What is bankruptcy?   Bankruptcy is a legal process by which individuals and companies can have some or all of their debts forgiven in exchange for their non-exempt assets.  This section will discuss two types of bankruptcy proceedings for individuals: Chapter 7 and Chapter 13 (Chapter 11 bankruptcy is not discussed here).  

Chapter 7:  Chapter 7 is the most common type of bankruptcy. It is called a liquidation or straight bankruptcy.  For a case with primarily consumer debts, individuals qualify if they do not make too much money for their household size. They must pass a “means test”.  If the debtor has primarily non-consumer debts, the debtor can file a Chapter 7 regardless of income.  All of your money and property becomes part of an “estate”.  Parts of the estate are protected with state and federal laws called exemptions. Whatever portion of the property is not protected is liquidated, and that money is used to pay your creditors based on their priority and the proportion of their debt to the whole.   In a Chapter 7 case, from the day the petition is filed to the date of discharge is usually 3 to 4 months assuming no complications. If it is an asset case, i.e., assets have to be sold by the trustee, it could take a year or more. 

Chapter 13.  Chapter 13 is a reorganization/payment plan for individuals.    A sole proprietor dealing with business debts can also file chapter 13. The policy of the Bankruptcy Code is to force debtors into Chapter 13 if they can make any kind of repayments to creditors.  Individuals who make too much money and do not pass the means test are required to file Chapter 13 in lieu of Chapter 7.  As of April 1, 2019, a debtor must not have more than $419,275 of unsecured debt and $1,257,850 of secured debt. The plan term is 3 to 5 years. The debtor must have regular income and if the plan provides for the debtor to pay less than 100% of debts, the debtor must contribute his or her disposable monthly income for the entire plan term.  A debtor must file a Chapter 13 plan within 14 days after filing the petition. 

Should you consider filing bankruptcy?  There are many factors to consider when deciding whether to file bankruptcy, and whether to file Chapter 7 or Chapter 13.  You should consult with a bankruptcy attorney before making a final decision. Some of the factors to be considered are the following: 

  • What is and is not possible with bankruptcy? Not all debts can be forgiven and not all assets can be protected in bankruptcy. People who are “judgment proof,” i.e., do not have  significant assets, probably should nor file bankruptcy. 
  • What assets are protected (exempt and non-exempt)? Is the debtor willing to surrender non-exempt assets to the Trustee? Can those assets be converted to exempt assets prior to filing? 
  • Are any of the debts owed in the nature of debts that are dischargeable in a Chapter 13 but not discharged in a Chapter 7? 
  • Can the debtor follow through with the obligations of a Chapter 13? 
  • Can the individual pay an attorney's retainer fee? 
  • Are there problematic transactions that were made by the individual recently that must be considered? 
  • Is there a “fire”, for example a foreclosure sale pending writ of garnishment, tax levy or other imminent seizure of the individual's property? 
  • Are there cosigners or co-obligors of the debtor? Is there a non-filing spouse? 
  • Have recent debts been incurred that might have the appearance of fraud? 
  • Was there a transfer of assets within two years of the bankruptcy filing? 
  • Are there any non-dischargeable debts? 
  • Was the debtor's prior Chapter 7 case filed at least eight years ago? Was a prior Chapter 7 filing within four years of a proposed Chapter 13, or was a prior chapter 13 within two years? 

The first meeting with your attorney.  Your first meeting with an attorney will be either on the phone, in a zoom meeting, or in person.  The attorney will let you “tell your story,” that is, how you got to this point, your fears and questions about the process, and your goals for recovery.  The attorney will explain the bankruptcy process and ask numerous questions to gather information about you and your finances.  If you and the attorney agree that he or she should represent you, then your attorney will request you to provide certain written documents and information.  In order for the bankruptcy process to work, it is imperative for the individual  to truthfully and fully disclose everything requested by the attorney and to be 100% candid. The attorney may need to review these documents in order to decide whether to recommend proceeding with filing bankruptcy and, if so, whether to file Chapter 7 or Chapter 13.  Critical to this decision is a means test analysis.  If the means test analysis is very involved, the attorney may request a retainer fee in order to perform the analysis. 

The bankruptcy process.  The formal bankruptcy process begins with the filing of a bankruptcy petition in the bankruptcy court.  Your attorney will work with you to gather all of the necessary information and to prepare the petition for filing.  The debtor must provide certain information requested by the Trustee (tax returns, etc.) shortly after filing, and fill out a questionnaire. 

The first meeting of creditors.  The first important thing that happens after filing the petition is the meeting with creditors, sometimes called a Section 341 meeting. This meeting is conducted by the bankruptcy Trustee. The primary purpose of the creditors' meeting is to allow the Trustee and creditors to question the debtor under oath about the bankruptcy documents and the debtor's financial situation. 

The Bankruptcy Trustee.  A Trustee is randomly appointed in every Chapter 7 case.  The Trustee is not a government employee but is a private business person. The Trustee is concerned with preserving estate assets and any value in them. The Chapter 7 and Chapter 13 Trustee duties include  (1) conduct the first meeting of creditors, (2) investigate the debtor's financial affairs and identify undisclosed assets, if any, (3) if appropriate, object to the discharge of the debtor, (4) be accountable for all property received, (5) object to claimed exemptions, if appropriate, (6) review proofs of claim and, if the purpose would be served, object to allowance, (7) file a report and account for the administration of the estate, (8) scrutinize the means test, (9) be the representative of the estate to sue and be sued, and (10) seek non-exempt assets that can be liquidated and distributed to creditors. 

Two things happen when the petition is filed: (1) the bankruptcy estate is created, and (2) the automatic stay goes into effect. 

The Bankruptcy Estate.  

