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Disqualification: Overview of Bankruptcy – Chapter 13 and Why to File, Part 1

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Series: #6 0f 13
In our previous article, we took an overview of Chapter 7 bankruptcy, and how it is handled in Indiana, an “opt out” state where residents take exemptions found under state law. In this installment, we will discuss why a debtor may not be eligible to file for a Chapter 7. Future articles will look at other reasons to file a Chapter 13 rather than a Chapter 7 Bankruptcy.

What is Chapter 13 Bankruptcy?

As mentioned in the last post, Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court. Three key components to a Chapter 13 plan are eligibility (whether a debtor is entitled to file a Chapter 13 under the limitations set forth in Section 109(e)), feasibility (whether a debtor can fund a payment plan which complies with Section 1322 and 1325), and good faith (as set forth in Section 1325 – Confirmation of plan*(a)(3)).
Per 11 U.S.C. Sec. 109*(e), there are limitations as to how much debt an individual having regular income can have to be eligible for Chapter 13.
Except for a stockbroker or a commodity broker, and individual and his spouse may have up to $336,900.00 of noncontingent, liquidated unsecured debt and non-contingent, liquidated, secured debts up to $1,010,650.00. [NOTE: These figures will adjust up to $360,475.00 and $1,081,400.00 respectively in April 2010.]

Why file a Chapter 13? You may not qualify for Chapter 7 Relief.

  1. The debtor is not eligible to receive a Chapter 7 discharge. As discussed briefly above, a debtor may not receive a discharge of debts under Chapter 7 of the Bankruptcy Code if the debtor has received a discharge in Chapter 7 or 11 in a case commenced within eight years before the date of filing the petition.In addition, a debtor may not receive a discharge of debts under Chapter 7 of the Bankruptcy Code if the debtor has received a discharge in Chapter 12 or 13 in a case commenced within six years before the date of filing the petition. See 11 U.S.C. §§ 727 – Discharge*. Maybe the first question to ask the debtor is whether she has ever filed for bankruptcy before.The attorney should also review the Public Access to Court Electronic Records (PACER) for information on previous filing dates and whether the debtor received a discharge or whether the case was dismissed.
  2. Filing Chapter 7 would be abusive to Chapter 7 provisions. In a nutshell:
    • If the debtor’s average “current monthly income” minus expenses reasonable and necessary (as defined by 11 USC § 707*(b)(2)(a)(i)-(iii)) leaves less than $6,575.00 ($109.00 per month), then there is no automatic presumption of abuse.
    • If the resulting figure leaves more than $10,950.00 ($182.50 per month) then there is an automatic presumption of abuse. If the resulting figure is anywhere between the two numbers, then there is a presumption of abuse if that figure would pay at least 25% of the non-priority unsecured claims (if the debtor has more debt, then there is less likelihood of abuse!). Note that the figures increase every three years on April 1.
    • The next adjustment is April 1, 2010. According to the Federal Register, Volume 75, Number 37 (February 25, 2010) the increased figures will be $7025.00 ($117.08 per month) for no abuse and $11,725 ($195.41 per month) for presumption of abuse.

    [We are not going to try and explain the provisions of the Section 707(b) means test in the limited space of this article because a reasonable explanation would likely take pages. Entire seminars have been given on the means test requirements, and Section 707(b) is very likely the section that has created the most litigation across the country. For more information on the topic, read 11 USC § 707 – Dismissal of a case or conversion to a case under chapter 11 or 13*.]

Next: Curing a Mortgage: Overview of Bankruptcy – Chapter 13 and Why to File, Part 2

* Source: Cornell University Law School Legal Information Institute

Chapter 7 Overview: Deciding on Which Bankruptcy to File

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Series: #5 of 13
As briefly mentioned in our previous article, “Initial Interview: Chapters 7 and 13 Bankruptcies – Deciding Which Chapter to File,” the goal of bankruptcy (regardless of the chapter) is to attempt to get some money for the general unsecured creditors in exchange for certain debts being discharged. The difference between a Chapter 7 and Chapter 13 bankruptcy, then, is how the court finds money.

What is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is a “liquidation” in which the debtor truly and honestly lists all assets and allows the court to determine if any assets are valuable enough to sell and help pay down the debt. The Code allows individual states to claim the Federal exemptions enumerated at 11 U.S.C. § 5221 or opt out of the Federal exemptions and take state exemptions. Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court.
Indiana is an “opt out” state and Indiana residents take exemptions found under state law. The majority of exemptions may be found in the Indiana Code at IC 34-55-10-2(c)2 and are generally broken down into four categories (which increased on March 1, 2010):

  1. Real estate or personal property constituting the personal or family residence of the debtor or a dependent of the debtor, or estates or rights in that real estate or personal property, of not more than $17,600.00. The exemption under this subdivision is individually available to joint debtors concerning property held by them as tenants by the entireties
  2. Other real estate or tangible personal property of $9,350.00
  3. Intangible personal property, including chooses in action, deposit accounts, and cash (but excluding debts owing and income owing), of $350.00
  4. An interest, whether vested or not, that the debtor has in a retirement plan or fund to the extent of contributions, or portions of contributions, that were made to the retirement plan or fund by or on behalf of the debtor or the debtor’s spouse which were not subject to federal income taxation to the debtor at the time of the contribution, or which are made to an individual retirement account in the manner prescribed by Section 408A of the Internal Revenue Code1 of 1986.

Any attorney acting as debtor’s counsel should be fully cognizant of all available exemptions available for debtors.
Further, debtors should be aware whether their case will likely be an asset case or not as soon as it is known, but certainly prior to the filing of the case.
Finally, debtors should be advised that filing of the bankruptcy creates a bankruptcy estate (see 11 U.S.C. § 541 – Property of the Estate1) which includes almost everything, and that they must not dispose of estate property until abandoned by the Chapter 7 trustee. Attorneys should also become familiar with 11 U.S.C. § 523 – Exceptions to discharge1 which details those debts which will not be dischargeable in a Chapter 7 case and advise debtors accordingly.
Not all debtors are eligible for a Chapter 7 bankruptcy and must file a Chapter 13 to receive the Section 362 automatic stay and subsequent discharge.
Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court.
In addition to not being qualified for Chapter 7 (or other chapters,) there are numerous reasons for a debtor to choose to file Chapter 13. In our next installment, we will begin a closer look at the primary reasons why to file a Chapter 13 rather than a Chapter 7 bankruptcy.
Next: Chapter 13 and Why to File, Part 1 – Disqualification

Sources: (links open in new windows)
1. Cornell University Law School Legal Information Institute
2. State of Indiana Constitution on IN.gov