WASHINGTON HOMESTEAD EXEMPTION

A homestead exemption is a protection granted by statute which safeguards equity in a residence of a homeowner from judgment creditors.  In Washington, this safeguard is automatic.  See Revised Code of Washington 6.13.040.  Under the statute, the exemption is automatically applied to the home as soon as it is occupied as a principal residence by the owner. 

          This automatic protection is very comforting, as a homeowner is not required to file any declaration to obtain the protection.  Homeowners have enough to worry about when purchasing a new home!

          What about when a new homeowner has purchased a piece of property, and is interested in moving into the property as their residence?  Imagine the property is raw land and the homeowner must rent while they are anxiously awaiting their dream home to be built.  The good news is that Washington has a mechanism for this homeowner to claim their new home as their homestead before moving into the property. 

          The homeowner in this unique circumstance can file a declaration of homestead and a declaration of abandonment of homestead.  With these two documents the homeowner is not only asserting the new property as their home, but they are denying any other property is their home.  This gives the homeowner the same protections as would be granted automatically, if they were able to move into it right away.

          This is a corner case for most people to worry about while waiting to move into a new home.  The individuals that are most benefited by this rule are those people who are already exposed to risk of loss:  individuals contemplating bankruptcy or individuals hounded by creditors through lawsuits and/or judgments.

          If your client is in such circumstances, let them know of the option to protect their new home!  Refer them to a qualified attorney to assist in not only filing the declarations, but planning for resolving their creditor problems permanently!

Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, & Kent.

MCFERRAN LAW BANKRUPTCY: DIFFERENCES BETWEEN CHAPTER 7 & CHAPTER 13 BANKRUPTCIES

McFerran Law, P.S.

Practicing Real Estate Law in Western Washington since 1986

May 14^th, 2018

Bankruptcy Update:

What is the Difference Between

Chapter 7 & Chapter 13 Bankruptcies?

Many people have very little understanding of bankruptcies.  Below I am attempting to give a cursory overview of the main types of bankruptcy.  It is not an exhaustive attempt to cover their differences.  Over time, I will be covering many facets of bankruptcy on my blog at Martin Prybylski’s Bankruptcy Blog. 

For most individuals, there are basically only two bankruptcy options:  Chapter 7 and Chapter 13.  Individuals can also file for Chapter 11 or Chapter 12, but they are designed for businesses and farmers or fisherman respectively. 

Chapter 7

A Chapter 7 bankruptcy is a liquidation proceeding where debtors can seek a discharge of most types of debts in exchange for assets they own that are not protected by state or federal law.  Many debtors do not have any such unprotected assets, and therefore do not need to surrender any assets to obtain their discharge. 

Assets

Assets can include more than just a debtor’s obvious tangible assets such as a car or a house.  Assets can include a debtor’s right to sue someone or a right to an inheritance.  It also includes any debts owed to a debtor by anyone including family members.

Another thing that can be viewed as an asset is anything you have paid to creditors to the detriment of other creditors.  The most common is payments made to friends or family members on debts. 

Timeline

Every bankruptcy must begin by filing the Voluntary Petition, Schedules, and other documents with the Bankruptcy Court.

In a Chapter 7, like in a Chapter 13, the debtor will be required to appear at a meeting of creditors about 30 days after the filing of the case.  If there are not objections to the debtor’s discharge, then the discharge will be issued about 60 days after the conclusion of the meeting of creditors.  If there are assets to administer, the case will not close until both the discharge is entered and the assets are fully administered.

Limitations

Not everyone can file a Chapter 7 bankruptcy.  Income can be an issue.  If a debtor makes too much money and their debt is primarily consumer in nature, then they will not be eligible for a Chapter 7 bankruptcy.  They will likely be forced into a Chapter 13.

Benefits

The biggest reason to file a Chapter 7 bankruptcy is its speed and efficiency.  A debtor is often done with their case in as little as 5 months.  The debtor is no longer under court supervision after closing, so they can continue to live their life normally and begin repairing their credit.  The debtor often pays less overall in legal fees and repayment to creditors in a Chapter 7. 

