosure suit and assert any defenses he or she may have. If the lender obtains a judgment, it may proceed to a “Sheriff’s Sale” in which the property is sold to the highest bidder. In Kansas, there is a right of redemption in which the borrower may redeem his or her interest in the property by paying the amount of the highest bid, plus fees, before the end of the redemption period. The redemption period ranges from ninety days to one year depending on the percentage the borrow has paid on the Note.
In either state, if the borrower fails to move after the foreclosure, the lender or buyer at the sale, may file lawsuit to eject the borrower. The borrower may be liable for money damages for failure to vacate the property.
Similarly to the repossession and sale of personal property, a foreclosure sale can generate a deficiency balance that the lender can pursue in state court. Lenders often do not attempt to collect the deficiency balances relating to first mortgages, However, the collection of deficiency balances relating to junior mortgages (second mortgages, home equity lines of credit, etc.) are common.
In the event of a surplus after a foreclosure sale, the surplus funds are refunded to the borrower.
A judgment for debt unrelated to the mortgage may also operate as a lien on real property. The judgment creditor may foreclose its lien as well, but this is fairly rare. However, a judgment lien must be paid when the property is sold or otherwise transferred in order to transfer clear title.
Common types of exemptions for specific types of property are the homestead exemption, household goods exemption, vehicle exemption, retirement exemption, tools of the trade exemption, and jewelry. Missouri and Kansas both have limits as to the amounts that may be claimed. Missouri also has the wildcard exemption and the head of household exemption that may be utilized to exempt property with no specific exemption or on property in which the property value exceeds the value of the exemptions State law exemptions also apply in bankruptcy. Pursuant to the U.S. Bankruptcy Code, U.S. Bankruptcy Courts must choose whether to use the exemptions allowed under federal statute or elect to use the exemptions allowed by the state where the U.S. Bankruptcy Court sits. Both Missouri and Kansas have “opted out” of the federal exemption statutes and therefore use the exemptions allowed under state law. However, to claim a state’s exemptions in bankruptcy, the debtor must have been a resident of the state for 730 days immediately prior to the bankruptcy filing. If the debtor has not resided in the state for 730 days, the debtor may have to claim the exemptions allowed in his or her previous state or claim federal exemptions. (See www.exemptionsexpress.com )
What percentage of bankruptcies are caused by medical bills?
A new study from academic researchers found that 66.5 percent of all bankruptcies were tied to medical issues —either because of high costs for care or time out of work. An estimated 530,000 families turn to bankruptcy each year because of medical issues and bills, the research found. CNCB.com Feb 11, 2019
COLLECTION LAWSUITS AND EXECUTION OF JUDGMENTS
When a creditor exhausts its non-judicial remedies in collecting a debt, the creditor may elect to file suit to obtain a judgment. The creditor files a petition that must be served on the defendant borrower. The borrower has the right to force the creditor to prove that the debt is valid. The borrower may assert his or her legal defenses and make a counter-claim, if warranted. If the borrower fails to answer the suit, agrees that the money is owed, or loses after a trial, the creditor is entitled to a judgment. Once the creditor obtains a judgment against the borrower, that creditor has the right to collect the debt by executing or attaching on the borrower’s assets. Common forms of judgment execution are wage garnishment, financial account garnishment, levies on personal property, and judgment liens. Under the laws of the states of Missouri and Kansas, certain property may be exempt from execution. If property is exempt from execution, the judgment creditor is not allowed to seize, attach, or in any way interfere with the rights of the debtor to that exempt property.
PRE-BANKRUPTCY BRIEFING AND PRE-DISCHARGE CREDIT COUNSELING
Individuals filing a case under Chapter 7 or Chapter 13 are required to complete a Pre-Bankruptcy Briefing course provided by an agency approved by the United States Trustee. After the case has been filed, a second course must be completed in order to obtain a discharge. The second course is known as a Personal Financial Management Course. Both courses may be completed on the internet.
