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Archive for the ‘Chapter 7’ Category

“General Unsecured Debts” in Chapter 7

December 11th, 2017 at 8:00 am

In a Chapter 7 case all or most “general unsecured debts” get “discharged”—legally written off. That’s one of the big benefits of Chapter 7.  

 

Last time we said there are two kinds of unsecured debts, “priority” and “general unsecured”:

  • “Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, by treating them much better than other unsecured debts. You can find a list of all the priority debts at Section  507 of the U.S. Bankruptcy Code.
  • “General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.”  “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”

We’ll get into “priority” debts later. Today’s post is about how “general unsecured” debts are dealt with in Chapter 7 “straight bankruptcy.

The Discharge of Debts

The main goals of a Chapter 7 case are 1) to stop creditors’ collection actions against you and then 2) to discharge as many of your debts as possible.

First, creditor collections are virtually all stopped by the “automatic stay.” This includes general unsecured debts. We discussed the automatic stay in our blog post of November 22, 2017. We compared how it works in Chapter 7 and 13. Also, see Section 362 of the Bankruptcy Code about it.

Second, in most Chapter 7 cases all “general unsecured debts” get discharged. See Section 727 of the Bankruptcy Code about the discharge of debts.

The discharge happens quite quickly. About 100 days after your bankruptcy lawyer files your case, the bankruptcy court enters a discharge order. Here is a very straightforward version of the Order of Discharge, consisting basically of this single short sentence: “A discharge under 11 U.S.C.  [the Bankruptcy Code] is granted to [Debtor].” Your assigned bankruptcy judge signs this order.

The Effect of Discharge

The effect of this discharge order is explained right on this form order, stating:

Creditors cannot collect discharged debts

This order means that no [creditor] may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.

Most General Unsecured Debts Get Discharged

“Priority” debts don’t get discharged. For example, unpaid child or spousal support can never be discharged. Nor can recent income taxes.

But most general unsecured debts do get discharged. There are some exceptions. We’ll cover those next time.

 

The Means Test is Based on Timing

October 6th, 2017 at 7:00 am

Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.   


The Means Test

To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.”  That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”

You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.                  

Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.

The Timing Focus of the Means Test

As we said above, the easiest way to pay the means test is for your income to be no larger than the published “median income” amount for a family of your size in your state. If your income is no more than that then right away you’ve passed the test. You’ve overcome the biggest qualification for filing a Chapter 7 case.

But your income for purposes of the means test is not calculated in any way you might think. In particular the timing aspect of how your income is calculated is unusual.

Your income for purposes of the means test is not based on your income for the previous calendar year, or prior 365 days or 12 months. It’s not based on any kind of annual basis. Instead it’s based on your income of the six full calendar months prior to the filing of your case.

  • For example, if you and your bankruptcy lawyer file your case during any day in October 2017, the pertinent prior-six-full-calendar-month period is from April 1 through September 30, 2017. After adding up the income received during that six-month period multiply it by two for the annual amount.
  • Your income for the means test is not just your “taxable income.” Instead include just about every bit of income or money you receive from all sources during that period of time. This includes irregular sources of money such as child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. However, exclude all types of social security-based income.

The Median Income Amount for Your Family Size and State

The last step is to compare your income amount as you just calculated to the median income for your state and your size of family. You can find that median income amount in the table that you can access through this website. (This median income information gets updated every few months so be sure to use the current table.)

Conclusion

If your income, as calculated in this distinct way, is no more than the median income for your state and family size, then you’ve cleared the means test hurdle! You can very likely proceed through Chapter 7 bankruptcy.

Next time we’ll focus on the opportunities presented by this quirky way of calculating income for the means test.

 

A Sample Completed Chapter 7 Case

September 15th, 2017 at 7:00 am

What does the completion of a successful Chapter 7 “straight bankruptcy” case look like? What happens to your debts?

 

A Sample Chapter 7 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. Today we’re doing the same thing with a Chapter 7 case.

And like last time we’ll show what a finished Chapter 7 case looks like through tangible facts.

