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CHAPTER 13 BANKRUPTCY

{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{{

MICHAEL LYNN GABRIEL

ATTORNEY AT LAW

B.S., J.D., DIP.(Tax), LL.M.(Tax)


TABLE OF CONTENTS

CHAPTER 13 BANKRUPTCY

INTRODUCTION

This book is a companion to another book of this legal series, CHAPTER 7 BANKRUPTCY. A Chapter 7 proceeding is known as a "straight liquidation"; whereas the Chapter 13 proceeding is known as an "individual reorganization." One or the other of these books should be used by the average individual contemplating the filing of a bankruptcy petition.

There are two other types of bankruptcy: Chapter 12 bankruptcy for farmers and Chapter 11 reorganization for large debtors (persons with over $250,000 in unsecured debts and over $750,000 in secured debts). Most people who file for bankruptcy protection do so under either Chapter 7 or Chapter 13 of the Bankruptcy Code.

A Chapter 13 petition is one of four types of bankruptcy and is often called an "individual's reorganization." Unlike a Chapter 7 proceeding, this type of bankruptcy filing does not liquidate all of a debtor's non-exempt property and immediately discharge a debtor of all dischargeable debts.

A Chapter 13 proceeding requires the debtor to make payments pursuant to a plan to the creditors. At the end of the plan's period of life (usually three years,) all unsecured debts are discharged. if all payments have be met. Debts owed to secured creditors usually are not discharged under the plan unless they are judgment liens on exempt property or non-purchase money liens on consumer goods. Full satisfaction of plan requirements relieves the debtor from any obligation to pay any discharged debts.

As with the Chapter 7 book, this one is free-standing and deals with its own area of the law although many of its areas overlap with a Chapter 7 bankruptcy . This volume helps the user understand the area of Chapter 13 reorganization.

This book deals entirely with Chapter 13 bankruptcy. It assists the average person, who may also be engaged in business with unsecured debts of less than $250,000 and secured debts of less than $750,000, in starting the bankruptcy reorganization process. This books contains the appropriate forms for Chapter 13 bankruptcy filing along with detailed instructions and examples for their completion. The law on bankruptcy is covered as it now relates to exemptions and dischargeable debts. Issues that may require a consultation with a bankruptcy attorney are stated in such a manner that the user can verify if the law has subsequently changed. In the vast number of cases, this book should be suffice with little additional source material and verification that the exemptions have not changed.

This volume explains Chapter 13 bankruptcy procedure and includes sample motions for special relief, such as lien avoidance or reopening the estate. After reading this book a few times and following its guidelines for verifying the current exemptions under state law, the reader should have nol difficulty in applying this book to the debtor's bankruptcy.

This book was written to be user friendly. In addition, the bankruptcy court as a stated objective, has the goal of helping a debtor start over. As such, there no honest mistakes a debtor can make that cannot be corrected before final discharge in the case and most such mistakes can be rectified after final discharge.

If this book is used for the purposes outlined and if the book's suggestions, comments and recommendations are considered, the reader should find the bankruptcy proceeding less intimidating and more understandable.


CHAPTER I

COMMON BANKRUPTCY QUESTIONS

Bankruptcy was once considered a disgrace and a sign of utter failure. A generation ago people committed suicide rather than live with the stigma of a bankruptcy. This stigma regarding bankruptcy no longer exists and in fact is now viewed as ridiculous. Bankruptcy filings have increased astronomically: nearly a million bankruptcies are filed per year.

The bankruptcy law was enacted to give debtors hope that they could start over. The United States Congress, when it enacted the bankruptcy code, was well aware how other countries dealt with their insolvent debtors. Both Great Britain and France had debtors' prisons and penal colonies where they jailed people for no other reason than their inability to pay their debts. In one of the great advances for personal dignity, the United States created the bankruptcy code to permit debtors to start over again.

Most bankruptcies are a very sad affair. Case in point: A client was an elderly widower who had retired from the Federal Aviation Administration. His wife of 30 years had died after a long painful struggle with cancer. His wife's medical bills had erased their entire life savings. The client even sold their house to pay for his wife's treatment. After his wife's death, the client still owed over $100,000 in debts. Bankruptcy was the only alternative.

This chapter does not deal with the entire bankruptcy code. This entire book deals only with one type of bankruptcy, a "Chapter 13 Bankruptcy."

A Chapter 13 petition is a special type of bankruptcy filing and is often called a "reorganization." This type of bankruptcy filing does not liquidate all of a debtor's non-exempt property and immediately discharge a debtor of all dischargeable debts. Instead a Chapter 13 proceeding requires the debtor to make payments, pursuant to a plan, for five years or less to the creditors. At the end of the plan, if all payments are met, all unsecured debts are discharged.

A Chapter 13 filing generally does not discharge debts owed to secured creditors unless they are judgment liens on exempt property or nonpurchase money liens on consumer goods. The liens of the secured creditors can be set aside. After a Chapter 13 bankruptcy becomes final, the debtor is released from the obligation of paying any discharged debts.

This chapter will help demystify the bankruptcy process. The question and answer format presents most of the general information regarding a Chapter 13 bankruptcy. This chapter covers the common questions asked by those considering bankruptcy. The average reader should have a better understanding of the bankruptcy process and his rights under the law after reading this chapter.

1. WHAT IS CHAPTER 7 BANKRUPTCY?

Chapter 7 bankruptcy is also called "straight bankruptcy" or "liquidation." It is the simplest and easiest form of bankruptcyproceeding. Bankruptcy per se is a federal statutory proceeding whereby qualified individuals may surrender their nonexempt property for division among their creditors. To the extent that their nonexempt property does not pay their debts completely, the debts are discharged: Forgiven.

The usual Chapter 7 bankruptcy takes between 100 and 180 days. The filing fees for a Chapter 7 bankruptcy are around $160. Usually, the creditor has to appear only once in court: At the meeting of creditors.

Once a discharge is given by the bankruptcy court, the debtor's dischargeable debts are forgiven. The debtor will still be obligated to pay any debts that the bankruptcy court determines should not be discharged for equitable reasons or are not dischargeable under federal law.

2. WHAT IS CHAPTER 13 BANKRUPTCY?

Chapter 13 is another type of bankruptcy proceeding. Unlike Chapter 7 bankruptcy, Chapter 13 is a reorganization of the debts, not a liquidation of the debtor's property. In a Chapter 13 bankruptcy, the debtor creates a plan to pay most or all of the debts during a three to five year period. To the extent that dischargeable debts are not to be paid under the plan, the unpaid portion of the debts are forgiven.

There is no time limitation for filing a Chapter 13 petition. In fact, a Chapter 13 petition can be filed immediately after the conclusion of a Chapter 7 proceeding if the debtor so desires.

A Chapter 13 plan is not final and can be modified by the court if the debtor shows good cause, such as a reduction in earnings. The debtor may convert a Chapter 13 petition to a Chapter 7 liquidation at any time provided the debtor has not filed a previous Chapter 7 petition within the previous six years. In addition, the debtor may dismiss the Chapter 13 at any time prior to completion of the plan and be treated as though the bankruptcy had never been filed.

3. WHAT IS A BANKRUPTCY TRUSTEE?

Once a Chapter 13 bankruptcy petition is filed, the bankruptcy court appoints a person called a "trustee" to handle the normal administration and management affairs of the debtor's plan. The trustee calls and oversees the creditors' meeting where the creditors of the debtor examine the debtor in an attempt to discover the location of assets.

After court approval of the debtor's plan, it is the trustee's responsibility to establish the payments to be made to the creditors pursuant to the court approved Chapter 13 plan. These payments are then transmitted to the creditors in accordance with the payment schedule set up in the approved plan. The trustee also has the power to bring or defend lawsuits on behalf of the bankruptcy estate.

After the plan is completely fulfilled according to its terms, the debtor is discharged from liability to pay all dischargeable debts. If the plan cannot be fully completed, the debtor can seek a partial discharge for certain debts as discussed in Chapter 13.

4. WHY DOES A PERSON FILE A CHAPTER 13 PETITION?

There are two reasons for filing a Chapter 13 petition. The first reason is that the debtor wishes to buy time to reorganize debts. Such a person intends to dismiss the petition within a period of time and pay the debts. The purpose behind filing the petition is simply to gain a breathing period and to avoid imminent foreclosures or lawsuits during the period.

The second reason for filing a Chapter 13 is the more common reason. The debtor possesses a significant amount of nonexempt property which would be lost in a Chapter 7 liquidation. To keep the property, the debtor elects to file a Chapter 13 petition and establish a plan that will pay the unsecured creditors the amount of money they would have received had the debtor filed a straight liquidation. A Chapter 13 filing allows the debtor to keep the estate intact while paying less per month than was being paid prior to the filing. Once the plan is completed, the debtor will be discharged from the unpaid portions of the unsecured debts. If the debtor is unable to complete the plan, it might still be possible for the debtor to get a partial discharge of unsecured debts from the bankruptcy court.

5. HOW MUCH DO UNSECURED CREDITORS RECEIVE IN A CHAPTER 13 PROCEEDING?

Under the bankruptcy code, unsecured creditors must receive, at a minimum, an amount equal to that which they would have received had the debtor filed a Chapter 7 liquidation instead of a Chapter 13. To determine how much the unsecured creditors receive,the debtor determines what property is exempt from unsecured creditors and what property is not exempt from unsecured creditors. The value of unsecured property is totaled, and that is the minimum value that must be split among the unsecured creditors.

Each unsecured creditor is given a minimum payment amount based upon that creditors percentage share of all creditors. Example: An unsecured creditor is owed 10% of all unsecured debts then ten percent of the value of the estate on the date of filing must be paid to the creditor.

Since the payment schedule for the plan extends over several years (no more than five years), it is permitted to pay a creditor more than the minimum amount as long as each unsecured creditor receives at least as much as the creditor would have received if a Chapter 7 petition had been filed at the beginning.

It is also permitted in a Chapter 13 proceeding to treat unsecured creditors differently. A debtor may establish classes of unsecured creditors and treat them differently. As long as the classes are established in good faith and with a legitimate reason, the debtor may pay the creditors of one class a higher percentage of their debt than creditors of another class.

6. WHAT IS A CHAPTER 13 PLAN?

In a Chapter 13 proceeding, the debtor is required to submit for court approval a written plan for the payment of creditors over a period of several years. The plan must last for three years and with court approval may be extended to five years. In special circumstances, a plan can be approved for less than three years butgenerally only if the debtor proves to the curt that all unsecured creditors will be paid in full under the plan.

The plan must provide payments to the unsecured creditors that will at a minimum equal the amount they would have received had the debtor filed a Chapter 7 liquidation instead of a Chapter 13 petition. The debtor is not required to pay all of the unsecured debts. Under the bankruptcy law, the debtor is required to pay only that percentage of debts that would have been paid had a Chapter 7 petition been filed. The plan may also provide for the payment of secured debts as well as unsecured debts. The Bankruptcy Code requires fully secured debts to be paid in full if they are included in the plan.

7. HOW ARE THE PAYMENTS OF THE PLAN MADE?

In a Chapter 13 proceeding, the debtor must make all of the payments ordered under the plan to the trustee. Upon receipt of the debtor's payments, the trustee pays the creditors the amounts designated in the plan. Generally, the trustee receives 10% of all payments received as his fee.

Payments under the plan must begin within 30 days after the filing of the plan with the court. The plan must be filed within 30 days of the filing of the Chapter 13 petition. The payments must be regularly made, usually on a monthly basis. Some bankruptcy courts will order an attachment of the debtor's wages to assure payments are made under the plan.