CHAPTER 7 BANKRUPTCY
Chapter 7 Bankruptcy is commonly referred to as a Chapter 7 liquidation because any unencumbered property or property with non-exempt equity is sold or “liquidated” by the Chapter 7 trustee for distribution to the debtor’s unsecured creditors. Individuals filing pursuant to Chapter 7 bankruptcy are typically trying to discharge unsecured debts. Discharge means that the debt is no longer enforceable against the person filing bankruptcy; personal liability is eliminated. However, creditors may resume collection for non-discharged debts and may proceed against property of the debtor that is subject to a lien held by the creditor. Secured debts such as home loans, car loans, and furniture loans may be discharged as well. However, to retain the property, the Chapter 7 debtor must pay the debt by reaffirming the debt, continue to pay the debt without reaffirming, or redeem the property for its value. Some debts are normally not dischargeable in Chapter 7, such as most taxes, domestic support obligations, student loans, and any debt reaffirmed in the bankruptcy. You should contact an attorney to discuss what debts are dischargeable in bankruptcy and which debts are not. Other than those debts reaffirmed by the debtor or those debts found by the bankruptcy court to be nondischargeable, the Chapter 7 debtor will receive a discharge of all personal liability for those debts.
CHAPTER 7 REQUIREMENTS; QUALIFYING FOR CHAPTER 7
Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a Chapter 7 debtor had to show that, after deduction of reasonable and necessary expenses from net income, there was little or no disposable income available to pay creditors. Under BAPCPA, individuals filing under Chapter 7 must have income below the “median income” for the state in which they reside or pass a “means-test”. To determine one’s income for purposes of the mean-test (“current monthly income”), debtor’s counsel must calculate the debtor’s average income from all sources over the six months immediately preceding the month in which the Chapter 7 case is filed. Median income is the median “census income” for the state in which the debtor resides and is based on household size. Once the current monthly income has been determined, debtor’s counsel must deduct expenses allowed under the IRS guidelines as well as the debtor’s allowed actual expenses. Some of the debtor’s actual expenses may not be allowed as deductions from income under the means-test. The final number after allowed deductions is the known as disposable monthly income. If disposable income is a positive number, the debtor is likely not eligible for Chapter 7 and must consider non-bankruptcy alternatives or file a case under Chapter 13 of the Bankruptcy Code. If the individual or married couple appears to qualify for Chapter 7, they will complete the Petition, Schedules, Means-Test, Statement of Financial Affairs, and other required documents with their attorney; the attorney will file those documents with the Bankruptcy Court.
CHAPTER 7 TRUSTEE
The Chapter 7 Trustee is appointed by the Office of United States Trustee, a component of the Department of Justice. Chapter 7 Trustees are known as “Interim Trustees”. The Chapter 7 Trustee has several duties. The Trustee reviews the Petition, Schedules, Means-Test, Statement of Financial Affairs, and other required documents to make sure that they comply with the Bankruptcy Code; determines whether any non-exempt assets exist that may be taken by the Trustee, sold, and used to pay the debtor’s creditors; and must hold a meeting to question the debtor about their financial situation and property. Creditors are allowed to attend the meeting and ask the debtors questions about their financial situation as well as regarding the debt that the debtor is seeking to discharge. The meeting is known as Section 341 Meeting of Creditors as is require by Section 341 of the Bankruptcy Code. However, it is fairly unusual for creditors to appear at the 341 Meeting.
DISTRIBUTION TO CREDITORS
In the majority of Chapter 7 cases, there are no non-exempt assets available for distribution to creditors. These are known as no asset cases. In no asset Chapter 7 cases, the Trustee has determined, based upon the value of the debtor’s assets and the exemptions claimed under the applicable state or federal law, that there are no non-exempt assets that can be taken by the Trustee and sold to distribute to the debtor’s creditors. In Chapter 7 cases, where non-exempt assets exist, the Trustee must either seize those assets and sell them, or require the debtor to pay the value of those assets to the Trustee. The proceeds will then be distributed to the debtor’s creditors on a pro rata basis based on claims filed with the Court by creditors.