So imagine Jennifer filing a Chapter 7 case through the help of her bankruptcy lawyer to stop a lawsuit by a collection company, write off some old income taxes she’d been struggling to make monthly payments on, hang onto a vehicle whose loan she’d started falling behind on, and write off a bunch of medical, credit card and other personal debts.

The Facts

Jennifer had fallen behind on virtually all of her debts 18 months ago. She’d lost her job and it took her 3 months to find a new one.

She couldn’t pay a $1,200 medical bill, so a few months later it was sent to collections. For 12 months Jennifer disregarded collection letter and phone calls because she had absolutely no money to pay this debt. Then the collector sued her. She was justifiably very concerned about getting her paycheck garnished. She’s a bookkeeper. Her employer made clear that employees in her position better not have their wages garnished. Stopping that lawsuit from turning into a judgment pushed her into filing a Chapter 7 case.

In 2012 she’d started a side business to try to get ahead in life. It made some money for a while but then the income fell off and she had to close it down. She couldn’t afford to pay federal income taxes on that income, so she owed $8,000. In 2015 she’d arranged with the IRS to make $150 monthly payments, and struggled to pay those. She was really afraid what would happen if she stopped paying. She still owed $5,000 in income taxes, interest and penalties.

In the midst of all these financial pressures she struggled to pay her $390 vehicle loan payments. She was often late on the payments, racking up late charges. The last month or two before filing bankruptcy she’d gotten right to the brink of getting her car repossessed. She had absolutely no way to get to work or doctor appointments without her car. So being able to pay for her car was another big reason for filing bankruptcy.

The Filing of Her Case

When Jennifer’s case was filed that immediately stopped the collection lawsuit. She could also stop paying the $150 monthly installments on her income tax debt. That’s because the tax was old enough and otherwise qualified for discharge—legal write-off. She no longer had to pay on any of the $75,000 in other unsecured debts—other medical bills, credit cards, and various other obligations. So she was able to quickly catch up on her car loan and be able to pay it without distress.

The End of the Chapter 7 Case

Jennifer filed her case 100 days ago. That’s about how long most consumer Chapter 7 cases take to finish. Completing her case successfully is crucial because otherwise she’d lose the benefits of her case.

Regarding her vehicle loan, a few weeks earlier she had entered into a reaffirmation agreement with her lender. That agreement formally excluded the loan from the discharge of the rest of her debts. She agreed to remain liable on that loan in return for being able to keep her car. She was happy to continue owing on this debt, now that she had no trouble making the payments. Reaffirming the debt also allowed her to quickly start re-establishing her credit.

So now Jennifer receives a copy of a Discharge Order from the bankruptcy court. Her creditors all also receive copies. This court order prevents any of her creditors—other than the vehicle lender—from pursuing her or her assets. From the time her Chapter 7 case was filed until now the debts were on hold. The “automatic stay” prevented any of her creditors from taking any collection action against her. But Jennifer still owed the debts. Now the Discharge Order makes her debts permanently uncollectible.

All of her creditors—again with the exception of the vehicle lender lender—now each write off her debt from their books. This includes the IRS. It becomes illegal for any of these creditors to do anything to collect its debt. They must report to credit reporting agencies that the debt has been written off and is no longer owed.

Conclusion

So Jennifer can get on with her life in financial peace. She doesn’t worry about lawsuits and garnishments. She doesn’t fear what the IRS will do to her if she misses an installment payment. And she can comfortably pay her vehicle loan payment and looks forward to paying it off. Other than that manageable single payment she is debt-free, and appreciating her fresh financial start.

 

Timing Can Be Crucial for Passing the Means Test

July 10th, 2017 at 7:00 am

With smart timing you can take advantage of the unusual way that your “income” is calculated for the Chapter 7 means test.  

Passing the Means Test

We introduced the means test a couple of weeks ago and said that many people pass this test simply by having low enough income.  Their income is no larger than the published median income for their state and family size.

