The most immediate thing that happens upon filing is an imposition of a court order of injunction, known as the Automatic Stay. The Stay is effective the instant the petition is filed with the bankruptcy clerk. While there are some exceptions to its applicability (for example it does not stop criminal actions, certain tax actions or an eviction after a judgment of possession has been entered in state court) the Stay is very broad and inflexible; violation of the Stay may subject the violating creditor to sanctions, including attorneys fees and monetary damages. Further, actions taken subsequent to the filing of a petition, for example the foreclosure auction of a property may be deemed void if done in without bankruptcy court approval or the modification of the Stay.
The purpose of the stay is to halt various actions which may be occurring in different courts or even different jurisdictions and to consolidate every party with a claim against the Debtor (the person filing the bankruptcy) or the debtor’s property in a single place–the bankruptcy court.
Dealing with debt
A chapter 7 bankruptcy typically seeks to discharge most types of debt. Certain types of taxes, governmental fines and penalties, domestic support obligations (alimony, child support) and students loans, as well as certain debts incurred prior to filing, are not eligible to be discharged.
A chapter 7 debtor has several options with regard to car loans.
- A debtor may surrender a vehicle in which the loan is in default and owe nothing.
- A debtor may exchange the vehicle for a less expensive vehicle and owe nothing further to the original creditor.
- A debtor may pay or obtain bankruptcy financing to pay the value of the vehicle and owe nothing further.
A chapter 13 bankruptcy can sometimes serve more varied purposes than a chapter 7. A chapter 13 is a type of personal (as opposed to business) reorganization. A chapter 13 debtor must propose a repayment is required to repay: (1) priority debts such as domestic support obligations and certain tax debts; and (2) past-due secured debts, such as mortgage arrears. These debts are then paid by an appointed trustee who receives monthly payments from the debtor’s income. Unsecured debt (such as credit cards) share in whatever funds may be leftover after the priority and secured debts are paid in full. Whatever portion of these unsecured debts is left unpaid after the specified plan-period are usually discharged at the end of the bankruptcy case.
A chapter 13 may also be an effective tool for dealing with mortgage issues. Debtors may elect to engage the mortgage lender in loss mitigation, in which the Court supervises the workout process. The bank’s claim to ownership and the amount past due or owed in total may also be challenged by the Debtor.
In some circumstances where a property is worth less than the value of the first mortgage, a second mortgage or secured line of credit may be converted to an unsecured debt and stripped of its security interest in the property.
For investment properties, debtors may also pay the mortgage company the value of the property rather than the amount owed, and strip off the lien securing the higher value loan obligation.
A chapter 11 is primarily designed for corporations and other business entities although individuals can file under chapter 11 if their debt limits exceed the limits imposed under chapter 13 or the flexibility of a chapter 11 is more suited to the filer’s particular circumstances.
A traditional business chapter 11 typically seeks to deleverage its balance sheet by reducing its debt and for larger companies may involve the conversion of creditors to equity holders, while wiping out pre-bankruptcy equity holders (in other words, bondholders become the owners of the reorganized company). While companies today do frequently file liquidating chapter 11 cases that serve similar end-functions as a chapter 7 liquidation, the primary purpose of a chapter 11 reorganization is to allow a business able to continue generating revenue to do so more efficiently by bringing all interested parties into one forum to devise a workout solution in a system of preset priority that ultimately increases the value of the business’s going concern.
In a similar way, a chapter 11 can allow an individual filer to more efficiently deal with debts that may either be too difficult or inefficient to handle individually or that themselves may reduce the value of certain collateral that would otherwise be controlled or liquidated by one or more creditors. A debtor may have more insight or ability to increase or maintain the value of certain assets necessary to effectively reorganize and so will typically remain in possession of his or her assets through the bankruptcy process.
Chapter 7 requires income below certain thresholds. While the analysis can be complicated and there are a number of exceptions, there is basic two-part test:
- First: Is the filer’s household income less than the median income for a comparable household size? If so, the first part of the test is met.
- For 2017 New York’s median income is:
- 1 person: $51,408
- 2 people: $66,056
- 3 people: $75,870
- 4 people: $91,998
- 5 people: $100,398
- 6 people: $108,798
- For 2017 New York’s median income is:
- Second, is the total net (take-home) pay less than the (reasonable) monthly expenses? If so, the second part is met.
Chapter 13 does not have the same income limitations as chapter 7, though it does have maximum debt limits. An individual with more than $1,184,200 of secured debt (mortgage, car loans, etc.) or $394,725 of unsecured debt (credit cards, etc.) is not eligible to file a chapter 13 and must instead file under chapter 11 of the Bankruptcy Code.
Further, an individual must have regular income from which to pay a portion to an appointed trustee each month. Chapter 13 cases come with other requirements before obtaining a court order confirming the debtor’s proposed plan of reorganization (e.g., the debtor must repay all priority tax debt and reinstate or repay any past due secured debts). However, many chapter 13 bankruptcies are not filed with such a “confirmation” as a primary goal. For example, a chapter 13 may be to stop a foreclosure and obtain a loan modification. This often may not require “confirmation” of the proposed plan. Chapter 13 comes with it an unqualified right of the Debtor to withdraw.
While chapter 11 does not have the same debt or income requirements as chapters 7 and 13 it is the most burdensome and costly type of bankruptcy to undertake.
Chapter 11 bankruptcies need not be completed within five-years like chapter 13s, although certain taxes must paid within five years. The complexity and case-tailored nature of this type of bankruptcy demands far more intricacy and involvement both from the debtor and the debtor’s attorney. Everything from tax filings to insurance coverage is highly scrutinized and the number of court filings required of the debtor’s attorney is significantly higher than in a chapter 13. The debtor is required to close all pre-bankruptcy deposit accounts and open new “debtor-in-possession” (or DIP) accounts and must file monthly operating reports which account for every penny of income and expenditure.
- Other than chapter-specific requirements, bankruptcies have numerous other requirements applicable to all chapters; such as (a non-exhaustive list):
- Filed in good faith
- Tax returns have been filed
- All necessary or required forms and schedules have been filed at the correct time
- A congressionally-approved pre-filing bankruptcy course has been completed and is accompanied with certificate of completion (and post-filing course completed prior to discharge)
- All statements and certifications are complete and accurate