- Chapter 7 and Chapter 13 Compared
- Automatic Stay and Relief Procedures
- Family Law Issues
- Personal Injury
Bankruptcy protection is available for individuals (including married couples), corporations, partnerships and limited liability companies. There are two forms of bankruptcy: liquidation and reorganization.
- Liquidation of debts, for any individual or entity, is governed by Chapter 7 of the Bankruptcy Code. For an individual, the result is a discharge of debts; for any other entity, the result is a dissolution and termination of the entity.
- The reorganization provisions are contained in Chapter 11 and pertain to corporations, partnerships, limited liability companies and some high-debt debtors. Chapter 13 is the reorganization provision for individuals.
Bankruptcies are commenced by the filing of a Petition for Relief, which triggers an automatic stay against the enforcement of debt against the debtors, including continuing collection efforts, lawsuits, foreclosures and repossessions. Examples of actions that are not stayed by the filing of the bankruptcy petition include government regulatory actions, criminal actions, and establishment or enforcement of domestic support obligations.
The bulk of this presentation regards bankruptcies filed by individuals.
A Chapter 7 bankruptcy is a liquidation process where debtors’ nonexempt assets are liquidated to satisfy their debts.
A Chapter 13 bankruptcy is a wage-earner plan, where the debtors pay their debts from their disposable income via a plan approved and overseen by a Chapter 13 trustee.
Under either chapter, the goal is the discharge of the debtors’ debts; the discharge occurs with the issuance of an Order of Discharge by the court. Under a Chapter 7 bankruptcy, the discharge is routinely granted within four months from the date of filing. Under a Chapter 13, the discharge occurs three to five years after filing and the debtor completing a court-affirmed plan.
On its face, a Chapter 7 filing appears to be preferable to a Chapter 13. A large number of Chapter 7 filers are able to discharge their unsecured debt, keep their property and move on with their lives. However, there are dictates of bankruptcy law, as well as benefits and tools of Chapter 13, that sometimes make filing under Chapter 13 a better option. To file a Chapter 13, the debtor must be an individual or married couple and have less than $330,000 of unsecured debt and less than $1,010,650 of secured debt.
Chapter 7 is a liquidation, and the issues revolve around which debts are dischargeable and what property the debtor can protect from the administration of the Chapter 7 bankruptcy trustee.
Most debts are discharged. The exceptions to discharge fall into three general categories:
- family court orders, and
- debts incurred by bad acts.
Additionally, student loans can be discharged only in cases of “undue” or extreme hardship. Also, homeowner association fees that were due prior to filing for bankruptcy are dischargeable, while HOA fees that come due after the filing are unaffected by the bankruptcy.
Upon filing a Chapter 7 bankruptcy, a bankruptcy estate is created that consists of all property of the debtor. Debtor’s property is protected for the benefit of the debtor’s creditors, by liens securing that property and/or exemptions.
Exemptions are statutory protections of property enacted under state and/or federal law. For example, an ERISA defined benefit plan or a qualified IRA is exempt up to $1 million under bankruptcy law and perhaps for more under state and ERISA provisions. Further, a property that is liened in excess of the value of the property and/or its exemptions will not be sold by the trustee.
Chapter 13 provides a flexible means for handling a variety of common debt issues that, in a Chapter 7, might not be in the debtor’s best interest. These include the ability to:
- “catch up” on delinquent payments on secured property, such as a house or car;
- force payment arrangements on taxes and child support and other marital support obligations;
- keep property that otherwise would be liquidated for the benefit of the debtors’ creditors under Chapter 7;
- potentially discharge debts that would not otherwise be discharged in a Chapter 7 case (such as debts incurred by fraud, intentional injuries or non-support orders of the Family Court);
- modify the rights of secured creditors;
- provide relief that is not available to the debtor in a Chapter 7; and/or
- protect co-debtors from collection actions.
Civil Proceedings. Upon filing a petition for relief in bankruptcy, an automatic stay (11 U.S.C. §362 (a)) goes into effect that prohibits many civil enforcement actions, including non-judicial foreclosures. A trustee sale completed or a judgment entered after the filing of the Petition for Relief is void. In re Mitchell, 279 B.R. 839 (9th Cir. BAP 1002). However, a continuation of the Deed of Trust sale date is not a violation of the automatic stay.
The automatic stay remains in effect until (a) the dismissal of the bankruptcy case, (b) the entry of discharge or (c) an order for relief from the Bankruptcy Court. The timing of these events is dependent upon the chapter under which bankruptcy relief is sought.
