The bankruptcy process is governed by several things: the Bankruptcy Code (the federal statutes that govern all bankruptcy cases), the Federal Rules of Bankruptcy Procedure, the set of Local Rules officially adopted by each bankruptcy court, and often the individual procedural preferences of the individual bankruptcy judges themselves.
Although there are six different types of bankruptcy cases provided for under the Bankruptcy Code, only two of them – Chapter 7, and Chapter 13 – are used by most people to find relief from their debts. Generally, all bankruptcy cases are started by filing a Voluntary Petition under a specific Chapter of the Bankruptcy Code. There are also other mandatory forms that must be filed with, or shortly after, the Voluntary Petition. These forms give the Court, the Trustee, and all creditors a full picture of the debtor’s assets, debts, income, expenses, and recent financial transactions.
This brief summary is intended to provide only a very general understanding of each type of case. It does not attempt to detail every aspect, including some critically important aspects, of each type. This is not intended to replace a discussion with an attorney or other professional.
Chapter 7 Bankruptcy
“Chapter 7” bankruptcy cases are liquidation cases. These are the most common type of case filed by debtors in Oklahoma. Chapter 7 bankruptcies involve the systematic liquidation of the debtor's non-exempt assets. However, there is usually little or no non-exempt property in most Chapter 7 cases because of Oklahoma’s generous exemption statutes. So, it is likely that there may not any actual liquidation of a particular debtor's assets in most cases. If non-exempt assets do exist, the Chapter 7 Trustee will sell them and will distribute the proceeds to creditors on a pro-rata basis. Any wages earned by the Chapter 7 debtor post-bankruptcy belong solely to the debtor, and cannot be forcefully used to satisfy any pre-petition debts.
Procedure under Chapter 7
A Chapter 7 bankruptcy case is generally initiated by filing a Voluntary Petition and required supporting schedules and statements detailing the debtor’s assets, debts, and financial transactions. Within about 30 days of filing the case, the debtor must appear for a “Meeting of Creditors.” This meeting enables the Chapter 7 Trustee and creditors to briefly question the debtor about his financial matters. A creditor may also question the debtor as to whether the debtor will reaffirm or surrender secured property. Most of these meetings last between three to ten minutes. Other than appearing at the Meeting of Creditors, most Chapter 7 debtors have no other involvement, or very little involvement, the process of the case.
Discharge under Chapter 7
In the vast majority of cases, assuming the debtor is a person and not a company , the debtor will receive a discharge that releases her from personal liability for dischargeable debts. This discharge is typically received about 90 days from filing the case. However, personal liability for some debts, like taxes, student loans, child support, spousal support, property division obligations in a divorce decree, and other non-dischargeable debts, will not go away after bankruptcy. Businesses do not get discharges under Chapter 7.
There are certain eligibility requirements that must be met to file a Chapter 7 case. If your debts are primarily (i.e. more than 50%) business related, you may file a Chapter 7 case. If your debts are primarily consumer debts, then the Bankruptcy Code requires you to satisfy a “means test” calculation related to your income to determine whether you qualify for relief under chapter 7.
Discharge does not mean the debt is erased, it just means you are not personally liable to pay the debt. If other people are obligated under a debt the with you, they will remain liable unless they file their own bankruptcy. Also, banks or others with mortgages on your land or security interests in your car, or other personal property, can still foreclose on their collateral. However, you will not be responsible for any shortfall if sale of the property does not satisfy the debt amount in full. If you do have a secured debt, you can elect to surrender the property and let the creditor sell it, or you can generally keep making payments to the creditor and keep the property if you were current on payments at the time you filed your case.
Chapter 13 Bankruptcy
Chapter 13 is a process of reorganization for individuals (not business entities) with regular income who have unsecured debt of less than $419,275.00, and secured debt less than $1,257,850.00. In a Chapter 13 case, the debtor keeps both his exempt and non-exempt property. Chapter 13 is also used by debtors who do not qualify for Chapter 7 relief under the means test. In return for keeping his assets, the Chapter 13 debtor creates a repayment plan and makes regular payments to the Chapter 13 Trustee to fund the plan payment out of future income for a period of three to five years. The Chapter 13 Trustee takes the debtor’s monthly payment and disburses it to the creditors as directed by the plan.
Most debtors who are behind in house or car payments prefer to file a Chapter 13 case because this type of case allows a debtor to repay the delinquent amount over the life of the plan while maintaining regular monthly payments. Also, it is not uncommon to owe more money on a car than it is worth. Chapter 13 also allows car loans older than 910 days to be reduced to the value of the vehicle. Further, a debtor may be able to reduce interests rates owed on cars and other personal property as well.
Procedure under Chapter 13
A Chapter 13 bankruptcy case is initiated by filing a Voluntary Petition and required supporting schedules and statements detailing the debtor’s assets, debts, and financial transactions. Unlike Chapter 7, Chapter 13 debtors must also file a plan of reorganization detailing how the debtor proposes to treat her debts. Chapter 13 debtors also attend a Meeting of Creditors about 30 days after filing their case. A debtor’s Chapter 13 plan might be confirmed at the Meeting of Creditors if no one has objected to the plan.
If the Chapter 13 Trustee or a creditor does object to the plan, the debtor will be given time to try and negotiate agreements with its dissenting creditors. If no agreement can be reached, the debtor may still gain court approval of a plan if it satisfies the requirements of Chapter 13 of the Bankruptcy Code.
Discharge under a Chapter 13
Chapter 13 debtors do not receive a relatively quick discharge of debts like Chapter 7 debtors do. Instead, Chapter 13 debtors must complete all their payments due under the confirmed reorganization plan before receiving a discharge. Although the debtor must wait longer for a discharge, Chapter 13 discharges more types of debt than Chapter 7 does.
Creditors need to remain alert when a debtor files for bankruptcy protection. In Chapter 7 cases, creditors need to seek reaffirmations, where possible, in a timely manner. For the Chapter 13 creditor, it is important that you review the debtor’s plan and file any objection in a timely manner or you risk losing any voice in the process and will be forced to accept the plan as is.
If you have any questions about filing for bankruptcy protection or taking steps to protect your interests when a debtor files bankruptcy, CLG is ready to help you in any way that we can and will be happy to discuss your issues. Should you have any questions, please feel free to contact us.
About the Author
Jeff E. Tate, J.D. is a Director at Christensen Law Group, PLLC where he is the Chair of its Reorganization, Bankruptcy Litigation & Creditors’ Rights Department.