Making Cents of the Bankruptcy Code, Part I

Part II: A More in-Depth Look

Chapter 7 Bankruptcy: Liquidation

 Filing Fee $335

Chapter 7 is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. Debtors whose debts are primarily consumer debts are subject to an income test designed to determine whether the case should be permitted to proceed under chapter 7. To determine whether or not you will qualify under Chapter 7, you should contact an experienced Kansas City bankruptcy attorney at Reneau & Shernaman for a free consultation.

Under chapter 7, a debtor may claim certain property as exempt under governing law. A trustee may have the right to take possession of and sell the remaining property that is not exempt and use the sale proceeds to pay some of the creditors.

• Advantages:
  • Relatively inexpensive and quick.
  • Discharge unsecured debts such as credit cards, personal loans, lines of credit, payday loans, car/house loan deficiencies, income taxes (if older than 3 years old and no tax lien), medical bills, utilities, etc.
  • Stops collection efforts, garnishments, repossessions and state court actions to recover money 

• Disadvantages:
  • It is possible that you may not get to keep all of your assets. The best way to find out for sure is to contact contact an experienced Kansas City bankruptcy attorney at Reneau & Shernaman for a free consultation.
  • Also, if a creditor can prove that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the Bankruptcy Court may determine that the debt is not discharged will therefore survive the Bankruptcy 

Chapter 13 Bankruptcy Reorganization

Filing fee $310

Chapter 13 is designed for individuals with regular income who find it beneficial to pay part of their debts in installments over a period of time. An individual’s ability to qualify for Chapter 13 is contingent upon many things. To determine whether or not you will qualify under Chapter 13, you should contact an experienced Kansas City bankruptcy lawyer at Reneau & Shernaman for a free consultation.

Under Chapter 13, the debtor must file with the court a plan to repay creditors all or part of the money that is owed, using the debtor’s future earnings. The period allowed by the court to repay the debts may be three years or up to five years, depending upon the debtor’s income and other factors. The court must approve the plan before it can take effect. In the vast majority of Chapter 13 cases, the debtor pays only their secured and priority debts.

• Advantages:
  • Debtors usually get to keep their assets, with few exceptions.
  • Stops foreclosure sales, collection efforts, garnishments, repossessions and state court actions to recover money
  • Mortgage or Auto Arrearages can be cured over the life of the Chapter 13 plan
  • Car payments restructured to be paid over course of the Chapter 13 plan – for many filers, that results in smaller monthly car payments
  • Taxes can be repaid without penalties accruing and at a discounted interest rate
  • Discharge unsecured debts such as credit cards, personal loans, lines of credit, payday loans, car/house loan deficiencies, income taxes (if older than 3 years old and no tax lien), medical bills, utilities, etc.
  • Stops collection efforts, garnishments, repossessions and state court actions to recover money 

• Disadvantages:
  •  More expensive than Chapter 7.
  • The process is far more lengthy than a Chapter 7.
  • Discharge is not entered until all plan payments are made in 3 to 5 years, depending on your plan length. This means you are not officially “done” with your obligations to repay until you make it to your final payment. 

Chapter 11 Bankruptcy Reorganization 

Filing fee $1,717

Chapter 11 is designed for the reorganization of a business but is also available to individual debtors. Chapter 11 is the only reorganization alternative if the debtor has debts above the Chapter 13 eligibility maximums. There is no legal maximum duration for a Chapter 11 plan. Creditors have the right to vote on whether to accept a debtor’s plan, and also have the right to propose their own plan. Debtors can not sell assets without the Court’s permission. Debtor’s can only keep a checking account at a bank that meets certain standards, and must identify themselves as “Debtors in Possession”, Debtors must obtain a federal tax ID number. Debtors must file monthly operating reports with the Court and they must pay a quarterly fee to the Office of the U.S. Trustee. After the Chapter 11 case is filed (usually within a week) there is an initial debtor interview with a member of the U.S. Trustee’s office where many of the rules of operation are explained to the debtor.