Residential Eviction Efforts. Continuation of Eviction Proceeding for Failure to Pay Rent. Eviction proceedings are stayed if there is no judgment of possession (a Judgment of Forcible Detainer) prior to the bankruptcy filing. However, if there is a judgment of possession, the landlord is permitted to continue with the eviction upon the filing of a certificate with the court and service of the certificate on the debtor. The required certificate needs to set out the facts that justify non-application of the automatic stay. §362(b)(22).
Continuation of Eviction Proceeding for “Endangerment of the Property or Illegal Use of Controlled Substances.” Where the landlord has commenced an eviction for reason of endangerment of the property or illegal use of controlled substances and the alleged misconduct occurred within thirty days of the filing of the bankruptcy, the landlord would be permitted to continue with the eviction upon the filing of a certificate with the court and service of the certificate on the debtor. The required certificate needs to set out the facts that justify the non-application of the automatic stay. §362(b)(23). In response, the debtor would be able to keep the stay in effect by a certificate denying the allegations. the court is then required to hold a hearing within ten days as to whether the circumstances exist or have been remedied. §362(m).
Family Law Cases. The automatic stay has authority over Family Law cases only to the extent of the division of property and debts. There is an exclusion from the automatic stay under §362(b)(2) for the establishment or enforcement of Domestic Support Obligations (DSOs). Beyond seeking a state court’s order to establish or enforce support, the exclusion from the automatic stay also includes the continuation of wage assignments, the continuation of administrative enforcement (such as suspension of licenses, e.g., drivers, professional or recreational), reporting overdue DSOs to consumer reporting agencies, interception of tax refunds, and enforcement of medical obligations.
Repeat Filer Issues. A vexing issue for secured creditors, especially mortgage lenders, arises when debtors have filed petition after petition, stopping foreclosure proceedings or a trustee sale. 11 U.S.C. §362(c)(3) provides that, if the debtor had one case dismissed within the prior year, the automatic stay as to secured creditors or leases terminates within thirty days, unless the debtor moves to extend the stay and, after a hearing, the Court extends the stay. The debtor must overcome a presumption of bad faith by showing a substantial change of financial condition from the circumstances of the prior case.
11 U.S.C. §362(c)(4) provides that, if the debtor had two or more cases dismissed within the prior year, the automatic stay as to secured creditors or leases will not go into effect. The debtor may move to impose the stay by motion within thirty days of the petition, and the debtor must overcome a presumption of bad faith by showing a substantial change of financial condition from the circumstances of the prior cases.
Additionally, relief from the automatic stay will be ordered “if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved either … (A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or (B) multiple bankruptcy filings affecting such real property.” 11 U.S.C. §362(d)(4).
Procedures for Relief from the Automatic Stay. An order for relief from the automatic stay may be granted after hearing and only upon “cause,” as defined by 11 U.S.C. §362(d), such as:
- for cause, including the lack of adequate protection of an interest in property of such party in interest;
- with respect to a stay of an act against property under subsection (a) of this section, if:
- the debtor does not have an equity in such property; and
- such property is not necessary to an effective reorganization
Relief from the Automatic Stay is initiated by motion (Rule 4001(a), F.R. Bankr. P.). Motions for Relief are viewed as a summary procedure and the resolution of these motions is handled on an expedited basis.
As was mentioned above, Domestic Support Obligations are not discharged in a bankruptcy filing.
In addition, a Chapter 7 bankruptcy discharge does not end the obligations of a divorce decree, separation agreement or other orders of the court. 11 U.S.C. §523(a)(15). so there is merit to filing a bankruptcy from the entry of the final decree of divorce and depriving the family court judge of the jurisdiction to divide debts. it also takes a very contentious issue off the negotiation table. however, a discharge of debts by a party to a divorce may cause the family court to consider the discharge of debts in dividing community assets. For example, in Arizona, the family court is to divide the marital property equitably under A.R.S. § 25-318(A). The Court of Appeals has sustained a family court redistributing property post-discharge in bankruptcy and upon a Rule 60 motion.
Debts that arise from orders in divorce or separation proceedings can be discharged in a Chapter 13 proceeding.
Right to Pursue the Insurer of the Debtor. the filing of bankruptcy by the defendant in a personal injury action stays that action. however, it does not preclude the plaintiff from proceeding against the defendant’s insurer. the court will grant a stay relief motion that permits the plaintiff to pursue the defendant in name only for purposes of proceeding against an insurer under 11 U.S.C. § 524(e) or any other entity that may be liable on the debtor’s behalf (for example, a unit of state or local government.) this stay relief can be granted prior to discharge or after discharge..