8. WHEN MAY A CHAPTER 13 BANKRUPTCY BE FILED?

Bankruptcy Code Section 109 states the criteria fordetermining when a debtor can file a Chapter 13 petition. A Chapter 13 petition can be filed if the debtor:

9. HOW IS A PLAN APPROVED?

A Chapter 13 payment plan must be approved by the bankruptcy court in order to discharge the debtor's unpaid portions of the debts. The procedure for obtaining court approval is straight forward. The debtor files a Chapter 13 petition. Notice of the petition is given to the creditors, which places an automatic stay on any collection actions by the creditors. The debtor thenprepares the proposed plan, which is filed with the court and served on the trustee and all of the creditors.

A hearing date is then set for the confirmation of the plan. Any creditor having objections to the plan may file objections, which will be heard at the hearing. As long as the unsecured creditors are paid the minimum amount they would have received had a Chapter 7 petition been filed and the debt is properly dischargeable, the objections will be overruled and the plan approved.

10. HOW ARE SECURED CREDITORS TREATED?

Secured creditors are treated differently from unsecured creditors in a Chapter 13 proceeding. Secured creditors may be treated in one of four ways. First, each secured creditor is given the option of accepting a proposed payment plan. This usually means that an approving secured creditor will be paid less than he is actually owed.

Second, each secured creditor may reject the proposed payment plan and stand on his security instrument. In this instance, the creditor must be completely paid within the term of the plan. The court will not approve any plan which will not pay an objecting secured creditor within the term of the plan. Interest must be paid on all secured claims handled in the plan.

Third, the debtor may surrender the collateral to the secured creditor holding a security interest on it. In such a situation, the secured creditor becomes an unsecured creditor to the extent of any deficiency resulting from a proper resale of the property.

The fourth way for a debtor in a Chapter 13 proceeding to deal with a secured creditor is to omit the creditor from the plan and continue to make the payments as before the filing.

When dealing with secured creditors it is important to remember that a secured creditor lien only extends to the fair market value of the security. As such, if a secured claim is handled in the plan and the creditor receives the fair market value of the collateral, the lien is discharged and the secured creditor becomes an unsecured creditor for any remaining unpaid balance.

11. HOW DOES BANKRUPTCY AFFECT CHILD OR SPOUSAL SUPPORT?

Alimony and child support obligations are not dischargeable in bankruptcy. The bankruptcy will not suspend or stop the requirement to make current court ordered payments.

The Bankruptcy Act of 1994 amended the automatic stay under section 362 to provide that collection of spousal or child support payments from property which is not property of the estate is not subject to the automatic stay. The 1994 Act also prohibited the automatic stay from blocking commencement or continuation of proceedings to enforce alimony and child support during the bankruptcy case. In a Chapter 13 case, property acquired during the life of the Chapter 13 plan is considered property of the estate. Under the Bankruptcy Act of 1994, child and spousal support claims now have priority over and are to be paid before general unsecured claims and also before tax claims. In addition, the Bankruptcy Act of 1994 prohibits both the trustee and the debtor from recoveringany property transferred to a spouse or to a child in connection with a divorce or separation made within one year of the filing of the bankruptcy petition. Before this amendment, the trustee and the debtor were each permitted to avoid such payments made within a year of the bankruptcy filing as a creditor preference or a payment not supported by reasonable equivalent consideration. Section 522 of the Bankruptcy Code was amended under the 1994 Bankruptcy Act to prohibit a debtor from being able to avoid a judgment lien on otherwise exempt property for child or support payments.

Even if the debts are collected during the bankruptcy, the obligation survives the bankruptcy, and the debtor must still pay the support obligation in full.

12. WHAT TYPES OF DEBTS ARE NOT DISCHARGEABLE BY LAW?

There are several types of debts that cannot be discharged under the bankruptcy law. Most important of the nondischargeable debts are:

The main exceptions to the general dischargeability of debts are discussed in detail below.

13. CAN A BANKRUPTCY COURT REFUSE TO DISCHARGE A DEBT THAT IS OTHERWISE DISCHARGEABLE?

A bankruptcy judge may refuse to grant a discharge for a debt that is otherwise a dischargeable debt when he determines that:

The rule of thumb for deciding whether a Chapter 13 filing to be beneficial is whether the payments under the proposed plan would be significantly less than those being paid.

14. WHAT IS AN UNSECURED DEBT?

In a bankruptcy, debts are divided into both secured and unsecured debts. An unsecured debt is a promise or obligation to pay to another a certain amount of money which is unsecured by any collateral. The failure to pay such debt will not entitle the creditor to an immediate right to repossess real or personal property to satisfy the obligation. Most debts are unsecured. Examples of unsecured debts are credit cards, utility bills, medical bills, legal bills, rent.

In a bankruptcy, after all the debts having priority are paid, the unsecured debts are totaled. If the estate is large enough, unsecured debts are paid in full. If there are not enough assets in the estate to pay the unsecured debts, they are paid in accordance to their percentage to the amount of money available. To the extent that there are not enough assets to pay all of the unsecured debts, the portion not paid is forgiven and discharged. Example: Theunsecured debts are $200,000, but there are only enough assets to pay $40,000 of the unsecured debts. Each unsecured creditor will be paid only 20 on the dollar.

15. WHAT IS EXEMPT PROPERTY?

Under both state and federal law, a person is entitled to exclude from the bankruptcy certain property. The individual is given an option of electing to take the federal exemptions or the particular state exemptions.

Both state and federal law have some of the same exemptions although they vary in amounts. Both systems provide exemptions for:

There are additional exemptions under both state and federal law, but these are the common exemptions. Of the above exemptions, the homeowner's exemption for equity is often the most important. The proceeds from the sale of any exempt property are not attachable by the trustee or creditors to pay debts. An exception exists if the otherwise exempt property is secured as collateral for payment of a debt. In such an event, the bankruptcy does not affect the rights of the creditor holding the security interest from repossessing theproperty after the bankruptcy discharge if the debt secured by the property remains unpaid.

16. WHAT IS NON-EXEMPT PROPERTY?

Non-exempt property is property that is not exempt from attachment to pay the debtor's obligations under federal or state law. Examples of non-exempt property in a bankruptcy are:

If most of a debtor's estate consists of non-exempt property, a decision should be made to determine if filing for bankruptcy relief is really best since most of the debtor's estate will be taken by the trustee.

17. HOW IS PROPERTY THAT HAS NOT YET BEEN RECEIVED TREATED?

A debtor is required to disclose in the bankruptcy petition any property which the debtor has a right to receive even though it has not yet been received. Examples of such property are:

The purpose behind requiring such disclosure is obvious. Itprevents a debtor from concealing assets by simply delaying payments of money or the delivery of property until after the petition for bankruptcy relief is filed. Any property in which the debtor has an interest, whether contingent or absolute, is required to be listed in the petition. Failure to do so will jeopardize the debtor's discharge.

18. IS PROPERTY ACQUIRED AFTER BANKRUPTCY INCLUDED IN THE ESTATE?

The general rule is that property acquired after the filing of a bankruptcy petition is not included in the bankruptcy estate. There are a few exceptions to this rule for certain property acquired within 180 days after filing bankruptcy.

The after-acquired property subject to inclusion in the bankruptcy estate is:

The importance of such after-acquired property is that it may affect the Chapter 13 plan and therefore require an amendment. As stated above, unsecured creditors must receive at least as much, under the plan, as they would have received had the debtor filed for a Chapter 7 discharge. Therefore, under the plan if the creditors were receiving the bare minimum based upon the assets that the debtor then possessed, the subsequent acquisition of any of the above property would require amending the plan to take into account the additional property. If, however, the debtor had beenpaying more than the minimum amount and even with the inclusion of the new property the creditors are still receiving more than they would had a Chapter 7 petition been filed, then no amendment of the plan is necessary. In any event, the debtor would be required to file an amended schedule to inform the trustee and the court of the additional property, even if the plan would not need to be amended.

There is no requirement that married couples file a joint bankruptcy petition. Each spouse may file bankruptcy separately. In addition, one spouse alone may file bankruptcy, and the other spouse may elect not to do so. Generally, if a married couple intends to file bankruptcy, it is more advantageous for them to file a joint petition rather than two separate petitions. The decision of the spouses as to how to file may be governed by the status in which they reside. The effect of state law on the classification of property as either community or separate property may make the filing of both spouses in bankruptcy necessary to protect their rights.

20. HOW IS COMMUNITY PROPERTY TREATED IN A BANKRUPTCY?

In a community property state, all community property is included in a debtor's estate regardless of whether the debtor's spouse files a bankruptcy. Bankruptcy law states that all community property, not just the debtor's half interest, is included in the estate if the debtor's creditors can attach it under state law absent the bankruptcy.

Example: A husband and wife own a piece of real property ascommunity property. Under state law, both spouses have equal management and control over the property as joint owners. As a result, when the husband files bankruptcy, the trustee will take all of the property and sell it to satisfy the husband' creditors, even though the wife never filed bankruptcy. For this reason, in a community property state, when one spouse files, the other spouse usually files to protect the spouse's interest in the community property.

21. HOW IS SEPARATE PROPERTY TREATED IN A BANKRUPTCY?

The separate property of the non filing spouse cannot be attached to pay the debts of the spouse filing bankruptcy. Separate property, in a community property state, is property acquired by a spouse prior to a marriage or after marriage by gift, devise or bequest: Not through work.

Any state that is not a community property state is a separate property state. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In a community property state the community property interest of the married, non filing spouse can be attached in the other spouse's bankruptcy. This is one of the drawbacks in having community property.

In a separate property state, the estate of a married debtor in bankruptcy consists of the debtor's separate property and only one-half of the jointly owned property with the debtor's non filing spouse. The separate property of the non filing spouse isnot included in the filing spouse's bankruptcy estate.

22. HOW ARE EXEMPTIONS DETERMINED?

Exempt property is property that the debtor can keep regardless of the bankruptcy. Each state has its own set of laws that list what property is exempt in bankruptcy.

There is a federal set of exemptions that the debtor may use in the District of Columbia, Connecticut, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Washington, Wisconsin and Vermont. The debtor cannot use the federal exemptions in addition to the state exemptions and cannot mix or match them. The election is for one set of exemptions or the other..

In the states not listed above, the federal exemptions are not available, and the debtors can use only their state's exemptions.

23. WHAT IS THE GENERAL EXEMPTION?

It is important for a debtor to understand all exemptions that are available. It is only from the nonexempt property that the payments required under the plan are to be made. Most states provide a general exemption that a debtor can apply toward any type of property or split among several properties. The following states have a $400 general exemption: California, Georgia, Maine, Ohio, Vermont, West Virginia. Kentucky has a $1,000 exemption, Maryland a $2,500, Missouri a $1,250 and Pennsylvania a $300 general exemption. Other states also have general exemptions butrestrict their application to personal property not real property. A federal general exemption also exists for $400.

23. HOW IS TENANCY-BY-THE-ENTIRETY HANDLED IN BANKRUPTCY?

As stated earlier, payments to unsecured creditors are made only from nonexempt property. An important exemption in some states is for tenancy-by-the-entirety property. Tenancy-by-the-entirety is a special form of ownership of property between married persons: The surviving spouse receives all of the property under a right of survivorship.

Sixteen states treat tenancy-by-the-entirety property in a different fashion from either separate property or joint property. These states will exempt all tenancy-by-the-entirety property from inclusion in a debtor's bankruptcy estate if only one spouse files bankruptcy and if the debts discharged were those owed solely by the filing spouse. If a married debtor tries to discharge joint debts in the bankruptcy, the tenancy-by-the-entirety exemption is lost.

24. CAN DEBTS BE PAID BEFORE FILING BANKRUPTCY?

Under the bankruptcy law, payments made within 90 days of filing a bankruptcy petition are considered preferential payments to creditors, and the trustee can set aside the payments and require that the creditor return the payments to the bankruptcy estate.

