Chapter 7 vs 13

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bulletDifferences between Chapter 7 and Chapter 13

Under Chapter 7, the Debtor loses all or most of his or her nonexempt property and receives a Chapter 7 discharge, which releases the Debtor from liability for most debts. Under Chapter 13, the Debtor usually retains his or her nonexempt property, must pay off as much of his or her debts as the Court deems feasible, and receives a Chapter 13 discharge.

bulletWhen To Enter Chapter 13

Chapter 13 is usually preferable for a Debtor who:

  1. has valuable nonexempt property.
  2. is not eligible for a discharge under Chapter 7 (i.e. filed prior Chapter 7 within 6 yrs, or committed Bankruptcy crimes).
  3. has one or more substantial debts that are not dischargeable under Chapter 7 but are dischargeable under Chapter 13 (i.e., some tax claims).
bulletWhat is a Chapter 13 Trustee?

A Chapter 13 Trustee is an officer of the Court appointed to collect payments from the Debtor, make payments to Creditors in the manner set forth in the Debtor's Plan, and administer the Debtor's Chapter 13 case until it is closed. The Chapter 13 Trustee is also required to perform certain other duties, and the Debtor is required to cooperate with the Chapter 13 Trustee.

bulletThe Types of Plans Available

While certain debts, such as debts for taxes and fully secured debts, must be paid in full under a Chapter 13 Plan, only an amount that the Debtor can reasonably afford must be paid on most debts. The unpaid balance of most debts that are not paid in full under a Chapter 13 Plan is discharged upon completion of the Plan. Under a Chapter 13 Plan, all Creditors must receive at least as much as they would have in a case of liquidation of assets under Chapter 7 of the Bankruptcy Code.

bulletHow much of a Debtor's income must be paid to the Chapter 13 Trustee under a Chapter 13 Plan?

Usually all of the surplus income of the Debtor and the Debtor's spouse for a three-year period must be paid to the Chapter 13 Trustee. Disposable income is income received by the Debtor and his or her spouse that is not reasonably necessary for the support of the Debtor and the Debtor's dependents.

bulletTreatment of Secured Creditors

Arrears owed to a secured creditor can be cured within the Plan. It is important to understand that a creditor has a secured claim only to the extent of the value of its security, which cannot exceed the value of the property securing the claim. Home mortgages have special rules under recent amendments.

bulletEligibility Rules

Any natural person may file under Chapter 13 if the person:

  1. has regular income.
  2. has unsecured debts of less than $250,000.
  3. has secured debts of less than $750,000.
bulletWhen does a Debtor have to appear in Court in a Chapter 13 case?

Most Debtors have to appear in Court at least twice: once for a hearing called the Meeting of Creditors, and once for a hearing on the Confirmation of the Debtor's Chapter 13 Plan. The Meeting of Creditors is usually held about a month after the case is filed.

bulletWhat fees are charged in a Chapter 13 case?

There is currently a court-required filing fee of $160 charged when the case is filed. In addition, the Chapter 13 Trustee assesses a fee of 10 percent on all payments made under the Plan. These court filing fees are in addition to the fee charged by the Debtor's attorney, and are paid directly to the Court.

bulletHow does filing under Chapter 13 affect collection proceedings and foreclosures previously filed against the Debtor?

The filing of a Chapter 13 case immediately and automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by Creditors against the Debtor or the Debtor's property. Within a few days after the case is filed, the Court will mail a notice to all Creditors advising them of the automatic stay. Certain Creditors may be notified sooner, if necessary. Most Creditors are prohibited from proceeding against the Debtor during the entire course of the Chapter 13 case. If the Debtor is later granted a Chapter 13 discharge, the Creditors will then be forever prohibited from collecting the discharged debts from the Debtor after the case is closed.

bulletThe role of the Debtor's attorney in a Chapter 13 case

The Debtor's attorney will typically perform some or all of the following functions in Chapter 13 cases:

