What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Generally speaking, a Chapter 7 Bankruptcy involves a total liquidation of the debtor’s assets (although the debtor may keep certain allowable exempt assets), and any non-exempt assets are used to satisfy the debtor’s unpaid debts.  Any remaining dischargeable debts are discharged, meaning they are no longer owed.  A Chapter 7 case places no limits on the amount of debt that may be discharged; however, there are income qualifications in order to be eligible for Chapter 7 as a result of the 2005 changes to the Bankruptcy law.

A Chapter 13 case places no income restrictions on the debtor, so if you cannot file Chapter 7 because you do not pass the means test, you can likely file Chapter 13.  Chapter 13 begins much like a Chapter 7 case, but after the liquidation of non-exempt assets, if any, the debtor will pay a certain amount based on his available income and after deduction of living expenses to the U.S. Trustee, who will distribute payment to creditors on a pro-rata basis.  The debtor will make monthly payments for 3-5 years, depending on certain factors, and then, as long as the debtor makes payments every month, the remaining unpaid portion of most debts will be discharged (though some debts, such as student loans may still be owed even after completion of the plan).

Chapter 13 has the benefit of permitting the debtor to spread out the repayment of certain debts over a 3-5 year period that would be otherwise non-dischargeable, such as tax debt, or student loans.  Additionally, the debtor could use Chapter 13 to avoid foreclosure and pay back mortgage arrearages over the term of the plan, which is helpful in cases where the lender is demanding a high “cure” amount to voluntarily get a house out of foreclosure.

Bankruptcy & Litigation Series: #10 Criminal Cases

Over the course of our bankruptcy & litigation series we have explored many ways that a bankruptcy can affect the course or outcome of a civil case.  Criminal cases, however, are not typically affected by bankruptcy.

The Automatic Stay will not stay the imposition of a criminal sentence or criminal penalty.

Criminal penalties are non-dischargable to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.

Additionally, debts arising out of frivolous claims filed by prisoners are not dischargable.

Bankruptcy & Litigation Series: #9 Personal Injury & Torts - Defendant Bankruptcy

Personal injury proceedings where the debtor is the defendant are automatically stayed pursuant to 11 U.S.C. s. 362.  The debtor or debtor's counsel should file a Suggestion of Bankruptcy in the civil suit, but NOT filing a suggestion of bankruptcy does not have any prejudicial effect.  The Plaintiff should file a proof of claim if the case is filed under Chapter 11 or Chapter 13, or in a Chapter 7 where there are assets to distribute. The underlying debt will be included in the debtor's discharge, and should the Plaintiff pursue the case, will be in contempt of either the Order of Discharge or the Order of Automatic Stay, and face civil contempt penalties, including being forced to compensate the debtor for actual damages, attorney's fees and punitive damages.

Note that depending on the case, certain damages claimed in a civil or personal injury suit are not dischargable:

1 Debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
2. for willful and malicious injury by the debtor to another entity or to the property of another entity;
3. for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance

See complete list at 11 U.S.C. s. 523.

What if there are multiple defendants?

In cases where there are multiple defendants, the case will be stayed as to the debtor, but the case WILL proceed as to the remaining defendants.  See 11 U.S.C. s. 362.

If you are a defendant and file for bankruptcy, the case will be stayed with respect to you while you are in bankruptcy, but may proceed against other named defendants.

Bankruptcy & Litigation Series: #8 Personal Injury & Torts - Plaintiff Bankruptcy

If you are the Plaintiff in a personal injury case and you file bankruptcy, it is generally a good idea to file a suggestion of bankruptcy to alert the court to the bankruptcy filing.  Most courts will temporary delay the hearing of the case, however 11 U.S.C. s. 362 is not designed for this application.  

Ultimately, the suit itself is an asset of the bankruptcy estate.  Like any other asset, it may be exempt depending on the value of the potential claim.  In the event that it is not exempt (and at all times before being abandoned by the trustee), the Trustee steps into the plaintiff's shoes during the administration of the bankruptcy estate.  The Chapter 7 trustee may then offer to settle, or compel the debtor to pursue the suit (although the Trustee will bear the cost of compensating counsel for any post-petition legal fees).  Any proceeds obtained during the suit (less any exempt portions of any receipts) will be turned over to the trustee as property of the bankruptcy estate and distributed to creditors.   Note that there are additional exemptions for personal injury cases in bankruptcy:  

1. $22,975 for personal injury damages, but not any recovery for pain and suffering or pecuniary loss

2. 100% of any award for loss of future earnings needed for support

3. 100% of any recovery for wrongful death of person you were a dependent of needed for support, and

4. 100% of any award of compensation received for being a crime victim.

5. Pain and suffering and pecuniary loss damages may be exempted under the wildcard exemption and/or unused home equity exemptions 11 U.S.C. 522 (d)(5). 

Therefore, if you are a personal injury plaintiff and file for bankruptcy during the pendency of your case or the possibility of bankruptcy is on the horizon at the conclusion of your case, it is important to work with your personal injury attorney to structure the settlement of your case in a way that maximizes the potential exemptions. 

Practice Tips:

1. If you are close to a personal injury settlement, make sure you consult with a bankruptcy attorney first.
2. Try to settle out the PI case before filing. A right to sue is an asset, and can be taken by the trustee if not exempt, and the trustee then decides how to settle the case.
3. Make sure your PI attorney considers how to structure your settlement in a way that protects as much of the judgment as possible: there are limits to the amount of personal injury damages that can be exempted ($21,625.00), but awards for future medical payments, lost earnings, disability payments, wrongful death and crime victims reparations are exempt 100%.