Chapter 13

A Chapter 13 bankruptcy is a reorganization proceeding where debtors propose a plan to repay creditors based on a number of requirements set out by the Bankruptcy Code.  Upon successful completion of a court approved plan, debtors will receive a discharge of most types of debts left unpaid at the end of the plan.

Assets

Like in a Chapter 7, what assets the debtor has is central to their case.  Unlike a Chapter 7, in a Chapter 13 proceeding, a debtor is not required to liquidate any assets.  Instead, a debtor must repay creditors such that unsecured creditors will receive at least as much as they would have in a Chapter 7.  Many debtors will file a Chapter 13 because they want to avoid liquidation of a treasured asset. 

Plan

The plan proposed by the debtor must be approved by the court.  The gatekeeper of an approved plan is often the Trustee assigned to supervise the case by the United States Trustee.  To obtain this approval the debtor must satisfy the requirements of 11 U.S.C. §1325.  Below are some of the important plan requirements.  This is not an exhaustive list.

-         The debtor must repay any arrears on secured loans they wish to retain. 

-         The debtor must pay all priority debts in full. 

-         The debtor must pay all disposable income into the plan. 

-         Unsecured creditors must not be treated worse than they would be in a Chapter 7.

Timeline

Debtors begin their Chapter 13 bankruptcy by filing the Voluntary Petition, Schedules, a proposed Chapter 13 Plan and other documents with the Bankruptcy Court.

Like in a Chapter 7, a debtor must attend a meeting of creditors roughly 30 days after filing their case.  After the meeting of creditors, the next hearing is the Confirmation Hearing for the proposed plan.  After successfully obtaining court approval of the plan, the debtor will simply follow the terms of the plan for the length of time dictated by the plan.  Plans are usually 3 to 5 years depending on the debtor’s income.

After successfully completing the plan, the debtor will receive their discharge of most of their remaining debts that were not.

Limitations

In a Chapter 13, a debtor must have sufficient regular income to fund a plan.  So, it is opposite of Chapter 7 where too much income can bar a filer. 

There are also limitations on how much debt a party can have when seeking a discharge in Chapter 13.  As of this writing, if a debtor has more than $394,725 in unsecured debt or $1,184,200 in secured debt, they do not qualify for a Chapter 13 bankruptcy.  If a debtor does not qualify for this reason, they may qualify for a Chapter 7 or Chapter 11 depending on their circumstances.

Benefits

The main benefits for a Chapter 13 over a Chapter 7 is the flexibility it gives the debtor.  It allows a debtor to keep a home that has arrears on its mortgage, homeowner’s association dues, or taxes.  It allows a debtor to reduce the debt and interest on certain vehicle loans.  It allows a debtor to reduce interest on credit card payments. 

Conclusion

Chapter 7 and Chapter 13 are very different vehicles for the same goal:  debt relief.  Anyone who is interested in learning how these can be used for their benefit should consult with a qualified attorney.

Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, & Kent.

BANKRUPTCY: REAFFIRMATION AGREEMENT?

Bankruptcy Update:

What is a Reaffirmation Agreement?

          A Reaffirmation Agreement is an agreement made during the pendency of a bankruptcy proceeding.  It is an agreement between the borrower and the lender that allows the debt to survive the bankruptcy proceeding. 

The good news is that they will report to your credit your payments made post-bankruptcy.  This allows you to rebuild your credit.

The bad news is that you will still be liable on the debt.  As most car loans tend to be upside down, the borrower is effectively borrowing a ton of unsecured debt.  If they are unable to continue making payments, then not only will they lose the car, but they will be sued for the deficiency balance. 

I don’t recommend my client’s sign a Reaffirmation Agreement very often.  I like to provide my clients with a fresh start after filing their bankruptcy proceeding.  In fact, for most institutional lenders, it isn’t even necessary to sign the agreement to keep the car and keep paying on the loan.  If at a later time you ca not pay, then they would only be able to pursue you for the vehicle and not the deficiency.

Don’t blindly sign a Reaffirmation Agreement.  They usually are not the right call.  Seek legal counsel before you do!

Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, & Kent.