Payments on debts owed to a debtor's relative, friend or company in which the debtor is an officer may be recovered by thetrustee if the payments were made within one year of filing for bankruptcy protection.

Payments of debts that are secured by exempt property can be a good planning tool. Paying the debts on exempt property with money that would otherwise be lost in the bankruptcy will assure that the debtor will receive the exempt property.

END OF PREVIEW


CHAPTER 2

WHAT A CHAPTER 13 BANKRUPTCY AND THIS BOOK

CAN AND CANNOT DO

I. INTRODUCTION

A. WHO CAN FILE

Filing a Chapter 13 bankruptcy petition is a big deal. Before filing the bankruptcy petition, the debtor must understand what a Chapter 13 discharge will do and what it will not do.

A Chapter 13 petition is a reorganization of debts for individuals. The debtor creates a plan which must be approved by the court; some of the debts are discharged (in whole or part), and the remaining debts are paid over a period of time (usually three to five years). A Chapter 13 proceeding is commonly called a "reorganization," which is a correct name. A bankruptcy petition filed under Chapter 13 of the Bankruptcy Code permits the debtor to establish a payment schedule over a period of time (between three and five years) for the payment of unsecured debts. Those unsecured debts that are completely paid during the term of the plan will have their balances discharged. By comparison, a bankruptcy proceeding filed under Chapter 7 is a liquidation of the debtor's estate with the proceeds being distributed among the debtor's creditors.

What has to be borne in mind when considering the filing of a Chapter 13 petition, is that a Chapter 13 petition can only be filed by a debtor with less than $250,000 in unsecured debts andless than $750,000 in secured debts. These restrictions severely limit the number of people who can seek Chapter 13 protection. Debtors, such as those engaged in business whose debts are greater than the stated limits must file a full blown Chapter 11 petition if they want to reorganize. That is generally prohibitive because of the cost.

In a Chapter 13 proceeding, the debtor's estate is not sold or liquidated. The debtor keeps all the assets of the estate. The Chapter 13 payment plan requires the debtor to pay the unsecured creditors a minimum amount equal to that which would have been received had the debtor filed a Chapter 7 bankruptcy petition. The dischargeable debts owed the debtor's unsecured creditors are thereafter discharged and forgiven to the extent they remain unpaid in the plan: The debtor will not have to pay them.

Not all debts are dischargeable in a bankruptcy proceeding, regardless of whether a Chapter 7 or a Chapter 13 petition is filed. A debtor should know what type of debts cannot be discharged. It is possible that a bankruptcy filing might not help a debtor because the majority of his debts may not be dischargeable. There are certain debts that Congress has made nondischargeable in bankruptcy as a matter of public policy. There are other debts that are nondischargeable only if the creditor objects. It is very important for a person considering filing for bankruptcy protection to know what debts are dischargeable and what debts are nondischargeable. Filing a Chapter 13 petition may be oflittle assistance where most of a debtor's debts are nondischargeable. This chapter identifies and explains which debts are nondischargeable under the bankruptcy code.

B. THE PURPOSE OF THIS BOOK, AND WHO SHOULD USE IT

This book is designed to offer a practical, easy-to-understand and easy-to-use "How To" book for the average Chapter 13 proceeding. This book was written to be used by an individual for personal bankruptcy or by an individual engaged in a small service or retail business with few assets or inventory. A Chapter 13 proceeding permits the debtor to keep the bankruptcy estate as long as the debtor makes payments to the unsecured creditors which are at least equal to the amount that the unsecured creditors would have received had the debtor instead filed a Chapter 7 liquidation proceeding.

A Chapter 13 proceeding is usually used when the debtor has nonexempt property which would be lost in a Chapter 7 proceeding. If the debtor does not have large amounts of nonexempt property, a Chapter 7 proceeding usually would be better than a Chapter 13 proceeding. To determine which bankruptcy proceeding would be best, the debtor needs to ascertain the extent of exempt and nonexempt property in the estate. This book explains in detail the exemptions available to a person filing for bankruptcy protection. A person using this book will calculate the exemption available to that person and check the bankruptcy code to see if any new exemptions have been added. The amount of exempt property in anestate will generally determine the type of bankruptcy petition to file.

This book can easily be used by married couples, and in fact a joint filing by married couples provides the following advantages in the vast majority of cases:

Yet there can be situations where filing jointly may not be best. Before filing a joint petition, a couple should consult an attorney specializing in bankruptcy and the bankruptcy code to determine any recent changes in the exemption law when the following exists:

Pensions. In some circumstances it may be beneficial for a couple to move to another state and use the federal pension exemption and the federal homestead exemption there.

This book does not cover nor should it be used for the following matters:

II. NONDISCHARGEABLE DEBTS

The Bankruptcy Code has 10 separate categories of debts which are non-dischargeable in a Chapter 7 or a Chapter 13 proceeding. Of the 10 categories, seven represent debts that cannot be discharged unless those debts fall into narrowly defined exceptions. The remaining three categories of debts are dischargeable UNLESS THE CREDITOR files timely objections to their discharge. Those nondischargeable debts are discussed below:

A. DEBTS NOT DISCHARGEABLE UNLESS AN EXCEPTION EXISTS TAXES

Under section 523(a)(1), a debt is not discharged if it is:

1. DISCHARGEABILITY OF TAXES

Generally, income taxes can be discharged provided the following conditions are met:

Under the bankruptcy code, tax assessments made against a debtor within 8 months of filing a bankruptcy petition are non-dischargeable even if the taxes are over three years old. The debtor must wait more than eight months after any tax assessment to be able to discharge those back taxes even if the other requirements for a valid discharge are met.

When all of the above conditions are met, the back taxes may be discharged. Penalties assessed for late filing or nonpayment are dischargeable if the taxes to which they relate are dischargeable. If the taxes are not dischargeable, neither are the penalties.

b. PROPERTY TAXES

Property taxes that are less than one year old are nondischargeable. Yet from a practical sense it makes no difference. Property taxes are almost always assessed against the property and not the owner. The taxing agency usually imposes a statutory tax lien against the property to secure payment of the lien (see Chapter 9, Lien Avoidance). Therefore, in truth of fact property taxes are not dischargeable because they must be paid if the debtor wishes to keep the property to which they are attached.

2. UNLISTED DEBTS

A creditor's debt will not be discharged pursuant to section 523(a)(3) unless the creditor was either duly listed as a creditor with the court or had actual notice of the bankruptcy filing. It is the clerk of the bankruptcy court who sends the notice of the bankruptcy filing to the creditors. A creditor who is not properly listed will not receive notice of the bankruptcy action and be unable to protect his interest.

The purpose of this exception to a discharge is obvious. There is an affirmative duty on the part of the debtor to notify the creditors of the bankruptcy. The bankruptcy system will not function as intended if debtors are permitted to exclude creditors and not give them an opportunity to participate in the proceeding. In addition, the discharge of any unnoticed creditor would probably be unconstitutional as a violation of due process.

If the creditor never had knowledge of the debtor's bankruptcy, the creditor's debt is not discharged. The debtor then remains liable for repayment of the debt even though the other debts of the debtor have been discharged.

In the case of an omitted creditor, the debtor may petition the court to list the creditor. Reopening the case is rare, but the procedure is covered in the Chapter 13. Absent reopening the case, the debtor remains liable for repayment of the debts of any creditor who was omitted on the petition and had no knowledge of the action.

3. SPOUSAL AND CHILD SUPPORT

Under section 523(a)(5), court-ordered payments for the support of a child or former spouse are non-dischargeable. Yet there are variations on this theme of which a debtor must be aware. A debtor should consult an attorney where back child support is at issue because it might be a criminal act, not to have paid it, quite apart from the bankruptcy law.

Once a court orders a parent to make child support payments, the obligation to make those payments then becomes nondischargeable (In re Harrell 33 B.R. 989; 1983. The obligation to make child support payments ordered by a court is not discharged even if it is assigned to a state or governmental agency. If a county or state agency provides benefits to a family because of the debtor's failure to make court- ordered support payments, the state or other governmental agency is assigned the right to receive reimbursement. That right to receive reimbursement for the support payments made by the state for the support of the debtor's child cannot be discharged (as it once was) by the debtor's subsequent bankruptcy.

The general rule is that claims of third parties for property or services provided for a child's support are dischargeable by a parent (In re Lo Grasso, 23 F.Supp. 340). There is, however, case law that holds that where a parent deserts or neglects the children, the debts for the property or services which have been provided by third parties are not dischargeable (In re Meyers 12 F.2d 938).

If there is be a court order requiring the support payments to be made the debt for child support to be non-dischargeable. All states have laws that impose a duty to support a child on the parent. In addition, the parent can be sued for the value of the child support provided by third parties. Yet these debts are dischargeable unless reduced to a judgment prior to the debtor-parent filing for bankruptcy protection. Example: A mother deserts her children and the father raises them. The father is entitled to reimbursement from the mother for her share of the child support. If the mother files for bankruptcy relief before the father gets a judgment for reimbursement, the obligation to reimburse the father for the back child support is discharged. If the father obtains a court order requiring the mother to reimburse him for the back support, the debt for back support is not dischargeable.

Spousal support, also known as alimony, requires either a court order or an agreement obligating the debtor to make support payments to the spouse to make the payment obligation not be dischargeable. The debtor may agree to make spousal support payments through a marital agreement or a property settlement agreement, and such support payments are nondischargeable. Without either a court judgment ordering a debtor to make spousal support payments or an agreement requiring them to be made, the debtor's obligation to make support payments can be terminated in a bankruptcy.

Where parties are not married, unless the relationship qualifies as a common law marriage, the debtor may be discharged from any obligation to make support payments to the other party through a bankruptcy proceeding.

The Bankruptcy Act of 1994 amended the automatic stay under Section 362 to provide that collection of spousal or child support payments from property that is not property of the estate is not subject to the automatic stay. The 1994 Act also prohibited the automatic stay from blocking commencement or continuation of proceedings to enforce alimony and child support during the bankruptcy case. In a Chapter 13 case, property acquired during the life of the Chapter 13 plan is considered property of the estate. Under the Bankruptcy Act of 1994, child and spousal support claims now have priority over and are to be paid before general unsecured claims and even before tax claims. In addition, the Bankruptcy Act of 1994 prohibits both the trustee and the debtor from the recovery of any property transferred to spouse or child in connection with a divorce or separation made within one year of the filing of the bankruptcy petition. Before this amendment, the trustee and the debtor were each permitted to avoid such payments made within a year of the bankruptcy filing as a creditor preference or a payment not supported by reasonable equivalent consideration.

Section 522 of the Bankruptcy Code was amended by the 1994 Bankruptcy Act to prohibit a debtor from being able to avoid a judgment lien on otherwise exempt property for child or supportpayments.

4. FINES, PENALTIES AND FORFEITURES

Section 523(a)(7) exempts from discharge those debts incurred as fines or penalties deriving from the debtor's violation of the law. This exception from discharge is firmly based on the belief that approving such a discharge would be an implicit approval of criminal or civil misbehavior. Therefore, all governmental sanctions, whether by a court or agency, for a violation of any rule, statute or law are not dischargeable.

The only penalties not completely excepted from discharge under this chapter are tax penalties if the tax itself can be discharged under section 523(a)(1) as discussed above. Some additional tax penalties can be discharged even if the tax is not dischargeable if the transaction giving rise to the tax occurred three or more years prior to the filing of the bankruptcy petition.

5. STUDENT LOANS

Under section 523(a)(8) student loans made or guaranteed by a governmental agency (which are just about all of them) are not dischargeable unless the payments on the loan became due more than seven years before the debtor filed for bankruptcy relief or unless failure to discharge the student loan debt would impose an undue hardship on the debtor.