Bankruptcy & Litigation Series: #7 Foreclosures and Short Sales

Foreclosures are down for the sixteenth straight month in Massachusetts (Source: Massachusetts Real Estate: Foreclosure Activity down yet again).  Whether you credit government intervention programs, improvements in the economy, or something else, this is good news for most people.  However, not everyone will be able to avoid a foreclosure of their property.

Homeowners encounter serious problems when they cannot pay (and have not paid) the mortgage especially if they have negative equity in the property (meaning that the mortgage is more than the fair market value).

Whether you took on a mortgage payment that you could not afford - i.e., purchased "too much house" - or some other temporary situation has impacted your finances such as an unexpected medical expense, loss of a job or other significant interruption in income, the bank will begin threatening foreclosure when you get behind on payments.  At this point, you must weigh your options.

If you can afford your mortgage payment and have just gotten behind then you may be able to work out a mortgage modification directly with your bank, but if they are not willing or able to work with you then bankruptcy can forestall a foreclosure proceeding.  In a Chapter 7 bankruptcy, you will have to pay any mortgage arrears if you want to keep the property, but the foreclosure will likely be delayed partially during the process.  In a Chapter 13 bankruptcy, the mortgage arrears can be included in your payment plan so long as they will result in a full payoff of the arrears by the end of the plan.

If you can't afford the payments, and your financial situation does not permit a mortgage modification, then your options may include bankruptcy, short sale, or foreclosure, or some combination of those.

Short Sales:

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Borrowers are able to mitigate damage to their credit history, and partially control the debt. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. The borrower must work directly with the lender to seek approval of the short sale by the bank, obtain a purchaser, and complete the transaction before any foreclosure proceedings are completed. (In some cases, the bank may have initiated foreclosure proceedings, in addition to contemplating consent for the short sale.) Timing is critically important, and the debtor is an important part of the short sale process.

However, if the individual does not then pay off the deficient portion of the mortgage (the unpaid portion of the mortgage after the short sale proceeds were applied to the balance), the lender can take further legal action against the debtor to collect the unpaid portion of the mortgage, which may include trustee process attachments, garnishments, or seizure of other assets, depending on the debtor's other property. The debtor may, after the short sale is complete, file for Bankruptcy upon completion of the short sale to discharge any deficiency and extinguish any further liability to the lender.  If the homeowner is already in bankruptcy, they will need the trustee or court's approval to transfer the property in a short sale.

Foreclosure and Bankruptcy:

A final option is to simply file for bankruptcy, and indicate that the debtor's intention is to surrender the property to the bank. Procedurally, the Bankruptcy case will progress through the Bankruptcy Court, and eventually the secured lender will seek permission from the Bankruptcy Court to be relieved of the automatic stay protections, and begin foreclosure proceedings. Regardless of whether the foreclosure auction is completed by the bank before or after the debtor's discharge (meaning they no longer owe certain debts, including the mortgage debt), any deficiency from the foreclosure auction is discharged by the bankruptcy court. From the debtor's perspective, the whole process is completed through the bankruptcy, and does not require any specific participation directly with the lender.

This option provides a swift resolution to the issue of past-due mortgage debt, the pending foreclosure on the property, and any mortgage deficiency all in one process that, in the case of a Chapter 7 bankruptcy, can be completed from filing to discharge in under six months. It is best utilized when the lender will not agree to a short sale, when there is insufficient time to arrange a short sale, or when the debtor's other financial concerns (such as collection actions on other debt) require immediate action. It also does not require the lender's permission or cooperation - provided you qualify for bankruptcy, the Bankruptcy Laws dictate the result, not the lender's business decision.

The credit implications of a foreclosure and bankruptcy (or in the context of bankruptcy) are more detrimental than a short sale followed by bankruptcy, if the debtor wants to obtain a mortgage again in the future.

Bankruptcy & Litigation Series: #6 Eviction - Tenant Bankruptcy

When one of the parties in a landlord-tenant relationship goes bankrupt, the result is very different depending on whether it is the landlord or the tenant.  As described in the previous post, when the landlord files for bankruptcy, the lease may continue even if the landlord abandons it to the trustee.  But what happens to a Landlord or Eviction Suit when the Tenant files for bankruptcy?

Just like a collection action, an Eviction proceeding is automatically stayed during the pendency of the filing.

The tenant can elect to assume or reject the lease.  If the tenant assumes the lease, any arrears must be brought current.  The landlord can file a motion for relief from stay to proceed with the eviction, but cannot pursue the debtor for pre-petition unpaid rents.   If the debtor assumes the lease, his financial obligations to the tenant must be either current, or in the case of a debtor in possession, must provide adequate assurances (in the form of money) that he can continue to afford his maintenance of the lease obligations.  Otherwise, the lease is deemed rejected.

Bankruptcy & Litigation Series: #5 Eviction - Landlord Bankruptcy

The tenant will receive a notice of bankruptcy.  A landlord can elect to assume (i.e., keep) or reject (i.e., end) a lease per 11 U.S.C. s. 365.

If the debtor-landlord elects to reject the lease, the terms of the lease can be administered by the trustee.  If the debtor assumes the lease, his financial obligations to the tenant must be either current, or in the case of a debtor in possession, must provide adequate assurances (in the form of money) that he can continue to afford his maintenance of the lease obligations.  Otherwise, the lease is deemed rejected.  If a tenant will be displaced by a debtor-landlord, he should file a proof of claim for his damages, and will be compensated pro-rata in the event that there are any bankruptcy assets.