BANKRUPTCY: 341 MEETING OF CREDITORS

What is a §341 Meeting of Creditors

Every person who files for relief under the U.S. Bankruptcy Code is required to attend a §341 Meeting of Creditors.  This meeting can sound ominous.  Many of my clients have assumed they would walk into a room full of actual creditors!  People get worked up about facing those intimidating creditors demanding money all at one time.  This can be very stressful for people who have been struggling with debts for a long time.  The harassing phone calls can lead to many sleepless nights. 

The good news is that in most cases no creditors show up!  In most instances, this meeting is simply a 5 to 10-minute hearing where a Trustee questions the bankruptcy filer about their assets, income, liabilities and expenses.  The questions the Trustee asks are usually to confirm the information the filer included in their filing paperwork. 

Another common misconception about the Meeting of Creditors is that there is a Judge conducting the meeting.  This is FALSE.  The meeting is conducted by the Trustee assigned to the individual consumer’s case.  The Trustee is a third-party individual who is appointed by the United States Trustee to administer bankruptcy cases in a particular jurisdiction. 

In most cases, the Trustee is the closest thing to an opponent the bankruptcy filer will have in their case.  This is because most creditors are not cost incentivized to participate.  The Trustee is incentivized to try and secure assets from the bankruptcy filer, so it is important to make sure your paperwork is accurate before you file.  Protect your assets before you file your case by consulting with a qualified attorney.  This will make your Meeting of Creditors be quick and painless. 

Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, & Kent.

SIGNALS TO CONSIDER REGARDING FILING FOR BANKRUPTCY

Signals to Consider Regarding Filing Bankruptcy

Bankruptcy is often not something at the forefront of people’s minds.  In fact, many people only consider bankruptcy when it is obvious that it is the only option. 

Obvious indicators we all know are things like death of a loved one, disability, divorce, prolonged unemployment, or a medical disaster.  It is easy to say bankruptcy is my only option once you have defaulted on your loans and cannot make monthly debt service payments regardless of how hard you try.  Most of my clients come to me at this stage.  The real problem is that they should have come earlier.

Many people have high amounts of unsecured debt they carry because they “can afford” the debt service payments.  The problem is they are not making any headway.  If they are not able to aggressively lower their debt and/or they are unable to contribute to their retirement, they are setting themselves up for failure to ever be able to retire or build wealth.  These individuals are often called living paycheck to paycheck.  One disaster can cause them to never be able to recover.  At that point, they may not be able to even afford to file a bankruptcy proceeding.

Some signals you should consult with an attorney about your financial distress:

-         You cannot afford to save for retirement regardless of your age.

-         You are pulling from savings or retirement accounts to pay debts.

-         You do not have a plan to be free of unsecured debts within three years.

-         Your total unsecured debts are equal to or exceed your annual income.

-         You are paying interest only or minimum payments on unsecured debts.

-         You are forgoing medical care to pay unsecured creditors.

This is a simple cost benefit analysis that an attorney can help you navigate.  These are not rules of thumb, but rather markers to have a conversation about your options.  The best part is the consultation is free.

If you are facing significant financial strain and want to explore how bankruptcy could provide you relief, then we invite you to contact McFerran Law, P.S. Our legal team has accumulated more than thirty-five years of bankruptcy law experience and is ready to help you explore your financial options during this difficult time. Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, or Kent.

TAXES & BANKRUPTCY

Taxes & Bankruptcy

Bankruptcy can provide relief from the tax man. Some taxes and penalties are dischargeable. Those that can’t be discharged can be paid without interest in Chapter 13. The automatic stay in bankruptcy stops even collection actions by taxing authorities, including garnishment and seizure.

How much relief?

Which taxes can be discharged in bankruptcy depends on a number of factors including:

1)      the kind of tax involved;

2)      the age of the tax;

3)      whether a return was filed; and

4)      whether the tax was recently assessed.

The three rules describe taxes that can be erased in bankruptcy:

1)  unsecured income taxes that were first due more than three years before the bankruptcy is filed,

2)  for which a timely and no-fraudulent return was filed, 

3) that were assessed more than 240 days before filing can be discharged in full in any chapter of bankruptcy.