If the bankruptcy petition is filed more than seven years after the student loan matured (became payable), there is no requirement for the debtor to prove undue hardship to have thestudent loan debt discharged. The seven year period is intended to keep students from discharging the loans prior to starting their careers.

Most courts will allow the debtor to discharge the entire student loan if it became due more than seven years earlier. Some courts will only discharge those delinquent payments over seven years old (see the California case In re Steiner 55 B.R. 1; 1983). If a debtor is considering discharging student loans over seven years old, the debtor should consult a bankruptcy attorney for determining how they are handled in that state. If the bankruptcy court of that state will only discharge the payments over seven years old, it might be advantageous for the debtor to move to another state whose bankruptcy court would discharge the entire amount.

In order to get a discharge for student loans less than seven years old, the debtor must convince the court that the debtor will suffer undue hardship from being required to make the payments on the student loan (In re Rice 4 C.B.C.2d 134; 1981). The second Circuit Court of Appeals (Brunner vs. New York State Higher Educational Service Corp. 831 F.2d 385; 1987) has stated that the debtor has to show all the following to prove undue hardship:

When the court is granting a discharge for undue hardship, the court may grant only a partial discharge of the student loans. It is rare that a court will grant a complete discharge based on undue hardship.

A special type of student loan is the Health Education Assistance Loan for use by those obtaining a medical education. This type of student loan was held not to be dischargeable unless the debtor could show a greater burden than just an undue hardship in being forced to repay the loan (In re Hines 15 C.B.C.2d 959 and Columbus College vs. Shore 707 F2d. 1337; 1983). For all intents and purposes, such loans should be considered and treated by a debtor as nondischargeable except in extreme cases.

6. DEBTS INCURRED FROM DRIVING WHILE INTOXICATED

Debts incurred as a result of an episode of intoxicated driving are not dischargeable under section 523(a)(9). If a debtor is driving while intoxicated and causes an accident, the debtor can no longer avoid the liability of paying for the damages caused by the escapade by filing a bankruptcy petition. Prior to the enactment of this section, such debts arising from damages caused by intoxicated driving were dischargeable unless the debtor had been driving in such a reckless manner as to make the conduct almost willful and thus nondischargeable under section 523(a)(6) discussed below.

Now, the damages caused by a person's intoxicated driving will not be discharged if the following requirements are met:

These requirements must be met in order for an intoxicated driving debt not to be discharged. In other words, a court for the state where the accident occurred must find the debtor legally drunk or under the influence of drugs and order the debtor to pay compensatory damages to the injured parties (fines payable to a state as punishment are already nondischargeable under paragraph 4 above).

Intoxication means that at the time of the incident, the debtor was operating the vehicle while under the influence of either alcohol or drugs to such an extent as to be unable to operate it safely. In addition, many states have enacted laws that specifically make it a crime for a person to operate a vehicle with a blood alcohol level above a certain level. In California, for instance, the legal level above which no person can operate a vehicle is a blood alcohol level of .08%. A person involved in an accident while having a blood alcohol level over the legal level is guilty of driving while intoxicated, and the resulting damages are not dischargeable.

Generally, if a debtor files for bankruptcy relief prior to a state court issuing its judgment, the debtor's debts are discharged. Yet some courts will not discharge drunk driving debts if a judgment is obtained after the filing of the petition (In re Thomas 51 B.R. 187; 1985). The Ninth Circuit Court of Appeals (In re Hudson 859 F.2d 1418) denied a debtor's discharge for a drunk driving debt stating:

"Since enactment of Section 523(a)(9) bankruptcy courts have consistently held and litigants relying on those opinions have assumed that its language includes claims against drunk driver bankrupts reduced to judgment after commencement of the case. We are not inclined to disturb the consistent body of law which Congress apparently acquiesces."

A person with drunk driving debts that have not been reduced to a judgment should consult a bankruptcy attorney. It might be possible to avoid payment of the intoxicated debts by filing for bankruptcy relief prior to a state court judgment being rendered. This might mean having to move to a state whose federal bankruptcy disagrees with and is not governed by the above Ninth Circuit Court's case.

7. PREVIOUSLY UNDISCHARGED DEBTS

Under section 523(a)(10), if a debtor had an earlier bankruptcy petition dismissed in its entirety because of substantial misconduct or fraud by the debtor, none of the debts that could have been listed in that earlier dismissed case can be discharged in a subsequent bankruptcy case. In the same vein, if the debtor waived a discharge in an earlier case, the debtor cannot seek a discharge in a subsequent case as to that debt.

The exception to discharge under this section does not applyto technical dismissal of the earlier case. Example: Dismissals based upon a failure to pay a filing fee or a dismissal based upon the fact that a previous discharge had been obtained after six years.

B. DEBTS THAT WILL BE DISCHARGED UNLESS A CREDITOR OBJECTS

There are other Section 523 types of debts that may be nondischargeable under certain circumstances. These debts are:

Under 523(c)(1), the debts will be discharged unless the creditor files an objection with the court seeking to have the above debts declared nondischargeable.

Condominium common charges which accrue while the debtor is living on the property or subletting are not dischargeable.

Bankruptcy Rule 4007(c) governs the procedure by which a creditor may object to the discharge of any of the above debts. Rule 4007(c) requires the creditor who holds the debt to file a complaint seeking to have the debt declared nondischargeable within 60 days of the first meeting of creditors in order to have any of the above debts declared nondischargeable. If the creditor does notfile this complaint within the allotted time, the debts will be discharged.

1. FRAUDULENT DEBTS

What constitutes a fraudulent debt is liberally construed. The operative word is fraud. By definition fraud is the intentional making of a misrepresentation (false statement) about a material fact on which another party reasonably relies to his detriment. If a debtor tricks another person of cash or property by false statements, that is a fraud.

Fraud also includes obtaining loans by making false statements, such as obtaining a loan based on false statements of credit worthiness. Fraud also exists whether the debtor obtained property by false pretenses, such as agreeing to hold property for another but instead taking the property for one's own use.

The most common type of fraud involves credit cards. A court will not permit a discharge of credit card bills if they were incurred with the deliberate intent to have them discharged in bankruptcy. It is a common misconception that credit card debts are always dischargeable. Consequently, debtors will max their cards (charge to the maximum of the line of credit) prior to filing for bankruptcy relief. The court will not discharge the charges that are out of the ordinary. Example: Mary normally charges $500 per month and has a $5,000 line of credit. Mary charges $5,000 on the card one week before files her bankruptcy petition. The creditor can object to the discharge of the credit card debts because it isclear from the facts that Mary deliberately made the charges with the intent to have the debt discharged.

Fraud requires an intent to deceive at the time the contract or representation is made. If a debtor enters a contract with the intent of performing it, there is no fraud and debt for failure to perform the contract is dischargeable. On the other hand, if the debtor enters a contract with no intent of ever performing it, the debtor is not discharged from paying those debts deriving from the breach of the contract or misrepresentation.

2. DEBTS FOR WILLFUL AND MALICIOUS ACTS

A debt deriving from a willful or malicious act that injures another person or property is not dischargeable if the creditor objects. A crime that injures a person or property is a willful and malicious act under bankruptcy code, and the debts deriving are not dischargeable. Example: A debtor attacks an innocent person and puts the victim in the hospital. The debtor's liability to pay the medical bills is not discharged by a bankruptcy. Also as discussed earlier, debts incurred from damages caused by the debtor's intoxicated driving have been held by some courts not to be dischargeable regardless of whether or not they can be discharged under section 523(a)(9).

Debts that do not derive from criminal acts may nonetheless be nondischargeable if the act was malicious. To be malicious, the act must be one that a reasonable person would believe to be highly likely to cause injury to another or property. Example: Thereckless operation of a power saw that cuts another person. There was no intent to cause the injury, but a reasonable person could see that playing with a power saw could cause that injury. The damages caused by the reckless operation of the saw are not dischargeable.

3. EMBEZZLEMENT, LARCENY OR BREACH OF A FIDUCIARY DUTY

Larceny and embezzlement are just different forms of theft. If the debtor steals property from a fiduciary position of trust, it is embezzlement. If the debtor steals the property from people at large, it is larceny. In either case, the debts deriving from the thefts, either the obligation to pay for the property or to return it, are not discharged by the bankruptcy if the creditor objects. This seems rather straight forward. Otherwise, a person stealing a million dollars would not have to pay it back.

A fiduciary duty is the obligation imposed by law on a person in a position of trust to act reasonably. A fiduciary is liable for any damages caused by the breach of this duty to act reasonably. If the fiduciary acts irresponsibly and injures the person required to be protected, the debts deriving from the breach of duty are not discharged. Example: A person is the guardian of another and invests that person's assets in risky investments (in which a reasonable person would not invest). The guardian is liable to replace any losses. The debts for breach of a fiduciary duty will not be discharged provided the creditor (the person injured or the representative) objects.

END OF PREVIEW


CHAPTER 3

STEPS IN A BANKRUPTCY ACTION

A Chapter 13 bankruptcy proceeding is methodical, procedural and entirely predictable. The steps begin with finding the correct court and end with receiving the final discharge. Throughout, the case is a logical progression from one step to another. Once the debtor understands the steps that will occur in the ordinary Chapter 13 case, the debtor will appreciate the orderly nature of the bankruptcy procedure and feel be more at ease.

1. SELECTING THE PROPER BANKRUPTCY COURT

Every state has at least one bankruptcy court. Some states have divide into judicial districts and have a bankruptcy court for each judicial district. The debtor is required to file the bankruptcy petition with the bankruptcy court covering the debtor's home state. If there is more than one bankruptcy, he files with the court in whose judicial district he has lived the most in the last six months (in other words more than 180 days before filing the petition).

With more than one bankruptcy court in a state, the bankruptcy court closest to the debtor's home is probably the one where the debtor should file. A list of the bankruptcy courts is at the end of this chapter. To be sure that a court is the proper one, the debtor can call the court and ask the clerk if the debtor's home is covered by that bankruptcy court.

II. GETTING THE RULES AND FORMS

Once the proper court has been determined, the debtor should call the clerk and ask the following questions:

The forms contained in this book are based upon the Official Bankruptcy Forms as prescribed by the Judicial Conference of theUnited States. These forms will remain valid for upcoming years even if there are changes made to them. Under the Bankruptcy Rules, as long as a form contains the basic information required on the official form, it can be used even though it has been superseded by another form. To be certain that the forms will be accepted, the clerk can be asked if the court will accept a specific form. If the answer is no, the reader will have to purchase the new official form from the court or a stationary or office supply store for about $20.

Calculate the amount of money all this will require and send a check in that amount to the clerk in a self-addressed envelope. Given the work load of most courts, the reader should not be surprised if the line is busy or if the clerk will not answer questions (they do not have to do it). The alternative is to drive to the courthouse and get this information in person.

Each court can adopt its own rules of procedure within the confines of the Bankruptcy Code passed by the U.S. Congress and the Bankruptcy Rules adopted by the U.S. Supreme Court. Anyone filing a bankruptcy petition must comply with all rules and procedures adopted by the court in which the petition is filed. The debtor must get a copy of the local rules. Usually, the local rules are no more than a statement of the general bankruptcy rules. The advice in this book is directed for compliance with the general rules and should usually comply with most local rules.

III. EMERGENCY FILINGS

There are occasionally situations where the debtor does not have the time to complete the full petition before some type of foreclosure act of a creditor occurs. Bankruptcy Rule 1007 (c) provides a possible method to file just the petition along with a list of creditors to get an immediate automatic stay.