We also explained that income for this purpose has an unusual definition. It includes:

  • not just employment income but virtually all funds received from all sources—including from irregular ones like child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits (but excluding Social Security);
  • funds received ONLY during the 6 FULL CALENDAR months before the date of filing, multiplied by two for the annual amount.

In other words, if you file a Chapter 7 case on any day of July, you count all funds received during the period January 1 through June 30. Then you double it and compare that to the applicable median income amount.

This very broad definition of “income” received within this very definite time period has some important tactical consequences for you. Under the right facts your “income” for the means test could shift significantly if you file your Chapter 7 case one month vs. the next. It could increase or reduce your “income” by enough to qualify or not qualify under Chapter 7.

We’ll show how this is possible through the following example.

An Example

Assume the following facts:

  • You have employment income grossing $3,750 per month that you consistently earned and received through the last several years.
  • Back in January you also received a modest auto insurance settlement of $2,500 from an insurance company.
  • The median annual income for your state and family size is $46,412.

Your “income” for means test purposes in July is:

  • 6 times $3,750 employment income = $22,500.
  • $22,500 plus $2,500 insurance proceeds = $25,000 total income from January 1 through June 30.
  • $25,000 times 2 = $50,000 annually.

Since $50,000 is more than the applicable median annual income amount of $46,412, you don’t pass the means test. (At least you don’t on the first income-only step. You may still pass by going through the expenses part of the test, but that’s beyond today’s blog post.)

So what happens if you don’t file your Chapter 7 case in July but rather wait until August? Here is the new income calculation:

  • 6 times $3,750 employment income = $22,500.
  • There’s no additional $2,500 from the insurance settlement because you received it in January while the pertinent 6-month period now is February 1 through July 31.
  • So $22,500 times 2 = $45,000 annually.

Since $45,000 is less than the applicable median annual income amount of $46,412, you now pass the means test. You qualify for Chapter 7. 

 

No Means Test If You Fit within a Military Exemption

June 28th, 2017 at 7:00 am

There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.


The Benefit of Avoiding the Means Test

We introduced the “means test” two blog posts ago. This test determines whether you qualify for a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts” case. It’s based on your income, or if your income is not low enough your expenses play a part as well.

Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually “discharges” (legally writes off) most debts without you paying anything.  And the cases usually only last about 4 months.

So if Chapter 7 is what you need, you can see why skipping the means test could be very important.

Completely Avoiding the “Means Test”

The two exemptions from the “means test” related to military service are:

1) the disabled veteran exemption, and

2) the active duty/homeland defense exemptions.

The law clearly states that under these exemptions you can completely avoid the means test.  It says that “the [bankruptcy] court may not dismiss or convert [into Chapter 13] a case based on any form of means testing” if either of these exemptions apply. (See Section 707(b)(2)(D) of the Bankruptcy Code.)

1) The Disabled Veteran Exemption

You can avoid the “means test” under this exemption by meeting two conditions:

First, you are “disabled veteran.” This means that either

a) you are entitled to veteran disability compensation by being least 30% disabled; or

b) you have been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty” (as defined in 38 U.S.C. Section 3741(1)).

Second, your “indebtedness occurred primarily during a period” in which you were either:

a) on “active duty,” meaning “full time duty in the active military service of the United States” (10 U.S.C. Section 101(d)(2)); or

b) “performing a homeland defense activity.” (See definition in 32 U.S.C. Section 901(1).)

On a practical level this second condition seems to be a challenging one.

Think about it. Let’s say you incurred most of your debts before you joined the military, then became disabled while on active duty. So if you then couldn’t pay your debts and needed to file bankruptcy, this exception wouldn’t apply. Your “indebtedness” would not have “occurred primarily” during your active duty but rather before it.

Or let’s say if you didn’t have much debt when you went on active duty. But then you became disabled while on active duty. If you then incurred most of your debt AFTER being released from active duty because of your disability, your “indebtedness” would not have “occurred primarily” during your active duty but rather after it.

In either of these situations you’d still have to pass the means test to go through a Chapter 7 bankruptcy. You don’t if your “indebtedness occurred primarily” while you were on active duty.