Next week I will discuss the importance of filing the return even if you can’t pay the tax right away.

Offers in compromise

An offer in compromise may be a better solution when the priority tax (recent taxes or trust fund taxes) is too large to pay off in a Chapter 13. The taxing authorities will consider an offer in compromise then there is doubt about the taxpayer’s liability for the tax or when there is doubt that they could collect the full amount of the tax. Often an offer in compromise is designed to get the taxpayer to tap family or illiquid assets that the government couldn’t otherwise reach to settle the debt.

In summary:

This is only a summary of the treatment of taxes in bankruptcy. The effect of recent tax assessments, offers in compromise, and amended returns have been omitted for simplicity. The subjects of taxes in bankruptcy is complex:  for every rule, there is an exception or an additional wrinkle that isn’t obvious.

Be certain to bring these issues to the attention of any bankruptcy lawyer you consult. If you have tax troubles, make sure to get advice from an experienced bankruptcy lawyer.  This is not territory for the cheapest lawyer in town.

If you are facing significant financial strain and want to explore how bankruptcy could provide you relief, then we invite you to contact McFerran Law, P.S. Our legal team has accumulated more than thirty-five years of bankruptcy law experience and is ready to help you explore your financial options during this difficult time. Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, or Kent.

BANKRUPTCY JUDGE: THE PHANTOM IN YOUR CASE

Bankruptcy Judge:

The Phantom in Your Case

Will the judge approve my bankruptcy case? Do I have to explain to the judge why I’m in bankruptcy? What if the judge makes a plan I cannot pay?

When you’re considering bankruptcy, you start to think about your upcoming encounter with a federal bankruptcy judge. Black robes.  Sober face.  Gobs of power over your finances. It can be unnerving.

Relax. Chances are, you’ll never even meet a bankruptcy judge in the flesh. You’ll collect the judge’s signature on the important orders in your case, but you’ll never come face to face.

Job of a bankruptcy judge

Think of the bankruptcy judge as an umpire.  He enforces the rules of the game and decides disputes.  Safe?  Out? He has no role in drawing up the lineup nor choosing strategy.  He just makes the call when the action moves to his courtroom.

If you are a debtor (the person who has filed a bankruptcy case) the opposing team, so to speak, is the trustee and perhaps creditors in your case. They have interests that may be different from yours.

When a dispute arises in your case that the parties can’t settle, the judge will hear the matter and make a ruling. But until a dispute moves to the courtroom, the judge doesn’t know your case exists.

When the judge is involved

The judge signs the most important document in your bankruptcy case, the discharge.  That’s the court order that says that your dischargeable debts are henceforth unenforceable.

Unless some party has challenged your right to a discharge, the judge’s signature is automatic.  He doesn’t pull your file, sift through your financial life, or speculate on whether bankruptcy was necessary.

If those with close-up information about your situation, like the trustee in your case, and the people you owe money haven’t complained, there’s no dispute for him to resolve.

Judges also sign orders that have big-time effect on the legal rights of your creditors.  Lien avoidance or lien stripping are the most frequent examples. Standard bankruptcy law says a discharge doesn’t affect liens on assets; so when bankruptcy law lets a debtor invalidate a lien, a court order signed by the judge, is necessary. The judge looks over the papers you’ve filed to strip a lien only to see that your motion includes competent evidence and that the law allows the relief you’re asking for.

Find your courtroom drama elsewhere. If you want legal drama, watch TV. You’re not likely to find it in your bankruptcy case.

And that’s just fine.  Dull is good when you’re a party to the case.

If you are facing significant financial strain and want to explore how bankruptcy could provide you relief, then we invite you to contact McFerran Law, P.S. Our legal team has accumulated more than thirty-five years of bankruptcy law experience and is ready to help you explore your financial options during this difficult time. Call us at 253-471-1200 to schedule a FREE one-hour bankruptcy consultation at any of our offices in Tacoma, Seattle, Kent or Silverdale.

Martin Prybylski

Attorney at Law

McFerran Law, P.S.