The debtor will have 15 days to file the missing schedules and statements. If the omitted schedules are not filed within the 15 days, the court will dismiss the petition unless the debtor obtains an extension from the Court. If the petition is dismissed, the debtor can refile but will have lost the $160 filing fee already paid.

The emergency filing requires that the debtor file at least the following:

The list of creditors must be put in the form approved by the local rules of court. Not all courts use the creditor matrix (the sheet with blocks for the typed names of creditors). Whatever form for the list of creditors the court requires is the form that the debtor must used.

IV. THE PREPARATION AND FILING OF THE PETITION

Once all the appropriate forms are obtained, the debtor determines the size, manner and type of the debts in the estate.There is a worksheet for the debtor to list the assets and liabilities of the debtor's estate following this chapter to help in organizing the estate.

After completing the worksheet, the debtor can use it to determine what debts are nondischargeable and what debts are dischargeable. The debtor should review Chapters 2, 6, 7, 8, and 9 for the state of the law.

Once the debts have been divided into the various categories, the debtor can decide if there are any liens on exempt property which may be avoided (removed) in accordance with the Bankruptcy Code (see Chapter 9). Once the above decisions are made, the debtor is ready to complete the schedules, the statement of intention and summary of debts and property.

The remaining acts to be done prior to filing are completion of the creditor matrix, statement of the debtor engaged or not engaged in business and cover sheets for the petition. When everything is complete, the debtor is ready to file the petition (see Chapter 4).

The filing fees of $160 dollars ($130 filing fee and $30 administrative fee) are payable in full at the filing. It may seem a bit strange that someone bankrupt must find $160 dollars to seek relief under the bankruptcy code. Bankruptcy Rule 1006(b)(1) permits a debtor to pay the $160 fee by installments over four months if the court approved Application to Pay Filing Fee in Installments is filed with the petition. No installment plan willbe given to a debtor who has previously paid an attorney for consultation or assistance in preparing the bankruptcy petition. An Application to Pay Filing Fee in Installments is included in this book.

V. MEETING OF CREDITORS

Soon after the petition for bankruptcy is filed with the court, the clerk of the court will schedule a meeting of creditors. The clerk will send notice of the hearing to all of the creditors named in the petition. Even though the court will notify the creditors of the bankruptcy, the debtor should send a letter immediately to the creditors informing them of the bankruptcy petition, the court where it was filed and the case number.

The purpose behind the debtor giving this notice is simply to avoid possible hassles. Under the bankruptcy law, once the debtor files the bankruptcy petition, there is an automatic stay on debt collection and foreclosure proceedings against the debtor. Yet unless a creditor knows of the bankruptcy, collection proceedings may go forward. Even though they will be subsequently set aside, there's no reason to go through the hassle and bother of doing so when a quick letter from the debtor early in the case would prevent that from happening.

Shortly after the petition is filed, the court appoints the trustee to handle the case. The trustee will preside over the creditor meeting. The judge will not be there. The trustee and thenthe creditors will question the debtor about the location of property in the estate and the debtors intent to set aside any liens on secured property.

VI. TRUSTEE'S MANAGEMENT OF THE ESTATE

Once a Chapter 13 bankruptcy petition is filed, the bankruptcy court appoints a person called a trustee to handle the normal administration and management affairs of the debtor's plan. The trustee calls and oversees the creditors' meeting where the creditors examine the debtor discover the location of assets.

There is a hearing to confirm the debtor's Chapter 13 plan following the meeting of creditors. This hearing can be set by the court to immediately follow the meeting of creditors or may be set for another date. If the debtor files his proposed plan when he files his petition, the confirmation hearing will probably be held at the same time as the meeting of creditors.

Once the court has approved a debtor's plan, the trustee is responsible for receiving the debtor's payments as ordered by the plan. The trustee then makes the payments to the debtor's creditors pursuant to the court approved Chapter 13 plan. Generally, the trustee receives 10% of all payments as the Trustee's fee.

Payments under the plan must begin within 30 days after the filing of the plan with the court. The plan must be filed within 30 days of the filing of the Chapter 13 petition. The payments must be regularly made, usually on a monthly basis. Some bankruptcy courts will order an attachment of the debtor's wages to assure paymentsare made under the plan.

These payments are then transmitted to the creditors in accordance with the payment schedule in the approved plan. The trustee also has the power to bring or defend lawsuits on behalf of the bankruptcy estate.

Once the plan has been completely fulfilled, the debtor is discharged of all dischargeable debts. If the plan cannot be fully completed, the debtor can seek a partial discharge for certain debts as discussed in Chapter 12.

VII. THE CHAPTER 13 PLAN

In a Chapter 13 proceeding, the debtor is required to submit to the court for approval a written plan for the payment of creditors. The plan must last for three years and may be extended to five years with court approval. The plan must provide payments to the unsecured creditors that will at a minimum equal the amount that they would have received had the debtor filed a Chapter 7 liquidation instead of a Chapter 13 petition. The debtor is not required to pay all of the unsecured debts.

To determine how much the unsecured creditors will receive, the debtor determines what property is exempt and what property is not exempt from unsecured creditors. The value of nonexempt unsecured property is totalled, and that is the minimum value that must be split among the unsecured creditors. Each unsecured creditor is given a minimum payment amount based upon that creditor's debt percentage of all creditors debts. Example: Anunsecured creditor is owed 10% of all unsecured debts. Then 10% of the value of the estate on the date of filing must be paid to the creditor. Since the payment schedule for the plan extends over several years (no more than five years), it is permitted to pay a creditor more than the minimum amount as long as each unsecured creditor receives at least as much as he would have received if a Chapter 7 petition had been filed at the beginning. To determine the minimum amount to pay the unsecured creditors, the debtor must first determine what property is exempt in the estate. The nonexempt property will then be used to calculate the amount to be paid to the unsecured creditors.

It is also permitted in a Chapter 13 proceeding to treat unsecured creditors differently. The Bankruptcy Code permits a debtor to establish classes of unsecured creditors and treat them differently with regard to the percentage of their debts which are paid. As long as the classes are established in good faith and with a legitimate reason, the debtor may pay the creditors of one class a higher percentage of their debt than creditors of another class.

The plan may also provide for the payment of secured debts as well as unsecured debts. Under the Bankruptcy Code, fully secured debts must be paid in full if they are included in the plan. If secured creditors are not fully paid in the plan, they can object, and no discharge will be granted as to their debts. A debtor is not required to deal with secured creditors in the plan and may continue to deal with them outside the plan. The main reason forlisting a secured creditor is to stave off a foreclosure. As long as the plan provides for the curing of a default and the resumption of normal payments in a responsible time, the court will prevent the secured creditor from proceeding with a foreclosure action. If the debtor cannot cure the default and resume payments within the plan, the court will release the debt from the automatic stay and permit the creditor to foreclose on the property. The debtor is required to pay interest on the debt of any creditor covered under the plan.

Secured creditors are treated in one of four ways. In the first instance, each secured creditor is given the option of accepting a proposed payment plan. This usually means that an agreeing secured creditor will be paid less than the creditor is actually owed under the security agreement.

Second, each secured creditor may reject the proposed payment plan and stand on his security instrument. The creditor must be completely paid within the term of the plan. The court will not approve any plan which will not pay an objecting secured creditor within the term of the plan. Interest must be paid on all secured claims handled in the plan.

In the third case, the debtor may surrender the collateral to the secured creditor holding a security interest on it. In such a situation, the secured creditor would become an unsecured creditor to the extent of any deficiency resulting from a proper resale of the property.

The last way for a debtor in a Chapter 13 proceeding to deal with a secured creditor is to omit the creditor from the plan and continue to make the payments as required before the filing.

When dealing with secured creditors it is important to remember that a secured creditor's lien only extends to the fair market value of the security. If a secured claim is listed in the plan, the lien is discharged once the creditor receives the fair market value of the collateral, and the secured creditor becomes an unsecured creditor for any remaining unpaid balance.

A Chapter 13 payment plan must be approved by the bankruptcy court in order to discharge the debtor of unpaid portions of the debts. The procedure for obtaining court approval is straight forward. The debtor files the Chapter 13 petition and notice of the petition is given to the creditors, thereby placing an automatic stay on any collection actions by the creditors. The debtor then prepares and files the proposed plan with the court, and the court serves it upon the trustee and all the creditors.

A hearing date is then set for the confirmation of the plan. Any creditor having objections to the plan may file objections, and they will be heard at the hearing. As long as the unsecured creditors are paid the minimum amount they would have received if a Chapter 7 petition been filed and the debt is properly dischargeable, objections will be overruled and the plan approved.

A Chapter 13 plan is not final and can be modified by the court if the debtor shows good cause, such as a reduction inearnings. The debtor may convert a Chapter 13 petition to a Chapter 7 liquidation at any time provided the debtor has not filed a Chapter 7 petition within the previous six years. In addition, the debtor may dismiss the Chapter 13 at any time prior to completion of the plan and thereafter be treated as though the bankruptcy petition had never been filed.

VIII. MOTION TO SET ASIDE A LIEN

The Bankruptcy Code gives the debtor the right to set aside judicial or judgment liens against exempt property. The procedure for setting aside a judicial lien calls for the debtor to file a motion with the court and give notice of the motion to the creditor possessing the lien.

A judicial lien is a lien placed against exempt property by a monetary judgment resulting from a lawsuit against the debtor. A judicial lien is quite different from a statutory lien created by operation of law. A statutory lien cannot be avoided by a debtor although it might under some circumstances be avoided by the trustee, usually not benefitting the debtor.

The procedure for avoiding a judicial lien is discussed in Chapter 9.

IX. CREDITOR'S MOTION TO SET ASIDE THE AUTOMATIC STAY

Once a debtor files for bankruptcy relief, there is an automatic stay on all proceedings against the debtor's estate. All lawsuits (including collection and repossession proceedings against the debtor) are automatically stayed for the duration of thebankruptcy case. The automatic stay remains in effect against all of the debtor's creditors; although it can be lifted upon request by individual creditors under certain circumstances.

To get the automatic stay lifted the creditor must file a compliant to lift the automatic stay with the court and serve it on both the trustee and the debtor. The debtor is not required to file a response to the complaint unless the local rules require it. The creditor is required to convince the court that the automatic stay should be lifted as to that particular creditor. The debtor, whether a response is filed or not, must explain to the court why the stay should not be lifted.

After hearing both sides, the court will decide whether to lift the stay and permit a creditor to foreclose against secured property in the estate or maintain a lawsuit for damages against the debtor.

X. DISCHARGE HEARING

If the plan has been fully performed and no objections to discharge have been filed, most courts will not hold a discharge hearing because there is nothing to be accomplished by the hearing. Instead, the debtor is mailed an order stating that the final discharge is granted. The case is then over for almost all intents and purposes.

A complete Chapter 13 discharge is granted under section 1328 (a) and is broader than a Chapter 7 discharge. A discharge under section 1328(a) discharges the debtor from all but the followingdebts:

If the debtor is unable to complete the plan, the debtor has three options. The debtor can dismiss the case and be treated by the creditors as having never filed the petition. The debtor will owe the creditors the amount that would have been owed had the Chapter 13 petition never been filed after taking into account any payments that were made through the plan.

The second alternative is for the debtor to convert the plan into a Chapter 7 filing. The debtor's estate will be liquidated, and the creditors will be paid in accordance with the bankruptcy law pertaining to Chapter 7 cases.

The third alternative is for the debtor to seek a partial discharge of the case under section 1328(b). A partial discharge relieves the debtor from all debts except:

In a partial discharge, the debtor is released from the obligation to pay the discharged debts.