2) The Active Duty/Homeland Defense Exemption

This second exemption is much broader. Unlike the above, the timing of your debts in relation to the time of your service does not matter. But this exemption from the means test comes with a very quick deadline to qualify for it.

You are exempt from the means test if at any time after September 11, 2001 you were (or still are) a member of the Armed Forces or the National Guard who served either in active duty or for the homeland defense for a period of at least 90 days. See Section 707(b)(2)(D)(ii) of the Bankruptcy Code.

To use this exemption you must file your Chapter 7 bankruptcy case either:

  • during your term of duty, or
  • within 540 days (about a year and a half) after it ends.

Conclusion

The disabled veteran exemption requires your indebtedness to have “occurred primarily during” your period of service. With the active duty/homeland defense exemption, to use it you must file your Chapter 7 case during or within 540 days after completing your service. Ask your bankruptcy lawyer whether you can skip the means test by fitting within one of these two exemptions.

Again, even if you don’t think you qualify for either of these exemptions, remember that most people needing to file a Chapter 7 case can pass the “means test” and so don’t really need an exemption from it.

 

No Means Test If You Have More Business Debts than Consumer Debts

June 26th, 2017 at 7:00 am

You only have to pass the means test if you have “primarily consumer debts.” If you have more business debts, skip the means test.  


The Consumer “Means Test”

Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.

But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.

The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:

16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”

16b. Are your debts primarily business debts? Business debts are debts that you incurred to obtain money for a business or investment or through the operation of the business or investment.

If you answer “no” to the first question (and usually “yes” to the second question), than you skip the means test. This can be a significant advantage because you may otherwise not qualify under Chapter 7.

How this Exception Fit’s into the Purpose of the Means Test

The purpose of the “means test” is to only allow you to go through a Chapter 7 case if you don’t have the “means” to pay a meaningful amount of your debts to your creditors. If your income is no more than the “median income” for your family size in your state, the law assumes you don’t have the “means” to do so. Next, if your income is more than the median amount, then your allowed expenses are carefully reviewed to see if you do have enough “means” left after your expenses.

When Congress created the means test, it decided to apply the test only to individual consumers, not to businesses and business owners.

The mechanism that Congress used to divide between consumers and business is the phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

Not “Primarily Consumer Debts”

If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”

As you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two reasons.

First, debts that you would normally consider consumer debts might not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. (Note the explanation to the question in the bankruptcy petition quoted above, that business debts include both those incurred in funding the business and in operating it.)

Second, some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at the filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and other possible charges.

Through a combination of these two considerations, your total business debt may be much more than you expected. So you might have more business debt than consumer debt.

Conclusion

You may not be in a position—given your income and the expenses you’re allowed—to pass the means test. If you have ANY business debts, be sure to ask your bankruptcy lawyer to see if you qualify for this not-“primarily consumer debt” exception.

 

Example of a Simple Chapter 7 “Asset Case”

June 21st, 2017 at 7:00 am

Chapter 7 “asset” cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.  

 

Asset and No-Asset Chapter 7 Cases

Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells (“liquidates”) it, and distributes the proceeds to your creditors.

We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special “priority” debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.

But what if you don’t have any such priority debts? What happens in an otherwise simple Chapter 7 case in which you to have an asset that the trustee gets and liquidates?

Our Simple Example

Assume someone named Hannah owes $80,000 in a combination of personal loans, credit cards, and medical bills. Her income qualifies her for a Chapter 7 case under the “means test” in her state with her family size. Under the property exemptions that the law provides to her, everything she owns is exempt except for one thing. She owns, free and clear, a sailboat with a fair market value of $8,000. (Such a boat may be exempt in some states, probably depending on what else she owns, but let’s assume it’s not exempt here.)

Hannah would partly like to keep the boat, because her kids enjoy sailing with her. But it is quite expensive to maintain, draining money she needs for much  more important expenses. So she doesn’t terribly mind losing the boat.

Keeping the Boat

Her bankruptcy lawyer tells Hannah she does have two possible ways to keep the boat. One is under Chapter 7 “straight bankruptcy” and another under Chapter 13 “adjustment of debts.”

