• Bankruptcy

In its simplest terms, bankruptcy is an opportunity to adjust the relationship between you, and your creditors. The reasons people declare bankruptcy are varied. They may have acquired large medical bills, have large credit card debt, divorce debt, or housing problems. Bankruptcy can be a way to buy time if one is having their home foreclosed upon or car repossessed. While in bankruptcy, many of the outstanding debts will be forgiven and certain property is exempted from the bankruptcy process.

Bankruptcy is defined by the United States Constitution in Article 1, Section 8, Clause 4, which allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States”. Congress has enacted the Bankruptcy Code, located at Title 11 of the United States Code. While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often dependent upon State law.

BANKRUPTCY CHAPTERS

There are six types of bankruptcy under the Bankruptcy Code:

• Chapter 7: Basic liquidation for individuals and businesses;
• Chapter 9: Municipal bankruptcy;
• Chapter 11: Rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets;
• Chapter 12: Rehabilitation for family farmers and fishermen;
• Chapter 13: Rehabilitation with a payment plan for individuals with a regular source of income;
• Chapter 15: Ancillary and other international cases.

In Chapter 7, a debtor surrenders his/her non-exempt property to a bankruptcy trustee. The trustee liquidates the property and distributes the proceeds to the debtor's unsecured creditors. The debtor is entitled to a discharge of his/her “consumer debts.” Certain debts are forbidden from discharge including alimony, child support, student loans, and taxes. Generally, the right of secured creditors to their collateral continues even though their debt is discharged. For example, absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged.

In Chapter 13, the debtor retains ownership and possession of all of his or her assets, but must allocate his/her future income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. Secured creditors are given higher priority and greater payment than unsecured creditors.

In Chapter 11, the debtor retains ownership and control of its assets and is re-termed a debtor in possession ("DIP"). The debtor in possession runs the day-to-day operations of the business while creditors and the debtor work with the Bankruptcy Court in order to negotiate and complete a restructuring plan. If a debtor is able to meet certain requirements with the Bankruptcy Court (e.g. fairness among creditors, priority of certain creditors) creditors are permitted to vote on the proposed plan. If a plan is confirmed by the creditors, the debtor will continue to operate and pay its debts under the terms of the confirmed plan. If a specified majority of creditors do not vote to confirm a plan, additional requirements may be imposed by the court in order to confirm the plan.

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT (BAPCPA)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, ("BAPCPA"), substantially amended the Bankruptcy Code. The enactment of BAPCPA followed nearly eight years of debate in Congress. Most of the law's provisions became effective on October 17, 2005. Among its many changes to consumer bankruptcy law, BAPCPA enacted a "means test", which was intended to make it more difficult for a significant number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code.

The "means test" is employed in cases where an individual with primarily consumer debts has more than the average annual income for a household of equivalent size, computed over a 180-day period prior to filing. If the results of the means test show no disposable income (or in some cases a very small amount) then the individual qualifies for Chapter 7 relief. If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may still seek relief under Chapter 13 of the Code. A Chapter 13 plan often does not require repayment to general unsecured debts, such as credit cards or medical bills.

BAPCPA also requires individuals seeking bankruptcy relief to undertake credit counseling with approved counseling agencies prior to filing a bankruptcy petition and to undertake education in personal financial management from approved agencies prior to being granted a discharge of debts under either Chapter 7 or Chapter 13.

The law offices of Black & LoBello are committed to providing excellent bankruptcy representation for our clients during their times of financial difficulty. If you wish to speak to a bankruptcy attorney concerning your case contact our offices to schedule a consultation.

Practicing Attorneys:
James E. Herbe, Esq.