To obtain a section 1328(b) discharge, the debtor must file a motion requesting a partial discharge. Upon filing the motion, at least 30 days notice must be given to the applicable creditors so they can file their objections to the partial discharge. A hearing is then held on the granting of the discharge. If no complaint is filed against the discharge, the debtor usually does not have to appear. If a complaint is filed, a hearing is held on the matter. To receive a section 1328(b) discharge, the debtor must have paid each unsecured creditor at least as much as the creditor would havereceived had the debtor filed a Chapter 7 petition instead of the Chapter 13 petition.

XI. DEBTOR'S REOPENING OF THE ESTATE

The bankruptcy court has full discretion to reopen a case when good cause is shown. Any interested party, creditor, debtor or trustee may ask the court to reopen the case for cause (see Section 350[a]). There is no definition of cause. It is left to the court to decide when the circumstances of the case are such that the court feels that its sense of justice requires the case to be reopened.

There is no express time limitation for making a motion to reopen an estate for cause. The motion must state those facts giving rise for the reopening of the case. The court will hear the arguments, both pro and con, for reopening the case. After the hearing on the motion, the court will render its order. If the motion is granted, the order cannot be attacked in a collateral action.

The reopening does not automatically reinstate the trustee. A court will not reinstate the trustee unless it finds the reappointment to be necessary to protect the interests of both the creditors and the debtor or the trustee is needed to administer the estate.

Generally, it is difficult for a debtor to convince a court to reopen a case, the debtor must do everything possible to assure that all creditors and property are duly listed.

UNITED STATES BANKRUPTCY COURTS

ALABAMA

P. O. Box 1805, 122 U.S. Courthouse, Anniston, AL 36201,

205-237-5631

500 S. 22nd St., Birmingham, AL 35233, 205-731-1615

P. O. Box 1289, 222 Federal Courthouse, Decatur, AL 35601,

205-353-2817

P. O. Box 228265, Mobile, AL 36652, 205-694-2390

P. O. Box 1248, Suite 127, Montgomery, AL 36192, 205-832-7250

P. O. Box 3226, 351 Federal Building, 1118 24th Avenue, Tuscaloosa, AL, 205-752-5966

ALASKA

P. O. Box 47, Federal Building, 701 "C" St., Anchorage, AK 99513, 907-271-5232

ARIZONA

U.S. Courthouse, 230 North First Avenue, Phoenix, AZ 85205, 602-261-6965

2nd Floor, Acapulco Building, 120 W. Broadway, Tucson, AZ 85701, 602-629-6304

ARKANSAS

P. O. Drawer 2381, 600 W. Capitol, Little Rock, AR72203,

501-378-6357

CALIFORNIA

235 Pine St., San Francisco, CA 94104, 415-556-2250

99 South E Street, Santa Rosa, CA 95403, 707-5258-8539

1300 Clay St., #300, Oakland, CA 94604, 510-273-7212

280 South 1st St., #3035, San Jose, CA 95113, 408-291-7286

2656 U.S. Courthouse, 1130 "O" St., Fresno, CA 93721, 209-487-5217

312 N. Spring St., Los Angeles, CA 90012, 213-844-3118

222 E. Carillo St., Rm. 104, Santa Barbara, CA 93101

699 N. Arrowhead, #105, San Bernardino, CA 92401, 714-383-5717

P. O. Box 12600, Santa Ana, CA 92712, 714-836-2993

940 Front St., #5N26, San Diego, CA 92189, 619-557-5620

COLORADO

END OF PREVIEW


CHAPTER 4

PREPARATION OF THE PETITION

I. INTRODUCTION

A Chapter 13 proceeding begins with the filing of a petition seeking relief under Chapter 13 of the Bankruptcy Code. A Chapter 13 petition is a formal document which consists of many schedules, statements and forms, all of which must be filed. The Bankruptcy Code requires all of its mandated official forms, even though some of the forms may not be applicable for a particular case. When a form contains a question which is inapplicable to a debtor, the debtor must nonetheless answer even if it means writing "N/A," "not applicable" or "none" where appropriate.

Sometimes a situation arises where the debtor needs immediate relief from the bankruptcy court. This situation usually arises where a debtor is facing an immediate or imminent foreclosure of property. An immediate filing is necessary to initiate the automatic stay provisions and stop the foreclosure or sale.

An emergency filing is accomplished through the use of Rule 1007(c). The petition and list of creditors are filed without the accompanying schedules. The schedules must be filed within 15 days or the debtor's bankruptcy petition will be dismissed. The debtor could refile again ,but that will mean paying a new filing fee. Usually, an emergency filing is only necessary when a creditor is about to sell debtor's property that, was security for a debt orwas an attachment to pay a court judgment.

Before the forms are prepared the debtor should complete the worksheet contained in this book and carefully review the material contained in this the book. He should pay particular attention to the discussion on exemptions, nondischargeable debts, lien avoidance, pensions and homestead in order to make the following determinations:

These determinations must be made before the case can proceed.

The debtor must prepare an objective and a plan on how to proceed even before the petition can be prepared. Once the debtor has decided what the objective and the plan are, he is able to complete the forms. A bankruptcy proceeding is a statutorily created action; it is therefore procedurally governed by statute and is very technical in nature. If the proper forms are filed, no one objects, debts are not nondischargeable by law, and the debtor completes the plan, the court must grant the final discharge. The point to bear in mind is that the function of the bankruptcy court is to help the debtor, not the creditor. The Bankruptcy Code was enacted to help a debtor, heavily laden with debt, to start with a new life. A debtor should not be fearful and apprehensive over the process.

Any mistakes that a debtor makes during the term of the plan can always be corrected before the court grants the final discharge. The debtor will not be punished for an innocent mistake. The biggest fear that a person has in filing his own petition is that some mistake will be made that will irreparably harm the case. Such a mistake cannot happen. The case is always under the management of the trustee and overseen by the court. Any mistakes that a debtor honestly makes can be corrected by filing amendments to the petition with the court before the final discharge. Mistakes uncovered after the final discharge can also be addressed through a motion to the court to reopen the case.

Debtors who are engaged in business are permitted to file a Chapter 13 petition providing they are otherwise eligible: They have unsecured debts of less than $250,000 and secured debts of less than $750,000.

Self-employed debtors are usually permitted to continue to operate their business as set forth in section 1304. Without court approval a self-employed debtor who continues to operate a business cannot use, sell or lease "cash collateral" or obtain credit other than unsecured credit in the ordinary course of business. "Cash collateral" is cash, or it is property equivalent to cash in which a secured creditor has a security interest. Debtors continuing a business will be required to prepare and file any required business reports that the court, trustee, or government tax entity may require. In addition to filing a Chapter 13 petition, a debtorcontinuing a business must file a complete inventory of the business within 30 days of filing the petition unless the inventory was included in the petition.

Many bankruptcy courts have special local rules regarding debtors continuing a business. Local rules should be consulted before filing the petition if the debtor wishes to continue to operate a business. Unless the court rules otherwise, the trustee is required to make a report following an investigation on the debtor's business and the debtor's management.

The entire petition consists of the following forms:

All of the above forms must be completed and filed with the court before the chapter 13 proceeding can commence. If all of the forms are not filed within a 15 day period, the court will dismiss the action. It is the filing of the Voluntary Petition along with the schedule of creditors that starts the case. An automatic stay immediately comes into effect to protect the estate of the debtor.

IMPORTANT NOTE: UNDER THE BANKRUPTCY CODE ALL PLEADINGS FILED WITH THE COURT MUST HAVE TWO STANDARD HOLES PREPUNCHED IN THE TOP IN ORDER FOR THE CLERK TO ACCEPT THEM FOR FILING. THE HOLES ARE REQUIRED SO THAT THE CLERK CAN PUT THE PLEADINGS IN THE FILE. (THE CLERK USE TO PUNCH THE HOLES). A punch can be purchased inexpensively at all office supply store. Also, most public libraries have such punches and would allow the public to them for the minutes or so it would take to punch the holes in the petition.

Following the filing of the petition, the clerk will schedule the creditors' meeting. At the creditors' meeting, the debtor will be examined to determine his assets and the debtor's intentions. After the creditor's meeting, the debtor will schedule any motionsfor lien avoidance.

The debtor must submit a plan for the payment of the debts to be administered by the court. If the plan is submitted to the court at the same time that the petition is filed, the court can set the hearing to confirm the plan to follow the meeting of creditors. This is a great convenience to the debtor because it relieves the debtor of having to make a second appearance before the court at a later date.

If the plan is not filed with the petition, then the hearing to confirm the plan will be held at a date after the meeting of creditors. Any creditor objecting to the plan has an opportunity to come forward to explain why the creditor feels the plan should not be approved. As a practical matter, the objections of unsecured creditors will not prevent a plan from being approved if:

Even if a debt is nondischargeable, the plan can nonetheless structure payments for that debt during the plan's term. If the debt is not fully paid in the bankruptcy proceeding, the debtor remains liable for payment of the balance after the plan has been completed.

In the same vein as nondischargeable debts are debts withpriority claims. Section 1322(a) requires that a Chapter 13 plan provide for full payment in deferred cash of all priority claims unless the holder of the claim agrees otherwise (agrees to take less than the holder owes or agrees to take payments outside the plan or after the plan has been completed). Priority claims are defined under section 507(a) as being:

Priority claims are listed on Schedule E.

Once the plan has been approved, all that remains is for the debtor to make the payments ordered under the plan to the trustee along with costs of the plan. The major cost of the plan is the trustee's fee: Equal to 10% of all the money paid to the trustee. Because the trustee fee is based upon the amount of the money paid to thetrustee, secured debts which are not in default are usually not included in the plan. In such a situation, the debtor makes the payments outside the plan and does not have to pay a 10% trustee fee for having the payments transmitted to the secured creditor. Where the debtor is in default of a debt with a secured creditor, the debt is handled in the plan so that the secured creditors cannot foreclose on the property securing the debt. In that instance, the debtor must pay the trustee fee on the payments going to the secured creditor pursuant to the terms of the plan.

If the plan has been fully performed and no objections to discharge have been filed, most courts will not hold a discharge hearing because there is nothing to be accomplished. The discharge is in this instance is basically automatic. Instead of holding a discharge hearing, the court simply mails an order to the debtor stating that the final discharge has been granted. The case is then over for all intents and purposes.

A complete Chapter 13 discharge is granted under section 1328 (a) and is broader than a Chapter 7 discharge. A discharge under section 1328(a) discharges the debtor from the obligation to pay all but the following debts:

In the situation where the debtor is unable to complete the plan, he has three options. First choice, the debtor can dismiss the case and be treated by the creditors as having never filed the petition. The debtor will owe the creditors the amount he would have owed had the Chapter 13 petition never been filed less any payments made through the plan. A form for a "Motion to Dismiss a Case under Section 1307(b)" is included in Chapter 12.

Second alternative, the debtor can convert the plan into a Chapter 7 filing. The debtor's estate will be liquidated and the creditors paid in accordance with the bankruptcy law pertaining to Chapter 7 cases. A form for a "Notice for Conversion of A Case To Chapter 7" is included in Chapter 12.

Third alternative, the debtor can seek a partial discharge of the case under Section 1328(b). A partial discharge discharges the debtor from all debts except:

In a partial discharge, the debtor is released from the obligation to pay the discharged debts. To obtain a Section 1328(b) discharge, the debtor must file a motion requesting a partial discharge. A form for a motion for partial discharge is included in Chapter 12.

Before completing a bankruptcy petition, if living with a person of the opposite sex, the debtor must disclose if a common law marriage exists. If a common law marriage does exist, it must be disclosed in the bankruptcy petition even if the other person does not join the bankruptcy petition.