• Advantages:
  • Debtors usually get to keep their assets, with few exceptions.
  • Allows for many of the same advantages as a Chapter 13. 

• Disadvantage: Significantly more expensive than both Chapter 7 and Chapter 13 because a Chapter 11 requires more time and effort from both the debtor and the attorney. 

Which Chapter of Bankruptcy to Choose 

Which Chapter to choose will depend on several factors, not the least of which is your particular goals. For instance, if you qualify for Chapter 7 and your goals do not include keeping your house; Chapter 7 may be the best choice. If, however, you want to keep your house and although you qualify for Chapter 7, a Chapter 13 may be the better option if you need help catching up on your house payment.  Or, if you want to keep your house and you do not qualify for Chapter 13 for whatever reason then Chapter 11 may be the best choice. To help determine under which Chapter of the Bankruptcy Code you should file, contact an experienced Kansas City bankruptcy attorney at Reneau & Shernaman for a free consultation.

Bankruptcy Means Testing

The following is written mostly in legalese for those who are really interested in knowing the technical parts—don’t worry this is what would be handled by your experienced attorney at Reneau & Shernaman.

Section 707(b) of the Code allows the Bankruptcy Court to dismiss a Chapter 7 case filed by a debtor whose debts are primarily consumer debts if it finds that the granting of relief would be “an abuse of the provisions of this chapter.” It then goes on to create presumption of abuse where the consumer debtor’s Current Monthly Income (CMI) minus allowed expenses exceeds the state median income for the debtor’s household size.

In order to complete Form B22 (the Means Test) accurately, the following documents and information should be present: sufficient pay stubs and other evidences of income to determine Current Monthly Income (“CMI”); Schedules A-J and Statement of Intention accurately completed; documentation of special circumstances that evidence justification for taking expenses that exceed the IRS standard deduction.

Section 101(10A) defines “current monthly income” (CMI). CMI includes the debtor’s total income from all sources (except social security benefits), for the six months ending in the month prior to the month of the bankruptcy filing. CMI also includes any amount paid by any other entity toward the debtor’s household expenses on a regular basis.

Code Section 101(39A) defines Median Family Income (MFI) as the median family income calculated and reported by the Bureau of the Census in the most recent year, or as most recently adjusted. The Census Bureau publishes figures for each state, for families of household sizes from one to five. Enter the Debtors’ state of residence and household size. Then, obtain the amount of the state median income for a household size of the debtors (www.usdoj.gov/ust/). The state median income in Missouri, at the time of this writing, is $41,092 for a household of one; $51,784 for two; $59,549 for three; and, $72,150 for four. Add $8,100 for each individual in excess of 4.

If your income places you below the median the Means Test calculation need not be performed. The Means Test calculation must be performed if your CMI exceeds the median income.

The remainder of the Means Test, for above median debtors, deals with deductions from your income. Some of the deductions are established by IRS standards, some are established by actual expenses, and some are a blend. A presumption of abuse arises under Section 107 if, after deducting allowable expenses from your income and multiplying the difference by 60, the result is the lesser of $10,000 or 25% of general unsecured debt, as long as that 25% is at least $6,000.

Using this calculation:

1)      There is a presumption of abuse if the resulting figure is $10,000 or more, and the debtor has more than $40,000 in general unsecured debt;

2)      There is a presumption of abuse if the resulting figure is $6,000 or more, and the debtor has more than $24,000 in general unsecured debt; and,

3)      There is a presumption of abuse if the debtor has $24,000 to $40,000 in general unsecured debt and the resulting figure is 25% of the amount of that general unsecured debt.

4)      The court may still find the filing to be abusive based on the totality of the circumstances pursuant to Section 707(b)(3)(B), where there is no presumption of abuse.

Conclusion

Ultimately, debt can be stressful and will lead to financial ruin if left unchecked.  If you or someone you know is troubled by debt, consider that you may have legal options available to you to help eliminate or handle your debt.  For a free consultation with a Kansas City bankruptcy attorney, call Reneau & Shernaman at 816-287-8080 today.