3906 S 74^th Street

Tacoma, WA 98409

253-284-3811

UNDERSTANDING FRAUDULENT TRANSFERS

Understanding Fraudulent Transfers

One of the many issues that I look for prior to filing a bankruptcy case is whether there have been any fraudulent transfers.  A fraudulent transfer is any transfer of an asset made with intent to hinder, delay, or defraud a creditor. 

Fraudulent transfers are very important because the bankruptcy Trustee who oversees the administration of the bankruptcy estate can reverse the transfer.  This means the recipient may become a defendant in an action to recover the fraudulently transferred asset.  Furthermore, the debtor seeking bankruptcy relief could have their entire discharge denied.  They could receive no relief from the bankruptcy filing. 

Obviously, not all transfers are fraudulent.  Clear examples of fraudulent transfers are gifted assets to friends and family members.  If some individual gifts away that pristine Corvette Stingray to their brother prior to filing a bankruptcy, then it’s a fraudulent transfer. 

A transfer without actual intent to hinder or defraud creditors can also be a fraudulent transfer.  If someone sells an asset for less than fair market value while they are insolvent, then it is also presumed to be a fraudulent transfer.  Luckily, if the Trustee cannot show intent, it is difficult to deny the entire discharge, but the Trustee can still reverse the sale. 

An example would be if while having financial distress, you decide to sell that Corvette to your brother for $10,000 knowing it is worth much more than that.  You may be trying to keep your prized possession in the family rather than selling it to a stranger rather than trying to defraud creditors.  This transfer would still be reversible by the Trustee. 

The important thing to understand is you should not make any transfers or sales of assets without first consulting with an experienced attorney if you are in financial distress.  You may not even be considering bankruptcy yet, but with a 2 year look back period, it is important to plan ahead.  There is a lot of grey area in fraudulent transfers.

Martin Prybylski

Attorney at Law

McFerran Law, P.S.

3906 S 74^th Street

Tacoma, WA 98409

253-284-3811

PLANNING FOR THE WORST

Bankruptcy Update: Planning for the Worst

Many people live their lives too optimistically for my taste.  As an attorney, I have become very risk adverse.  Instead of thinking of how things will go well, I am always worried about how things can go wrong.  Don’t get me wrong – optimism is GREAT!  But if you are too optimistic, you will ignore dangers and walk right into them. 

This comes up in my bankruptcy practice all too often.  My clients will wait long past financial distress, and wait until financial Armageddon before they ask a professional what they should be doing.   This severely limits their options. 

I want to take a little time to explain some things all people should do or not do – especially if they are having difficulty meeting their financial burdens.

1.      Meet with a professional!:  This is not merely self-serving.  You can meet with accountants, investment advisers, or attorneys.  Professional guidance at every step of financial health will improve your ability to avoid dangers. 

2.      Retirement accounts:  Everyone knows that having money for retirement is a good idea.  Less well known is that they are protected from creditors in and out of bankruptcy.  This is a good safe-haven for your assets in the event you are hounded by creditors.

3.      Know who to pay:  Some people freeze up when they cannot pay everyone – so they pay no one.  If you get to this point you should go back to number 1 before you start pulling money from your retirement or borrowing from friends or family. 

4.      Personal loans:  If you are going to lend money to a friend of family member or they are going to loan money to you, consider securing the loan.  This helps ensure payment to these parties in the face of collection from other creditors. 

5.      Create Trusts:  If you decide you want to help family members in this life or after, you should consider placing those funds into a trust.  You can set up a trust in a way to allow those family members to receive the benefits of the trust without impairing their ability to obtain Supplemental Social Security or Medicaid.  You can also protect those trust assets from their creditors!

6.      Disability Plan:  Plan on how you will live should you become disabled.  You should at least have short-term and long-term disability insurance. 

I know – this is an eclectic list of points.  They all have one thing in common, better safe than sorry.  Keep these in mind when times are good, and your bad times will not be quite as bad.  Don’t be the one to later say, “I never thought it would happen to me.”

If you or someone you know has a toxic property, they should consult with a qualified professional that can explore all that property owner’s options to best resolve their issue.

Martin Prybylski

Attorney at Law

McFerran Law, P.S.