Several states recognize common law marriages. If the couple live together as man and wife for a period of time continuously in such a state (usually five years), the couple is legally married. A couple married by common law can file a joint petition. The states permitting common law marriages are:

Alabama Colorado Idaho Kansas

Montana Ohio Oklahoma Pennsylvania

Rhode Island S. Carolina Texas District of Columbia

If an unmarried couple live in a common law state and wish to file bankruptcy, they should check the law of the state to determine if they are legally married. If so, they can file jointly and usually save money and possibly increase their exemptions.

II. PREPARATION OF THE VOLUNTARY PETITION

The voluntary petition is the easiest form to complete. The following information concerning each debtor filing for bankruptcy relief is typed in the appropriate boxes:

In addition, the debtors must check the following boxes as appropriate:

A completed example for a bankruptcy under the laws of California is set forth for reference. This sample is good for any bankruptcy filing because the same forms are used in all bankruptcy courts, and the bankruptcy law covers the entire United States.

III. STATEMENT OF FINANCIAL AFFAIRS

This form is required to be completed by all debtors. An individual debtor engaged in business as a sole proprietor (the only type of debtor engaged in business which this particular book addresses) must provide all of the information requested concerning the business as well as the debtor's personal affairs.

Each question must be answered. If the answer is "none" or the question is not applicable, it must be so stated. The questions were written in such a way that the answers will furnish information. Both the court and trustee will use this information to evaluate the debtor's eligibility to receive a discharge of debts. If more space is needed to answer the questions, continuation sheets may be attached.

Questions 1 through 15 must be answered by all debtors. Questions 16 through 21 are only to be answered by those debtors who have been engaged in business. A debtor is considered to be engaged in business if he has been a sole-proprietor or self-employed within the previous two years.

If the debtor has been an officer, director or managing executive of a corporation or a general partner of a business within the previous two years, he must also answer questions 16 through 21. Since this book is not for use by such a debtor, it will not address the problems faced by such a debtor. This type of debtor should consult a bankruptcy attorney.

QUESTION 1

Question 1 asks how much the debtor has earned from work (employed or self-employed) within the previous two years. If more space is needed, the debtor can attach additional pages.

QUESTION 2

Question 2 asks what other income (other than from business) the debtor has received during the previous two years. Such income may be interest, dividends, inheritances, devises, etc. The purposeof this question is to make sure the debtor is not concealing assets.

QUESTION 3

Question 3 requires the debtor to identify all payments made to creditors within 90 days of filing. The purpose for identifying those payments is that the trustee may have the right, to recover such payments from the creditors. These recovered payments may then be distributed among the debtor's unsecured creditors. This probably will not result in additional property being kept by the debtor.

QUESTION 4

Question 4 requires the debtor to list all lawsuits, executions and garnishments in which the debtor has been involved in within the previous year. The trustee may be able to recover any property transferred pursuant to a court order or judgment during the previous year. This recovery would be for the benefit of the unsecured creditors and not result in additional property being kept by the debtor.

QUESTION 5

Question 5 requires all foreclosures, repossessions or voluntary surrenders of property in which the debtor has been involved within the previous year be reported. The trustee may be able to recover such property as an improper preference to creditors. This recovery would be for the benefit of the unsecured creditors and not result in additional property being kept by the debtor.

QUESTION 6

Question 6 requires all assignments made to creditors within 120 days preceding the filing and all property that has been held by a custodian, receiver or court-appointed officer within one year preceding the filing be reported. The trustee may be able to recover such property as an improper preference to creditors. This recovery would be for the benefit of the unsecured creditors andnot result in additional property being kept by the debtor.

QUESTION 7

Question 7 requires the debtor to list all gifts more than the $200 per family member and $100 per charitable organization made prior to the year of filing the bankruptcy petition. The purpose is to ensure that the debtor has not dissipated the estate by making gifts (usually to family members) who may later give it back.

QUESTION 8

Question 8 requires the debtor to list all losses from theft or casualty within one year from the commencement of the case and after the commencement of the case. This question helps to determine if the debtor is squandering the estate's assets or hiding them by claiming that they were stolen.

QUESTION 9

Question 9 relates to payments made on debt counseling including payments made to attorneys within one year of the filing. It might be possible for the trustee to recover such payments as estate assets and use them for the benefit of the unsecured creditors (which these people will become).

QUESTION 10

Question 10 requires that the debtor list any other transfer of property not previously covered (other than those transfers in the ordinary course of business or as security) within one year of the debtor's filing for bankruptcy relief. It might possible for the trustee to recover such property and place it in the estate for the benefit of the unsecured creditors (which these people will become).

QUESTION 11

Question 11 requires the debtor to disclose all bank accounts, brokerage accounts, credit union accounts, pension funds, and all other financial accounts of whatever nature. This simply is to ensure that no assets are being hidden or omitted.

QUESTION 12

Question 12 requires that safe deposit boxes held within one year of the bankruptcy be listed along with contents. The purpose it to make sure that the debtor is not concealing assets.

QUESTION 13

Question 13 requires that the debtor list any setoffs that creditors have applied against debts owed to them. A setoff exists where a creditor reduces a debt by applying property or money owed to the debt against it. For example, assume that George owes the bank $500, and the bank takes it out of his checking account. That is a setoff. Setoffs made within 90 days of the debtor filing for bankruptcy relief may be recovered by the trustee as assets to the estate. The Trustee will apply such recovered property to the debts of the unsecured creditors.

QUESTION 14

Question 14 requires that property be listed that is held by another but owned or controlled by the debtor. The purpose of this is to prevent a debtor from giving property to another to hold or manage under the directions of the debtor (such as a revocable trust) in order to remove it from the bankruptcy estate.

Such property will be recovered by the trustee and placed into the bankruptcy estate to the extent such property is not exempt.

QUESTION 15

Question 15 requires the debtor to list all prior addresses of the debtor within the last two years. This is simply background information in the event the trustee needs to investigate the debtor.

QUESTIONS 16 THROUGH 21

Questions 16 through 21 should be answered by a person using this book if the person has been self-employed or a sole-proprietor within the previous two years. These answers also have to be answered by debtors who have been general partners of a business, or an officer, director, managing executive or owner of more than5% of the securities of a corporation. This book, however, does not address the particulars faced by such sophisticated debtors.

This information will be used by the trustee to acquire more information to determine what assets should go into the debtor's estate.

QUESTION 16

Question 16 is a basic question requiring the debtor to state the name, address and description of any business in which the debtor was involved as a sole-proprietor or self-employed within the two years previous to the bankruptcy filing.

QUESTION 17

Question 17 requires the debtor to list all the bookkeepers and accountants of the business for the six years prior to filing of the petition. In addition, the debtor is required to list anyone who has audited the books of the business within the two year period prior to the filing of the petition. The debtor is also required to list every person and entity to whom a financial statement was given within two years prior to filing for bankruptcy relief.

The debtor will request copies of the audits and financial statements from these people and entities. The trustee will then compare the information contained in the financial statements and audits with the books and records of the business.

QUESTION 18

Question 18 deals with the inventories of the business. The debtor is required to list the dates and values of the last two inventories. The inventory of the business is an asset of the debtor's estate when the debtor is self-employed or a sole-proprietor. The inventory will be taken by the trustee to the extent it is not exempt.

QUESTION 19

Question 19 requires the debtor to list each partner, officer or director of the business (if it is a corporation). For personsusing this book, the answer should be "no" because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than a self-employed person.

QUESTION 20

Question 20 requires the debtor to list each partner, officer or director of the business (if it is a corporation) who withdrew within the year previous to the filing of this petition. For persons using this book, the answer should be no because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than a self-employed person.

QUESTION 21

Question 21 requires the debtor to list every withdrawal or distribution to any partner, officer or director of the business (if it is a corporation) within one year of the filing of the debtor's petition for relief. For persons using this book, the answer should be "no" because no one who is a partner or shareholder of a corporation engaged in business should use this book. As seen by the questions asked so far, it should be clear that such businesses will have far more complicated problems than a self-employed person.

A sample completed Statement of Financial Affairs is set forth for reference purposes.

IV. SCHEDULE A: REAL PROPERTY

Schedule A is simple list of the real property in which the debtor has an interest. Leasehold interests of the debtor are not listed on this form; they are listed on Schedule G, Schedule of Executory Contracts and Unexpired Leases. The trustee will request copies of the deeds and other instruments that are necessary for the administration of the estate.

Included on this form is the description of the debtor's interest in the property. Life estates along with easements and covenants concerning land owned by another are to be listed. Real property in which the debtor owns an interest are to be listed along with the percentage of ownership. Another column is for use when a married couple files jointly, thereby ensuring that the owner of the property will be listed. If the property is owned by the husband an "H" is placed in the column. If it is owned by the wife, a "W" is placed; if it is owned jointly, a "J" is used; if owned as community property, a "C" is placed in the column.

The debtor is also required to list the current fair market value of the property in one column and in the last column to list the value of any secured claim (loan, judgment lien or statutory lien) on the property.

A completed Schedule A is set forth as an example. All bankruptcy courts will use this form, and it will be completed in the same general manner as the example.

V. SCHEDULE B: PERSONAL PROPERTY

Schedule B is to be used for reporting all the debtor's ownership in personal property leases and executory contracts which are listed in Schedule G, Schedule of Executory Contracts and Unexpired Leases. The trustee will request copies of deeds and other instruments that are necessary for the administration of the estate.

The first column of this form is the place for the description and location of the debtor's ownership in personal property. Another column is for use of a married couple filing jointly to ensure that the owner of the property is listed. If the property is owned by the husband, an "H" is placed in the column across from the property; if it is owned by the wife, a "W" is placed; if it is owned jointly, a "J" is used ; if owned as community property, a "C" is placed in the column.

The debtor must also list the current fair market value of the property in the last column. The debtor is not permitted to reduce the fair market value of the property by any lien on it.

A completed Schedule B is set forth as an example. All bankruptcy courts will use this form, and it will be completed in the same general manner as the example.

VI. SCHEDULE C: PROPERTY CLAIMED AS EXEMPT

The debtor lists on Schedule C property that he claims as exempt under the set of exemptions which he uses. If the debtor uses the federal set, box 11 U.S.C. section 522(b)(1) should be checked. If the states exemptions and the federal non-bankruptcy exemptions are used, box 11 U.S.C. section 522 (b)(2) is checked.

The debtor should read the exemption information in Chapters 2 and 3 before he elects a set of exemptions. The debtor should calculate which set would be most beneficial and use that set. It might even be advantageous for a debtor to delay filing and move to another state and reside there for three months in order to use either that state's exemptions or the federal exemptions.

This form is easy to use. The debtor describes the property in the first column. The second column is for code sections or case law justifying the exemption. Column three is for recording the value of the exemption. In column four is placed the fair market value of the property. If the value in column 4 is higher than the value in column three, the debtor may have to pay the difference to the trustee in order to keep the property. Otherwise, the trustee may sell the property, give proceeds equal to the value of the exemption to the debtor and use the remainder for payment to the unsecured creditors.

A sample completed Schedule C is set forth for reference.

VII. SCHEDULE D: CREDITORS HOLDING SECURED CLAIMS

Since a debtor files for bankruptcy relief to have debts discharged, it is important that the debtors and their claims be listed.

This form requires that the debtor list all creditors holding any type of secured claim against the debtor's property. A secured claim includes: consumer loans, credit loans, judgment liens, statutory liens, mortgages, deeds of trust and other security interests. If additional sheets are necessary, continuation sheets can be attached.

The creditor's name and address along with the account number is placed In the first column.

Place an "X" across from the debt in the second column if there is a codebtor( such as a cosigner on a loan or a codefendant on a court judgment). If a spouse is liable for the debt also but is not filing jointly, place the "X" there as well. For all codebtors (other than a spouse filing jointly), the debtor must also complete Schedule H (Codebtors).

