How Do The Bankruptcy Laws Protect Unsecured Creditors

What Are Bankruptcy Exemptions

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In a Nutshell

Bankruptcy exemptions are laws that protect your property in a bankruptcy. Filing for bankruptcy relief doesn’t mean that you have to give up everything you own. This article covers how exemptions protect your property in a Chapter 7 bankruptcy.

Written byAttorney Andrea Wimmer.

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Bankruptcy exemptions are laws that protect your property in bankruptcy. Exemption laws exist in both the Bankruptcy Code and in state law. The exemptions contained in state law often protect your property from creditors even if no bankruptcy case is filed.

Property that’s exempt can’t be sold for the benefit of your unsecured creditors. To protect your property, you have to claim an appropriate bankruptcy exemption when filing your bankruptcy petition. If you don’t claim any exemptions or you claim the wrong exemption, the property isn’t protected from the Chapter 7 bankruptcy trustee.

What You Must File

A Chapter 7 case begins with the debtor filing a petition with the U.S. Bankruptcy Court serving the area where the individual lives. In addition to the petition, the debtor must file:

• Schedules of assets and liabilities

• A schedule of current income and expenditures

• A statement of financial affairs

• A copy of his or her tax return for the most recent tax

• A certificate of credit counseling

• Evidence of any payments received 60 days before filing

• A statement of monthly net income and any anticipated increase in income or expenses after filing

• The court charges about $300 in filing fees, which can be waived in some cases

In order to fill out the official bankruptcy forms that make up the petition, statement of financial affairs, and the various schedules, the debtor must provide the following information:

• A list of all creditors and the amount and nature of their claims

• The source and amount of the debtor’s income

• A list of all of the debtor’s property

• A detailed list of the debtor’s monthly living expenses

Filing a petition under Chapter 7 automatically “stays” most collection actions against the debtor. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

How Chapter 13 Works

A chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court: schedules of assets and liabilities a schedule of current income and expenditures a schedule of executory contracts and unexpired leases and a statement of financial affairs. Fed. R. Bankr. P. 1007. The debtor must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling evidence of payment from employers, if any, received 60 days before filing a statement of monthly net income and any anticipated increase in income or expenses after filing and a record of any interest the debtor has in federal or state qualified education or tuition accounts. 11 U.S.C. § 521. The debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case . Id. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302.

In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:

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Who Can Use The Federal Bankruptcy Exemptions

There are 31 states that have opted out of allowing their residents to use the federal bankruptcy exemptions. If you live in one of these opt-out states, you have to use the set of exemptions provided in your stateâs law. You donât get a choice.

If your state hasn’t opted out and youâve lived there for at least two years when you file your bankruptcy petition, you can choose between state and federal exemptions.

How Does Chapter 13 Bankruptcy Affect My Credit

A Chapter 13 bankruptcy does not discharge debt. Instead, it restructures your debt into a payment plan. Chapter 13 could be better for those whose incomes disqualify them from Chapter 7 or those who want to keep property that might otherwise be subject to liquidation.

Like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can cause your credit score to drop by 100 points or more.

The Rocket Lawyer Bankruptcy Worksheet can help you organize the information you need to determine whether bankruptcy is right for you.

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Priority Of Debts In A Chapter 13 Bankruptcy

A Chapter 13 repayment plan will be created based on a debtors disposable income. The amount that a person will be able to put toward their repayment plan each month will be calculated by considering all forms of income and subtracting applicable expenses, including taxes, living expenses, utilities, transportation costs, and union dues. The amount remaining will be considered disposable income that the debtor may use to make ongoing payments throughout the entirety of their repayment plan.

When determining how the amount paid through a repayment plan will be allocated between different creditors, certain types of debts will be prioritized differently. Domestic support obligations, including child support or spousal support, are given the highest priority. Secured debts will usually be given the next highest priority. Unsecured debts will be addressed after payments are applied toward other types of claims. When debts are classified into different categories, the debts within each category must be treated equally, and a plan cannot unfairly discriminate against different claims within a certain class.