She could likely keep the boat by essentially paying for the right to keep it, in a different way with these two options.

Chapter 7 Option for Keeping the Boat

In a Chapter 7 case, if she could come up with around $8,000 she could offer it to the trustee. The trustee would almost certainly accept the money instead of taking the boat. In fact the trustee would likely accept somewhat less because Hannah would be saving the trustee the costs involved in liquidating the boat. The trustee may even allow Hannah to pay off the boat over the course of several months. Then after receiving Hannah’s money, the trustee would distribute it out to her creditors.

Assuming that Hannah doesn’t have ready access to $8,000, either immediately or over the next several months, this is not a very practical option. And even if she could borrow or otherwise raise the money, she’d likely decide that that much effort wasn’t worthwhile. Again, she doesn’t really want the boat anymore.

Chapter 13 Option for Keeping the Boat

Chapter 13 makes hanging onto the boat easier. Hannah would likely have 3 to 5 years to make payments into a Chapter 13 payment plan. Those payments would reflect how much she could afford to pay, and would have to be enough over time to pay at least the $8,000 value of the boat.

So she’d have much more time to pay than under Chapter 7. But she’d be stuck in a bankruptcy case for years, simply to be able to keep something she no longer thinks is wise to keep.

The Best Option Here—the Asset Chapter 7 Case

Hannah decides that simply giving the boat to the Chapter 7 trustee would be the best for her here.

So, with the help of her lawyer she files a Chapter 7 case. A few weeks later she signs over the boat to her assigned trustee. The trustee sells the boat, and after expenses (for the boat broker’s commission, storage fees and such), has a net amount of $7,000.

The trustee is entitled to a fee. It’s generally calculated to be no more than 25% of the first $5,000 distributed, plus 10% of the next $45,000. (See Section 326(a) of the U.S. Bankruptcy Code.) That amounts to a $1,950 fee here, which would come out of the $7,000.

That leaves $5,050 for the creditors. Since Hannah owes no “priority debts,” the $5,050 is divided pro rata among the $80,000 of debts. This means that her creditors would all receive a little more than 6 cents on the dollar.

Although Hannah is losing the boat to her creditors, under her circumstances this is her best option. She gets rid of something that she doesn’t need, finishes her case in a matter of a few months, and gets a fresh financial start by being debt-free.

 

A Chapter 7 “Asset Case”

June 19th, 2017 at 7:00 am

Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?  

 

The More Common No-Asset Case

The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold.  But in most consumer Chapter 7 cases that’s not what happens.

Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.

The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions.  So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything.  Nothing is actually “liquidated.”  Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.

Asset Case

So naturally, if you file a Chapter 7 case and own some assets which do NOT fit within the applicable exemption, that’s called an “asset case.” The trustee has assets to take and sell, and distributes their proceeds to creditors.

Reasons Non-Exempt Assets May Not Result in an Asset Case

Just because you have assets that do not fit the applicable property exemptions does not necessarily mean you have an asset case. The trustee is not necessarily obligated to take non-exempt assets, for the following reasons: 

1. The value of the non-exempt assets may be too small to justify the effort. The trustee has to go through quite a few steps in collecting and distributing assets in a Chapter 7 case. If the anticipated amount of collected assets is small, the effort going through all the steps may not be worthwhile.  Talk with your bankruptcy lawyer about what your trustee may consider “too small,” because that varies with different trustees and on your circumstances.

2. The cost and risk involved in collecting or liquidating the asset(s) may not be worthwhile.  You may have an asset in the form of a claim against somebody which may be worth some money. But it may cost a lot in attorney fees to pursue it, and there may not be a positive result.  The trustee may decide that the odds of winning the lawsuit or claim do not justify paying the attorney fees.  

3. An asset can be “burdensome” and not worth collecting for a various practical reasons.  Examples include real estate tainted by hazardous waste, and a pedigree show dog that has a serious temperament problem.

Not Want an “Asset Case”?

Don’t you want to avoid having an “asset case,” avoid having the trustee take something from you?