The bankruptcy estate consists of all non-exempt  legal and equitable interests of the debtor as of the time of filing.   This would include the debtor's primary residence, commercial/investment property, personal property (furnishings, vehicles, guns, horses), financial assets (i.e., IRAs/401 (k), life insurance, bank accounts), unpaid wages/commissions, business interests, community and separate property, and partial interests (i. e., 33% of family farm). Property acquired after filing is not part of the bankruptcy estate.  The bankruptcy estate includes rights that arise prior to the filing, like the right to file a lawsuit. 

Exempt property.  Certain property is exempt and is not included in the bankruptcy estate. Exempt property is determined by both state and federal law.   Some common exemptions in Oklahoma are the Homestead exemption, which is  one acre if you live in a city, town or village, or up to 160 acres if you live elsewhere, and personal property exemptions consisting of the following types of personal property:

  • one motor vehicle up to $7500 in equity
  • wages - 75% from 90 days
  • alimony and child support
  • books, portraits, and pictures
  • burial plots
  • clothing to $4,000
  • college savings plan interest
  • ERISA benefits, IRA, Roth IRA, Keoghs
  • food and seed for growing crops to last one year
  • guns for household use, up to $2,000
  • health aids that are prescribed by a professional
  • household items, furniture, personal computer, and related equipment
  • livestock for family use: five cows, 100 chickens, 20 sheep, 10 hogs, 2 horses (along with bridles and saddles), feed to last one year
  • personal injury and wrongful death recoveries to $50,000
  • prepaid funeral benefits
  • war bond payroll savings account
  • wedding and anniversary rings to $3,000 

Exempt property also includes retirement accounts, personal injury proceeds, Social Security, child-support, welfare, unemployment, veteran benefits and disability benefits, to name a few.  

Examples of non-exempt property.  Some examples of non-exempt property are investment property (rentals, farms) financial accounts, certificates of deposit, tax refunds, money owed to debtor from a third party, boats/ATVs/trailers/scooters/campers/RVs, business interests, stocks/bonds (other than what is in a qualified retirement plan) prepaid items (e.g., wedding deposits, airplane tickets), and inheritance acquired within 180 days of filing. 

The Automatic Stay.  

The automatic stay is a temporary injunction that protects the estate property, the debtor and the debtor's property during the bankruptcy.  The automatic stay immediately stops most collection efforts by creditors, collection agencies and government entities against debtors and their property.  The automatic stay can be modified by interested parties by filing a motion with notice and a hearing. In such event the automatic stay may be terminated, annulled, modified or conditioned. There are various grounds for modifying the automatic stay. 

The Trustee's “Claw Back” Powers.  

The Trustee has two powers, known as “claw back” powers, that allow the Trustee to bring property into the bankruptcy estate that otherwise would not be part of the estate. These are preferences and fraudulent transfers. 

  • Preferences. A preference is a repayment of a debt by a debtor shortly before he or she files bankruptcy. One of the purposes of bankruptcy is to pay creditors fairly, and to not prefer one creditor over another. There are two preference rules: (1) any amounts paid to an arms-linked creditor in 90 days before filing can be clawed back by the Trustee, both voluntary and involuntary payments; and (2) if the creditor “is an” insider” (relative or close friend) the clawback period is one year.  Also, a lien granted right before filing bankruptcy might be an avoidable preference if the lien is not perfected within 30 days of the debtor receiving the loan. Creditors have some defenses to the trustees clawback powers, for example, payments made in the regular course of business to a creditor are not considered as a preference. 
  • Fraudulent transfers.  A transfer of property made by the debtor within two years before the debtor filed bankruptcy may be avoided by the trustee if  (1) the debtor made the transfer with the intent to defraud a creditor or trustee (called an “intentional fraudulent transfer”); or (2) the transfer was made while the debtor was insolvent and the debtor did not receive “fair market value” for the transfer.  To prove an intentional fraudulent transfer a trustee will look for “badges of fraud,” that make the transfer appears suspicious, for example, the debtor sold a non-exempt boat worth $8000 for just $2000. 

Chapter 7 Discharge.  The final step in a Chapter 7 bankruptcy is usually the granting of the debtor's discharge. There is a 60 day objection period following the 341 meeting, during which creditors may object to discharge. Objections include fraud, embezzlement, etc. To become eligible to receive a Chapter 7 discharge a debtor must, with very limited exceptions, complete a personal financial instructional course offered by an approved provider which can be taken in person, on the phone or online. The discharge is effective as to all debts except: certain taxes, some debts not listed by the debtor in the schedules, debts for domestic support obligations, most fines and penalties owed to government units, most student loans, debts which were or could have been listed in a prior bankruptcy in which discharge was denied or waived, federal criminal restitution debts, debts incurred to pay non-dischargeable taxes, marital property settlement debts, certain condominium, homeowners association and cooperative fees, certain court fees and costs owed by prisoners, and debts for repayment of loans from pension plans.  The Trustee can file a proceeding to deny a debtor's discharge, for example, if the debtor does not disclose all required financial information, or refuses to turn over non-exempt property like a tax refund. 

Chapter 13' Reorganization Plan.  A chapter 13 is essentially a payment plan in which the individual will make payments over 3 to 5 years to the trustee, and the trustee will use that money to pay the creditors. The amount of the debtor's monthly payments is determined based on his or her take-home pay less reasonable expenses.   If a debtor is behind with mortgage or car payments, chapter 13 allows you to come current with your payments, and allows for the debtor to modify some secured debts (but not a mortgage on the primary residence).  In chapter 13 a debtor can retain some non-exempt property that you would lose in Chapter 7.  Certain debts have to be paid in full, for example, payments due to the IRS, and mortgage arrearages if you want  to save your home or vehicle.

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