3906 S 74^th Street

Tacoma, WA 98409

253-284-3811

WASHINGTON STATE HOMESTEAD EXEMPTION

A homestead exemption is a protection granted by statute which safeguards equity in a residence of a homeowner from judgment creditors.  In Washington, this safeguard is automatic.  See Revised Code of Washington 6.13.040.  Under the statute, the exemption is automatically applied to the home as soon as it is occupied as a principal residence by the owner. 

          This automatic protection is very comforting, as a homeowner is not required to file any declaration to obtain the protection.  Homeowners have enough to worry about when purchasing a new home!

          What about when a new homeowner has purchased a piece of property, and is interested in moving into the property as their residence?  Imagine the property is raw land and the homeowner must rent while they are anxiously awaiting their dream home to be built.  The good news is that Washington has a mechanism for this homeowner to claim their new home as their homestead before moving into the property. 

          The homeowner in this unique circumstance can file a declaration of homestead and a declaration of abandonment of homestead.  With these two documents the homeowner is not only asserting the new property as their home, but they are denying any other property is their home.  This gives the homeowner the same protections as would be granted automatically, if they were able to move into it right away.

          This is a corner case for most people to worry about while waiting to move into a new home.  The individuals that are most benefited by this rule are those people who are already exposed to risk of loss:  individuals contemplating bankruptcy or individuals hounded by creditors through lawsuits and/or judgments.

          If your client is in such circumstances, let them know of the option to protect their new home!  Refer them to a qualified attorney to assist in not only filing the declarations, but planning for resolving their creditor problems permanently!

Surrendering Toxic Real Property in a Bankruptcy

Many people become confused about what it means to ‘surrender’ an asset in a bankruptcy.  It is commonly believed if you surrender a property through a bankruptcy proceeding, somehow you no longer own that property.  The problem is that this is not only wrong, but a dangerous misunderstanding.

Surrendering your rights to a piece of real property through a bankruptcy is merely a statement of your intention regarding that property.  It has no vesting power to the ownership of that property.  You remain title owner of the property and, to some extent, you are liable for post-bankruptcy taxes, HOA dues, and tort actions.

As owner of the property, if someone is injured on the property, you could be exposed to significant liability.  If significant time passes after you file the bankruptcy, then you could be facing a huge HOA assessment including fines! 

A big reason to desire to surrender property through a bankruptcy is because the property is a source of dangerous liability.  Imagine a couple who inadvertently rented their condo to meth manufacturers.  The risk and costs for this poor couple could easily make the property undesirable to retain.  The issue is that the first mortgage holder may not be in a big hurry to foreclose on the property.  It could be years that this toxic property remains in the couple’s name after a bankruptcy.  During that time, they would be liable on the condominium association’s dues.  No one wants to throw good money after bad.

Luckily for this group of individuals, there is an option to force the lender’s hands.  In a Chapter 13 Bankruptcy, the property owner can include special language in the plan that will not only surrender the property, but to actual transfer ownership to the first mortgage holder.  This can be done even in the face of creditor objections in many cases.

If you or someone you know has a toxic property, they should consult with a qualified professional that can explore all that property owner’s options to best resolve their issue.

What is the Difference Between Chapter 7 & 13 Bankruptcies?

Many people have very little understanding of bankruptcies.  Below I am attempting to give a cursory overview of the main types of bankruptcy.  It is not an exhaustive attempt to cover their differences.

For most individuals, there are basically only two bankruptcy options:  Chapter 7 and Chapter 13.  Individuals can also file for Chapter 11 or Chapter 12, but they are designed for businesses and farmers or fisherman respectively. 

Chapter 7

A Chapter 7 bankruptcy is a liquidation proceeding where debtors can seek a discharge of most types of debts in exchange for assets they own that are not protected by state or federal law.  Many debtors do not have any such unprotected assets, and therefore do not need to surrender any assets to obtain their discharge. 

Assets

Assets can include more than just a debtor’s obvious tangible assets such as a car or a house.  Assets can include a debtor’s right to sue someone or a right to an inheritance.  It also includes any debts owed to a debtor by anyone including family members.