DURATION OF CHAPTER 7 PROCESS
Clients of Barlow & Niffen, P.C. will normally make an appointment for the client to come in to meet with an attorney within a few days of the initial phone consultation. Our office will normally mail or e-mail the prospective client a letter confirming the date and time of the appointment. The letter includes with a list of information the prospective client should being to the appointment. However, in emergency situations, our office will make every effort to schedule an immediate appointment. After the initial meeting, your petition and schedules will normally be ready for filing within ten days to two weeks. In situations where a garnishment or foreclosure is pending or imminent, preparation and filing will be expedited to meet the client’s needs. Filing the Chapter 7 case causes the automatic stay to take effect, stopping debt collection. Approximately 30 days after filing, the 341 Meeting of Creditors will be held, presided over by the Chapter 7 Trustee. Most cases conclude, absent objections to discharge, with the Court granting a discharge order approximately 60 days after the Section 341 meeting.
CHAPTER 13 BANKRUPTCY OVERVIEW
As an alternative to Chapter 7, debtors may elect to file under Chapter 13 of the U.S. Bankruptcy Code. Chapter 13 Bankruptcy is normally appropriate for debtors who have regular disposable income. Disposable income is net income minus reasonable and necessary living expenses. In addition, individuals that do not qualify for Chapter 7 due to the means-test have the opportunity to file Chapter 13. However, above-median Debtors have a 60-month commitment period. Chapter 13 allows a debtor to restructure his or her debts by submitting a plan to the Bankruptcy Court and agreeing to pay the debtor’s disposable income to the Chapter 13 Trustee over a period of 36-60 months. As stated previously, above-median debtors have a 60-month commitment period. Below- median debtors have a 36-month commitment period. Chapter 13 debtors are required to pay their disposable income to the Chapter 13 Trustee on a monthly basis for the required commitment period unless the debtor intends to pay all creditors back in full. At the end of the plan period, any dischargeable debt that has not been paid back through the plan will be discharged much as in a Chapter 7 bankruptcy. As in Chapter 7 cases, some debts are not discharged at the completion of the Chapter 13, such as some taxes, student loans, and domestic support obligations. A Chapter 13 plan will normally only be allowed to run less than the applicable commitment period if the debtor is able to pay his or her debts back in full during the life of the Chapter 13 plan in what is known as a “100% plan.”
REAFFIRMATION OF DEBTS (CHAPTER 7)
In a Chapter 7 case, debtors may want to “reaffirm” certain debts. To reaffirm a debt normally means that the debtor intends to pay a specific debt back to a creditor under the terms of the original agreement. This is typically done on secured debts such as home mortgages, automobile loans, and purchase money loans for furniture and electronics where the debtor wants to retain that piece of secured property. These debts are normally not modified and reaffirmation of the debt will cause the debt to survive bankruptcy as if no bankruptcy had been filed. If a debt is reaffirmed, the debt will not be discharged upon the completion of the Chapter 7 case. A debtor is not required to reaffirm any debt in the bankruptcy. In many cases, the debtor may retain the property without reaffirming it by continuing to make payments pursuant to the original contract. If the debtor does not reaffirm a debt secured by real or personal property, and fails to continue making payments, the creditor has the right to foreclose on or repossess the property. If the debt is reaffirmed, the creditor will likely resume reporting the account to credit reporting agencies.
REDEMPTION (CHAPTER 7)
Debtors may sometimes redeem property for its value. If the debtor pays the creditor a lump-sum of the value of the collateral securing the debt, the property may be redeemed. Redemption extinguishes the creditor’s lien on the property. The parties must agree upon the redemption value or it must be determined by the Bankruptcy Court.
STOPPING COLLECTION: THE AUTOMATIC STAY
Once the Chapter 7 debtor files his or her case with the Bankruptcy Court, what is known as the automatic stay goes into effect. The automatic stay prohibits any creditor from taking any action to collect any debt without the permission of the Bankruptcy Court. Therefore, creditors may no longer send letters or statements, make collection calls, proceed with lawsuits, repossess vehicles, or garnish or attach on any assets of the debtor once the automatic stay goes into effect. The automatic stay goes into effect immediately upon filing of the debtor’s bankruptcy petition. The automatic stay will remain in effect until the discharge is granted of the unless the stay expires or the creditor files a motion with the Court requesting that the stay be lifted after showing good cause.