Three Types Of Creditor Protection: Debtor Control Credit Contracts And Insolvency Procedures

The CBR index attempts to capture the complexity of insolvency law in this period of change by dividing the generic category of creditor rights into three sub-categories which reflect the distinct ways in which creditors may be protected by the law: debtor control, credit contracts and insolvency procedures. Taken together, the different components of the index reflect the ways in which creditors may be protected while the firm is still a going concern, as well as via the reorganization process itself .

Insolvency procedures. This sub-index concerns the procedures governing corporate reorganizations and liquidations. It deals with the rules relating to the triggering of insolvency proceedings by shareholders and directors whether creditors can file for insolvency proceedings on a balance-sheet basis, which may make the firm more vulnerable to being broken-up whether a single creditor can initiate liquidation proceedings the availability to the firm of a stay or moratorium in liquidation and rehabilitation proceedings, deflecting creditors’ claims whether directors can retain control during rehabilitation proceedings whether secured creditors alone, unsecured creditors, shareholders or courts have the power to appoint a bankruptcy trustee or administrator rules on voting over the firm’s exit from bankruptcy and priorities between different creditor groups in liquidation and rehabilitation proceedings.

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What If You Earn Too Much Money

If the debtor’s “current monthly income” is more than the state median, the Bankruptcy Code requires application of a “means test” to determine whether the Chapter 7 filing should be dismissed. The “current monthly income” received by the debtor is the average monthly income received over the six months before the bankruptcy filing.

The individual Chapter 7 debtor hopes to and usually does receive a discharge, which means that he or she is relieved of the obligation to pay most unsecured debts. Debts not dischargeable include debts for alimony and child support, certain taxes, and debts for malicious injury by the debtor to another person.

When General Unsecured Creditors Receive Payment In Mn

Only after all priority creditors are paid, in full, will the general unsecured creditors receive any payment from the trustee. The general unsecured creditors typically are not paid, in full, and will usually only receive a pro rata share of their debt, meaning they will only receive a share of the payment in proportion to the amount of debt owed to them in relation to the amount of debt owed to the debtors other creditors. An exception to this is student loan debt, which is generally non-dischargeable, absent extraordinary circumstances, and is typically paid by the debtor outside of the bankruptcy.

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How The Homestead Exemption Works In Florida Chapter 7 Bankruptcy

The Florida Constitution exempts a Florida homestead of unlimited value from liens and execution. A debtor may protect unlimited amounts of money invested in a homestead property. A debtor may invest money into an exempt homestead even after being sued. These homestead rules apply in state court collection proceedings. Bankruptcy law does not affect Floridas unlimited homestead exemption in state court proceedings.

But bankruptcy law is a federal law, and federal law may supersede state law in certain cases. The Florida homestead exemption is applied differently in a Chapter 7 bankruptcy than in Florida state court.

There are some value ceilings and purchase deadlines applicable to Floridas homestead exemption in Chapter 7 bankruptcy. Under federal bankruptcy law, the debtors Florida homestead is exempt up to a value of approximately $160,000 unless the debtor occupied his current Florida homestead property and previous Florida homestead properties for a continuous 40-month period prior to filing bankruptcy. Joint bankruptcy debtors can protect approximately $320,000 of a jointly owned homestead. These numbers increase from time to time, so debtors should get the current limits from their bankruptcy attorney. Chapter 7 bankruptcy debtors are entitled to an unlimited homestead exemption if they have occupied their Florida homestead for more than 40 months prior to filing.

Who May File For Bankruptcy Protection

Consumer Bankruptcy:The most common bankruptcy filing for individuals is under Chapter 13 of the Bankruptcy Code, which:

• provides for the filing of a reorganization plan setting forth a repayment schedule
• applies to individuals with a regular income who have unsecured debts of less than $250,000, and secured debts of less than $750,000, and
• the reorganization plan must be submitted within fifteen days of filing a bankruptcy petition, and may not exceed five years in duration.

Individuals may also file under Chapter 7, which:

• provides for appointment of a bankruptcy trustee to liquidate the debtor’s non-exempt assets and
• to assess claims of creditors and pay as many of the petitioner’s debts as possible,
• while leaving the debtor sufficient assets to carry on.

Individual debtors who have debts in excess of the Chapter 13 limits, or who own substantial nonexempt assets, can also file for reorganization under Chapter 11.

The property of a bankruptcy estate is determined according to 11 U.S.C. § 541. State law governs exemption of certain property.