Sure, in most cases you want to keep everything you own and not have it go to your creditors. But, sometimes you don’t mind giving up something, especially if doing so is the best alternative for you.  

You may not mind giving up an asset if you don’t need it any more. You especially many not mind giving up the asset if the trustee pays the proceeds to creditors you want to be paid anyway.

Paying Your Important Creditor(s) Through Chapter 7 Liquidation

Let’s say you’re a small business owner with leftover business assets after you’ve shut down the business. (Assume these asset are not “tools of your trade” you need for earning your future living). You don’t need or want the business assets. You’d rather give the trustee the headache of divvying them up among the creditors. Surrendering those former business assets to the trustee may well be much better than going through a 3-to-5 year Chapter 13 payment plan just to keep those assets. 

How could the proceeds from those assets possibly go to pay creditors you want to be paid?  This can happen because of the priority rules which determine which debts get paid first. Those priority rules yield results that are often consistent with your own priorities.

For example, the trustee pays any accrued child or spousal support, some tax obligations, and various other categories of “priority” debts in full before paying anything to the conventional “general unsecured” creditors. These special debts are often the ones you want to pay, because they are often not discharged in bankruptcy. So you are simply using the law’s priority rules to your advantage.

Easier Said Than Done

To be clear, things have to fall into place correctly for this to happen. A number of considerations have to be met in order for your assets to flow through a Chapter 7 trustee to the debts you want or need to be paid.

The point is that there are circumstances in which a Chapter 7 “asset case” is not such a bad thing. Indeed it can be your best alternative.

 

Chapter 7 Trustee’s Abandonment of Property

June 16th, 2017 at 7:00 am

Just because you own something that’s not exempt doesn’t always mean that the Chapter 7 trustee will take it. The trustee could abandon it. 

 

Our last blog post discussed factors that a trustee would consider in deciding whether to liquidate one of your assets. In most consumer Chapter 7 cases the trustee liquidates nothing because everything the debtor owns is “exempt,” or protected.  That’s called a “no asset” case because the trustee does not claim anything for the “bankruptcy estate.”

The trustee can get interested in something a debtor owns only if it is not exempt—not protected.  But even when something isn’t exempt, the trustee may still decide it’s not worth liquidating. If that’s the trustee’s decision, he or she could then “abandon” the property.                

Reasons to Abandon

The United States Bankruptcy Code says that

the trustee may abandon any property of the [bankruptcy] estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

See Section 554(a) of the Bankruptcy Code.

The Chapter 7 trustee’s main job is to “collect and reduce to money the property of the estate” (to the extent the property is not exempt). Section 704(a)(1). After the trustee liquidates any non-exempt property, he or she distributes that money to the creditors.

The point is to pay creditors a part of the debts owed (or, rarely, pay those in full). So it makes sense for the trustee to not have to mess with property that won’t help in that. It makes sense for the trustee to abandon property that is either “burdensome” or “of inconsequential value and benefit.”

“Burdensome”

“Burdensome” essentially means more trouble than it’s worth. An asset can be burdensome by being a liability—for example, real estate that has a severe hazardous waste problem. And it can be burdensome by costing more to liquidate than the asset is worth—for example, a modest boat worth $1,000 but which is in such of a remote location that it would cost more than that to retrieve, market, and sell it. And the asset could be both a potential liability and cost too much to liquidate. An example would be a questionable debt owed to the debtor, which would take attorney and court fees to collect, and may also result in counterclaims against the trustee.

“Of Inconsequential Value and Benefit”

A trustee has to consider whether something is worth so little that it’s not worth the trouble to collect and sell it. The usual considerations come into play about accounting for liquidation costs in arriving at the net cash proceeds.

But there’s another overarching consideration. The net cash proceeds need to be large enough to justify the trustee’s efforts involved in an asset case. Trustees get paid a maximum of 25% of the first $5,000 collected and 10% of the next $45,000. There is more to administering an asset-distribution case than you might think. Many trustees won’t bother chasing even $1,000 net cash proceeds because the $250 fee would not be worth all their trouble administering the case. Talk with your bankruptcy lawyer to find out your local trustees’ practices. At what threshold dollar amount do your panel of trustees consider that an asset is beyond “inconsequential value”?