SECTION 341: MEETING OF CREDITORS
Approximately 30 days after the Chapter 7 case is filed, what is known as the Section 341 Meeting of Creditors is held. The Meeting is presided over by the Chapter 7 Bankruptcy Trustee. At that time, the individual debtors will be placed under oath and questioned regarding their income, assets, and debts. Any creditor wishing to ask specific questions of the debtor also has the right to appear and inquire of the debtor. If there are no objections to discharge by the Trustee or creditors, the Chapter 7 debtor will normally be granted a discharge approximately 60 days after the conclusion of the Section 341 meeting of creditors.
A similar meeting is held with the Chapter 13 Trustee in Chapter 13 cases.
ADVANTAGES TO FILING A CHAPTER 13 BANKRUPTCY There are a number of advantages to a Chapter 13 case over a Chapter 7 for the individual debtor. In a Chapter 13 case, while a residential home mortgage normally may not be modified, a debtor in arrears on his or her mortgage payment is allowed to pay that arrearage back through the Chapter 13 plan. The Bankruptcy Courts in Kansas and Missouri have local rules requiring mortgage payment to be made from plan payments if the debtor’s mortgage payments are in arrears at the time the Chapter 13 is filed. These are known as “conduit payments”. The Kansas Bankruptcy Court also requires that the monthly plan payments to the Trustee be made by wage withholding when the mortgage payments are behind and the arrearage is being cured through the plan.
In addition, in a Chapter 13 case, certain secured loans such as loans on automobiles and other personal property are allowed to be paid back based upon the fair market value of the secured property (“cramdown”) and at the Trustee’s interest rate as adopted by local rule (“discount rate”). To qualify for a cramdown on a purchase money security vehicle loan, the debtor must have purchased the vehicle more than 910 days (30 months) before the filing of the Chapter 13. If the vehicle loan is a “910 car loan,” the lender is entitled to receive the full amount owed. If the vehicle loan has been refinanced or in the case of a title loan (non-PMSI), the debtor may cramdown the secured debt to the value of the vehicle. Regardless of whether the vehicle loan can be crammed- down to value, the debtor is allowed to pay the discount rate of interest. Similarly, Chapter 13 Debtors may cramdown secured debts on other personal property such as furniture and appliances. If the creditor has a PMSI, there is no cram-down for items purchased within one year of the Chapter 13 filing. Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.
Chapter 13 can be a good way to redeem non-exempt equity in property for which the debtor could not make a lump-sum redemption. In Chapter 13, the non-exempt equity is redeemed over the life of the plan. The funds paid for the non-exempt property will be paid to unsecured creditors on a pro- rata basis.
Chapter 13 can also be a good way to pay back taxes. Income taxes and property taxes classified as priority may be paid back over the life of the Chapter 13. In most cases, penalties and interest will stop accruing and the tax liability will be paid over the life of the plan.
CHAPTER 13 AS DEBT CONSOLIDATION
Many individuals have the ability to pay their debts back in full if given protection from creditors and a reasonable time to do so. For those with the ability to pay debts back in full, Chapter 13 can be treated a consolidation that is forced on creditors. Outside of Chapter 13, creditors are not required to participate in a consolidation program. Once an individual file a Chapter 13 case, his or her creditors are only allowed to collect through the Chapter 13 claim’s process. Creditors have a specific time period to file claims. If a creditor fails to file a claim, it is not entitled to be paid through the plan. Under these circumstances, some of the unsecured debts that would have been paid end-up being discharged. However, it is desirable for secured and priority creditors to file claims as the secured creditor’s liens and priority tax liability would survive the Chapter 13 discharge if not paid through the Chapter 13. In addition, unsecured debt will stip accruing interest, late charges, and other fees.
AGAIN, PLEASE SPEAK TO YOUR LAWYER IF YOU NEED FURTHER INFORMATION OR EXPLANATION, INCLUDING HOW THE BANKRUPTCY LAWS RELATE TO YOUR SPECIFIC CASE.
Please note: Barlow & Niffen, P.C., is a debt relief agency as defined by the Bankruptcy Code.
Barlow & Niffen, P.C. helps people file for relief under the Bankruptcy Code.
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