Commercial Bankruptcy:A corporation or partnership can petition for bankruptcy relief under Chapters 7 or 11 of the Bankruptcy Code, but businesses often file a reorganization plan under Chapter 11 to keep their businesses alive and pay their creditors over time.

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Is Protection From My Creditors The Only Reason To File Bankruptcy

No. Something else achieved through a bankruptcy or consumer proposal is the elimination of your unsecured debt. Even if you are keeping up with all of your minimum payments and managing to keep your creditors at bay, you may have more debts than you can reasonably repay.

If you are starting to fall behind on your payments and are feeling stress about what your creditors may do its time to talk to a bankruptcy trustee about your debts. Contact us for a free consultation to talk with a licensed insolvency trustee about about the best option to protect yourself and eliminate your debt so that you can start focusing on the future again.

The Chapter 13 Discharge

The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of the chapter 13 discharge.

A chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan so long as the debtor: certifies that all domestic support obligations that came due prior to making such certification have been paid has not received a discharge in a prior case filed within a certain time frame and has completed an approved course in financial management . 11 U.S.C. § 1328. The court will not enter the discharge, however, until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption. 11 U.S.C. § 1328.

The discharge releases the debtor from all debts provided for by the plan or disallowed , with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

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How Will I Know What’s Going On

Sometimes, you may first learn about a bankruptcy in the news. If you hold stock or bonds in street name with a broker, your broker should forward information from the company to you. If you hold a stock or bond in your own name, you should receive information directly from the company.

You may be asked to vote on the plan of reorganization, although you may not get the full value of your investment back. In fact, sometimes stockholders don’t get anything back, and they don’t get to vote on the plan.

Before you vote, you should receive from the company:

• a copy of the reorganization plan or a summary
• a court approved disclosure statement which includes information to help you make an informed judgment about the plan
• a ballot to vote on the plan and
• notice of the date, if any, for a hearing on the court’s confirmation of the plan, including the deadline for filing objections.

Even when stockholders do not vote, they should get a summary of the disclosure statement, and a notice on how to file an objection to the plan.

Stockholders may also receive other notices unrelated to the plan of reorganization, such as a notice of a hearing on the proposed sale of the debtor’s assets, or notice of a hearing if the company converts to a Chapter 7 bankruptcy.

Types Of Creditors Under Ibc 2016

Secured and unsecured creditors further classified are discussed below:

i) Financial creditor defined U/s 5 of Part II of IBC means a person/institution to whom a financial debt is owed including a person who has been assigned such debt legally.

ii) Operational creditor- as defined in U/s 5 of Part II of the Code means a person to whom an operational debt is owed including a person who has been assigned such debt legally and includes workmen and employees.

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What Is A Secured Claim

A creditor with a secured claim in bankruptcy has two things: a debt that you owe and a lien on a piece of property you own. If you don’t pay according to the terms of your contract, the lien allows the lender to recover the property, sell it at auction, and apply the proceeds to the account balance. For instance, a mortgage lender with a lien can recover real estate in a foreclosure action, and a vehicle loan lender with a lien can recover a car through repossession.

Secured claims are often voluntary. For instance, if you agree to pledge an asset as collateral for the loan , you voluntarily give the creditor a security interest in your property.

Creditors can also obtain an involuntary lien against your property without your consent. For instance, a credit card company can get an involuntary lien after suing you in a collection lawsuit and winning a money judgment. When you fall behind on your taxes, statutory law gives the IRS the right to a tax lien against your property.

Common examples of secured bankruptcy claims include:

• mortgages

You’ll list all secured claims on Schedule D: Creditors Who Hold Claims Secured By Property.

How Long Will I Be Bankrupt

The length of time you will be bankrupt and are required to make bankruptcy payments is determined by your income and if you have declared bankruptcy before.

• A first bankruptcy with no surplus income lasts 9 months. Surplus income will extend your bankruptcy to 21 months.
• A second bankruptcy with no surplus income lasts 24 months. This is extended to 36 months if you have surplus income.
• A third bankruptcy can only be discharged after a court hearing.

Most personal bankruptcies in Canada involve no surplus income and last for nine months. This is because someone with high surplus income would find it more advantageous to file a consumer proposal as an alternative to making high monthly bankruptcy payments.

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