Another thing that can be viewed as an asset is anything you have paid to creditors to the detriment of other creditors.  The most common is payments made to friends or family members on debts. 

Timeline

Every bankruptcy must begin by filing the Voluntary Petition, Schedules, and other documents with the Bankruptcy Court.

In a Chapter 7, like in a Chapter 13, the debtor will be required to appear at a meeting of creditors about 30 days after the filing of the case.  If there are not objections to the debtor’s discharge, then the discharge will be issued about 60 days after the conclusion of the meeting of creditors.  If there are assets to administer, the case will not close until both the discharge is entered and the assets are fully administered.

Limitations

Not everyone can file a Chapter 7 bankruptcy.  Income can be an issue.  If a debtor makes too much money and their debt is primarily consumer in nature, then they will not be eligible for a Chapter 7 bankruptcy.  They will likely be forced into a Chapter 13.

Benefits

The biggest reason to file a Chapter 7 bankruptcy is its speed and efficiency.  A debtor is often done with their case in as little as 5 months.  The debtor is no longer under court supervision after closing, so they can continue to live their life normally and begin repairing their credit.  The debtor often pays less overall in legal fees and repayment to creditors in a Chapter 7. 

Chapter 13

A Chapter 13 bankruptcy is a reorganization proceeding where debtors propose a plan to repay creditors based on several requirements set out by the Bankruptcy Code.  Upon successful completion of a court approved plan, debtors will receive a discharge of most types of debts left unpaid at the end of the plan.

Assets

Like in a Chapter 7, what assets the debtor has is central to their case.  Unlike a Chapter 7, in a Chapter 13 proceeding, a debtor is not required to liquidate any assets.  Instead, a debtor must repay creditors such that unsecured creditors will receive at least as much as they would have in a Chapter 7.  Many debtors will file a Chapter 13 because they want to avoid liquidation of a treasured asset. 

Plan

The plan proposed by the debtor must be approved by the court.  The gatekeeper of an approved plan is often the Trustee assigned to supervise the case by the United States Trustee.  To obtain this approval the debtor must satisfy the requirements of 11 U.S.C. §1325.  Below are some of the important plan requirements.  This is not an exhaustive list.

-         The debtor must repay any arrears on secured loans they wish to retain. 

-         The debtor must pay all priority debts in full. 

-         The debtor must pay all disposable income into the plan. 

-         Unsecured creditors must not be treated worse than they would be in a Chapter 7.

Timeline

Debtors begin their Chapter 13 bankruptcy by filing the Voluntary Petition, Schedules, a proposed Chapter 13 Plan and other documents with the Bankruptcy Court.

Like in a Chapter 7, a debtor must attend a meeting of creditors roughly 30 days after filing their case.  After the meeting of creditors, the next hearing is the Confirmation Hearing for the proposed plan.  After successfully obtaining court approval of the plan, the debtor will simply follow the terms of the plan for the length of time dictated by the plan.  Plans are usually 3 to 5 years depending on the debtor’s income.

After successfully completing the plan, the debtor will receive their discharge of most of their remaining debts that were not

Limitations

In a Chapter 13, a debtor must have sufficient regular income to fund a plan.  So, it is opposite of Chapter 7 where too much income can bar a filer. 

There are also limitations on how much debt a party can have when seeking a discharge in Chapter 13.  As of this writing, if a debtor has more than $394,725 in unsecured debt or $1,184,200 in secured debt, they do not qualify for a Chapter 13 bankruptcy.  If a debtor does not qualify for this reason, they may qualify for a Chapter 7 or Chapter 11 depending on their circumstances.

Benefits

The main benefits for a Chapter 13 over a Chapter 7 is the flexibility it gives the debtor.  It allows a debtor to keep a home that has arrears on its mortgage, homeowner’s association dues, or taxes.  It allows a debtor to reduce the debt and interest on certain vehicle loans.  It allows a debtor to reduce interest on credit card payments. 

Conclusion

Chapter 7 and Chapter 13 are very different vehicles for the same goal:  debt relief.  Anyone who is interested in learning how these can be used for their benefit should consult with a qualified attorney.