  1. Examining the Debtor's financial situation and determining whether Chapter 13 is a feasible alternative for the Debtor, and if so, whether a single or joint case should be filed;
  2. Assisting the Debtor in the preparation of a monthly budget;
  3. Examining the liens or security interests of secured Debtors to ascertain their validity or avoidability, and taking the legal steps necessary to protect the Debtor's interest in such matters;
  4. Developing and implementing methods of dealing with secured Creditors;
  5. Assisting the Debtor in developing a Chapter 13 Plan that meets the needs of the Debtor and is acceptable to the Court;
  6. Preparing the necessary pleadings and Chapter 13 forms;
  7. Filing the Chapter 13 forms and pleadings with the Court and forwarding the filing fee (currently $160, to be paid by the Debtor);
  8. Attending the Meeting of Creditors, the Confirmation Hearing, and any other Court hearings required in the case;
  9. Assisting the Debtor in obtaining Court approval of a Chapter 13 Plan;
  10. Checking the claims filed in the case, filing objections to improper claims, and attending Court hearings thereon;
  11. Assisting the Debtor in overcoming any legal obstacles that may arise during the course of the case;
  12. Assisting the Debtor in obtaining a discharge upon the completion or termination of the Plan.
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NEW – BANKRUPTCY REFORM
bulletThe House recently passed legislation that is designed to drastically impact Chapter 7 filings and change the proceedings for debtors, their attorneys and trustees.
bulletThe House passed leg. To tighten the bankruptcy laws in an effort to discourage the growing practice of consumers’ declaring personal bankruptcy to erase their debts. The leg. Would prohibit anyone earning more than the national median income for their family size from declaring personal bankruptcy under Ch. 7 laws. Those earning more than $50,000.00 and deemed able to repay at least 20% within 5 years would have to adhere to a payment schedule under Ch. 13. The bill would force those who file for bankruptcy to pay most debts they accumulate within 90 days of filing.
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CHAPTER 13 ABUSE RULES

bulletAn individual is precluded from filing a Chapter 13 petition if the individual was a debtor on a petition that was ultimately dismissed within the preceding 180 days for willful misconduct. Examples of willful misconduct include:
bulletFailure to abide by a court order.
bulletFailure to appear before the court.
bulletThis preventative measure is targeted at eliminating multiple filings.
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LIEN AVOIDANCE IN CHAPTER 7

bulletIf a judicial lien (a judgment which attaches to the debtor’s property) has been rendered against the debtor, the debtor’s attorney can initiate an adversary proceeding to avoid such lien. The authority for this lies under "Impairment of Exemption" rules and the result depends on the exemption, lien, and value of the property, and is applied using a mathematical formula.
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STUDENT LOANS

bulletThis type of debt will not be dischargeable unless the Bankruptcy Petition is filed no sooner than 7 years from when the student loan first becomes due.
bulletHowever, there is an undue hardship exception to this "7 Year Rule." The exception allows some or all of the debt to be discharged even though it has not been 7 years from the date the loan first became due. The exception is not absolute, and only applies in the discretion of the court.
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DIVORCE

bulletSome debt obligations resulting from a divorce are not dischargeable, including:
bulletAlimony
bulletMaintenance
bulletSupport
bulletRecent amendments to the Bankruptcy Code have limited the dischargability of property settlements if the debtor has the ability to repay the settlement. Prior to the amendment in 1994, property settlements were freely dischargeable regardless of the debtor’s ability to repay.
bulletSimilarly, attorney’s fees incurred by the debtor in a claim for alimony, maintenance, support or otherwise nondischargeable obligation are nondischargeable, while those incurred because of a property settlement claim are discharged.
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FRAUDULENT DEBTS

bulletThere are possible benefits in filing Chapter 13.
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TAX CLAIMS IN BANKRUPTCY

bulletGenerally, there is a 3 year rule, although other rules also exist which must be followed as well. These include:
bullet240 day rule
bullet2 year rule
bulletExceptions:
bulletPriority taxes, including payroll and sales taxes
bulletFraudulent taxes
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