Deemed Abandoned

A Chapter 7 trustee can do a formal abandonment procedure through a motion to the bankruptcy court. Otherwise, everything listed on your bankruptcy asset schedules “at the time of the closing of a case is abandoned to the debtor.” Section 554(c).

Practically speaking, trustees usually don’t bother to do a formal abandonment unless they want to quickly avoid the risk of liability from a detrimental asset. Most consumer no asset cases are closed within about 100 days after filing. So at that point all your assets are deemed to be abandoned by the trustee to you.

 

A “No Asset” Chapter 7 Case

June 12th, 2017 at 7:00 am

Most individual consumer Chapter 7 cases are “no asset” ones. This means that the Chapter 7 trustee doesn’t liquidate any debtor assets.

 

Chapter 7 Is a Liquidation Form of Bankruptcy

When think “liquidation,” this is what you may come to mind. A business decides to close down and files a Chapter 7 “liquidation” bankruptcy. A bankruptcy trustee gathers and sells all of the business’ assets and pays its creditors as much as it can out of the proceeds.

When you as an individual file under Chapter 7 it’s still a so-called “liquidation” bankruptcy, but it’s usually completely different. Nothing of yours is liquated by your Chapter 7 trustee. The reason is that, unlike a corporation, you are entitled to many property exemptions. These are provisions in the law which protect what you own from your creditors. They protect your property from your Chapter 7 trustee, who acts on behalf of your creditors. Usually everything you own fits within the exemptions that apply to you, protecting everything.

That is called ano asset Chapter 7 case.” The trustee does not liquidate anything.

But in some Chapter 7 cases, everything is not exempt. This is called an “asset Chapter 7 case.”

In this blog post we’ll look at some practical aspects of “no asset” cases.

Anticipating a “No Asset Chapter 7 Case”

After deciding with your bankruptcy lawyer to file under Chapter 7, together you prepare your property and exemption schedules. See Schedule A/B and Schedule C.

In less than half the states, you will have the option of using your state’s property exemptions or a set of federal ones. The federal ones are in the Bankruptcy Code. (See Section 522(d).) In the rest of the states you must use the exemptions provided by the state.

In many situations it will be clear that everything you own fits within the exemptions available to you. Everything fits reasonably neatly into exemption categories. For example, you own a vehicle, and there is an available vehicle exemption. And everything you own is worth no more than the maximum value allowed. For example, your vehicle is worth $4,500 and the exemption maximum is $5,000.  

So your lawyer informs you that based on the information you’ve provided, you should have a “no asset case.” The trustee is not likely to decide that anything you own is not exempt and therefore considering taking and liquidating.

The “Meeting of Creditors”

Then about a month after filing your case, you and your lawyer attend a so-called “meeting of creditors.” Although your creditors are invited, usually none, or maybe only one or two, attend. The meeting is presided over by the assigned Chapter 7 trustee. Usually the main thing that happens is that the trustee verifies that everything you own is exempt and protected. The trustee asks you a few questions under oath verifying the accuracy of what you put on your asset schedules.

Then, depending on the personal practices of the individual trustee, he or she may announce towards the end of the meeting that it’s a “no asset case.” If you do not hear that announcement, your lawyer will likely tell you right after the meeting that that’s effectively the situation. That’s because your schedules show that everything you own is exempt, and the trustee is not asking for further information.

The Trustee’s “No-Asset Report”

Whether or not the trustee announces it at the hearing, if the trustee determines that the case is a no asset case he or she files a “no-asset/no-distribution report.” Here’s a sample of that simple report from the Handbook for Chapter 7 Trustees. At the heart of it is the following statement: “I… report that… I have made a diligent inquiry… and that there is no property available for distribution from the estate over and above that exempted by law.”

 

Next time we’ll get into what happens when things don’t go quite as smoothly as this.

 

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