The third column is for use by a married couple. The debtor places an "H" if the debt is the husband's, a "W" if the debt is the wife's, "J" if jointly or "C" if the debt is community property.

Unless the debtor agrees with the amount of the debt, the debtor is required to mark the debt as contingent, unliquidated or disputed. A contingent debt is one that might occur if somethinghappens. For example, the possibility that a person will be sued for an accident.

An unliquidated debt is one where the amount has not yet been calculated. The debtor currently only knows the creditor will be owed an amount of money but not how much. Example: An auto accident in which the damages have not yet been determined or calculated.

A disputed claim is just as the name implies: One in which either liability or the amount is disputed. Example: In a lawsuit for an auto accident each party may claim the other caused the accident. Both the amount of the debt and its validity are disputed.

The amount of the debt is placed in the next to last column. No deduction is taken from the amount of the debt for the value of the collateral.

The last column is for the amount of any claim that is be unsecured. Example: The value of a property that is less than what is owed. The balance therefore is unsecured and placed in the last column.

A sample Schedule D is set forth for reference purposes.

VIII. SCHEDULE E: CREDITOR HOLDING UNSECURED PRIORITY CLAIM

An unsecured creditor is a person who is owed money and does not have an interest in debtor collateral to secure the payment.

There are, however, a few types of unsecured claims that are entitled to be paid before the other non-priority unsecured claims. The types of claims with priority are:

Listing these debts does not help the debtor. It merely makes it easier for the trustee to decide how to divide the proceeds inthe debtor's estate.

The form is easy to understand and follow. The first column contains the creditor's name and mailing address.

Place an "X" across from the debt in the second column if there is a co-debtor (such as a co-borrower on a loan or a co-defendant on a court judgment). If a spouse is also liable for the debt but is not filing jointly, place the "X" there as well. For all co-debtors (other than a spouse filing jointly) the debtor must also fill out Schedule H (Codebtors).

The third column is for use by a married couple. The debtor places an "H" if the debt is the husband's, a "W" if the debt is the wife's, "J" if jointly or "C" if the debt is community property.

In column 4 the debtor must file state the date of the claim and the consideration for it.

Unless the debtor agrees with the amount of the debt, he is required to mark the debt as contingent, unliquidated or disputed. A contingent debt is one that might occur if something happens. Example: The possibility that a person will be sued for an accident.

An unliquidated debt is one where the amount has not yet been calculated. The debtor currently knows only that the creditor will be owed an amount of money but not how much. Example: An auto accident in which the damages have not yet been determined or calculated.

A disputed claim is just as the name implies: One in which either liability or the amount is disputed. Example: In a lawsuit for an auto accident each party may claim the other caused the accident. Both the amount of the debt and its validity are disputed.

The amount of the debt is placed in the next- to-last column. No deduction is taken from the amount of the debt for the value of the collateral.

The last column is for the amount of any claim entitled to priority. If not all of the claim is entitled to priority, only that portion permitted to priority is placed here. Example: A debtor owes a person $3,000 in back wages. The total of the $3,000 claim is placed in the next-to-last column. Only $2,000, however, is entitled to priority, so only $2,000 will be placed in the last column. The trustee will pay the $2,000 first as a priority unsecured claim and treat the remaining $1,000 as an "unsecured claim without priority."

A sample Schedule E is set forth for reference purposes.

IX SCHEDULE F: CREDITORS HOLDING UNSECURED NON-PRIORITY CLAIMS

An unsecured creditor is a person who is owed money and does not have any ownership in the debtor's collateral to secure payment.

Schedule F must contain a list of all unsecured creditors that have no portion of their claims entitled to priority.

As with Schedule E, the listing of these debts does not help the debtor. It merely makes it easier for the trustee to decide how to divide the proceeds in the debtor's estate.

The form is easy to understand and follow. The first column contains the creditor's name and mailing address.

Place an "X" across from the debt in the second column if there is a codebtor (such as a co-borrower on a loan or a codefendant on a court judgment). If a spouse is also liable for the debt but is not filing jointly, place the "X" there as well. For all codebtors (other than a spouse filing jointly), the debtor must also fill out Schedule H (Codebtors).

The third column is for use by a married couple. The debtor places an "H" if the debt is the husband's, a "W" if the debt is the wife's, "J" if jointly or "C' if the debt is community property.

In column 4 the debtor must file state the date the claim was incurred and the consideration for it.

Unless the debtor agrees with the amount of the debt, he is required to mark the debt as contingent, unliquidated or disputed.A contingent debt is one that might occur if something happens. For example, the possibility that a person will be sued for an accident.

An unliquidated debt is one where the amount has not yet been calculated. The debtor currently knows only that the creditor will be owed an amount of money but not how much. Example: An auto accident in which the damages have not yet been determined or calculated.

A disputed claim is just as the name implies: One in which either liability or the amount is disputed. Example: In a lawsuit for an auto accident each party may claim the other caused the accident. Both the amount of the debt and it validity are disputed.

The amount of the debt is placed in the next to the less column. Example: George owes Bill $500 for having lost his outboard motor while fishing. Bill receives no security from George to ensure payment of the $500. Bill is an unsecured creditor. Since the debt is not one entitled to priority, Bill's claim is placed in Schedule F.

A sample Schedule F is set forth for reference purposes.

X. SCHEDULE G: EXECUTORY CONTRACTS AND UNEXPIRED LEASES

Under Schedule G every executory contract is listed in which the debtor is still a party. An executory contract is a contract still in effect and that has not been fully performed.

The most common executory contracts are:

This is a straight forward form. Basically, it is an information return for use by the trustee. The important information relating to property or debts of the estate is governed by the documents revealed in the other schedules. The main purpose of the form is to apprise the trustee of the outstanding obligations of the debtor to others and of others to the debtor.

The form is easy to complete. Descriptions of the contracts along with the respective rights of the parties, debts owed, and the addresses of the parties are listed. The debtor is required to disclose specific information needed to assist the trustee in identifying leases that must be assumed within 60 days after the order of relief or be rejected under Section 365(d) of the Bankruptcy Code.

A completed Schedule G is set forth for reference purposes.

XI. SCHEDULE H: CODEBTORS

This is the one of the simplest schedules in the petition. Persons equally liable along with the debtor for a debt is to be listed here with the creditor of the debt.

If the debtor is married filing separately and there are debts for which the spouse is also liable, the spouse must be listed across from every creditor who is jointly owed the debt.

The complete schedule provides information regarding nondebtor parties, such as guarantors and nondebtor spouses having an interest as tenants by the entirety.

A completed Schedule H is set forth as a reference sample.

XII. SCHEDULE I: CURRENT INCOME FOR INDIVIDUAL DEBTORS

Under Schedule I, the debtor is required to record information regarding the household's income. This information is basically used:

This form is to be completed by the debtor. If a married couple is filing a joint petition, both spouses must fill out the petition. The one first listed in the title of the action is the debtor, and the other debtor is the spouse.

The form has been greatly simplified. The introductory information is basic. An "S" for single or "M" for married is placed in the marital status box. The debtor's name, age, length of employment and employer's address are completed for each spouse.

If a married couple is filing jointly, both spouses complete the columns. If a married person if filing separately, the column for spouse does not need to be completed, yet it might be necessary to do so anyway if the court make exemption decisions based on need for support.

Most states have laws requiring spouses to support each other. The court may require the information to be provided before it rules on any exemptions that are decided on the basis of the debtor's need for support.

If current income is expected to increase or decrease by more than 10% within a year, the debtor is required to attach a written explanation. The court may need such information to determine the need for support of the debtor. Expected changes are part of that consideration.

If the debtor receives income from sources not listed on the schedule, those sources must be listed under the title "other monthly income." If more space is needed to list "other monthly income," the debtor must attach a continuation sheet.

A sample completed Schedule I is set forth for reference.

XIII. SCHEDULE J: CURRENT EXPENDITURES FOR

INDIVIDUAL DEBTORS

Under Schedule J the debtor places information regarding the household's income. This schedule contains average monthly expenses of the debtor and the debtor's family. If a married couple is filing jointly but maintaining separate households, each spouse prepares a separate Schedule J.

The list of expenditures is fairly complete, including everything from alimony payments to tax payments. If there are some expenses not specifically listed, the debtor will list those expenses under the title "other." If more space is needed, the debtor must attach a continuation sheet.

This form helps the court determine the level of support needed by the debtor. This determination is important. Some of the exemptions are limited to the amount needed for support. If the debtor does not need the exempted property for support, the debtor will not get the property. The only way a court can determine if an exemption is needed for support is for the debtor to complete this form. Therefore, all expenses should be listed by the debtor.

A sample completed Schedule J is set forth for reference.

XIV. SUMMARY OF SCHEDULES AND DECLARATION

This is a self-explanatory form. There is column of schedules entitled "name of schedule." Each schedule is listed in the column. The next column is entitled "attached." The debtor is required to state whether the schedule is attached or not. The third column requires the debtor to list the number of sheets in the schedule. Usually, there is only one sheet per schedule; however, if continuation sheets are attached, the number will change. The next three columns are titled; "assets," "liabilities" and "other" respectively. The totals from each column are placed in the appropriate boxes. To make it less confusing, the box is blackened where no information is to be entered.

This schedule is the most useful of all forms in the bankruptcy. Most amendments to the petition will result in this schedule also being amended.

A sample completed schedule is attached for reference.XV. CREDITOR'S MATRIX

Many bankruptcy courts requires that the debtor list the creditors through the use of a mailing matrix. This matrix is a page that is divided into 30 blocks. The debtor is required to type the name and address of one creditor in each box. If there are more than 30 creditors, additional pages can be attached.

Some courts will have their own forms for listing creditors and for other special requirements. The debtor can determine through the clerk of the court or through the local rules of court if the enclosed mailing matrix will be accepted or if a special local form must be used. If a local form is required the debtor must get it from the clerk.

If the mailing matrix can be used, the debtor types the debtor's name, address and phone number in the top left hand corner. The debtor will list the creditors in alphabetical order, unless local rules require another method.

Particular care must be taken to assure that all creditors are listed. The debt of any creditor not listed will not be discharged. To get such a debt discharged later is a great deal of work that would require either filing an amendment and holding a new creditors' meeting or reopening the estate.

Following below, for reference purposes only, are the local rules of the Bankruptcy Court for the Northern District of California that relate to the Creditor's Matrix. Each Bankruptcy Court promulgates its own local rules so it is necessary to get from the court or from a law library the local rules for that Court. Examples of the two types of matrixs follow. In case of an emergency filing, a debtor might fill out both types of matrix and leave it to the clerk to select the appropriate one for filing with the court.block matrix sample

END OF CHAPTER PREVIEW


CHAPTER FIVE

THE CHAPTER 13 PLAN

Once the debtor has completed the petition, the next matter to attend to is the creation of the Chapter 13 Plan. Under the Bankruptcy Code, the debtor in a Chapter 13 proceeding is required to submit, for court approval, a written plan for the payment of creditors over a period of years. The plan must last for three years and with court approval may be extended to five years.

The procedure for obtaining court approval is very straight forward. After the debtor files the chapter 13 petition, notice of the petition is given, by the Clerk, to the debtor's creditors which places an automatic stay on any collection actions by the creditors. The debtor then prepares the proposed plan which is filed with the court and served upon the Trustee and all of the creditors. The proposed Plan can be filed at the same time as the Petition or afterwards by a date set by the Court.

A hearing date is then set for the confirmation of the plan. The Official Form 9 is a combination form for giving notice of the due date for the filing of all creditors claims on Form 10, the date of the Meeting of Creditors and notice for when the Plan has been filed and date of the hearing on the Confirmation of the Plan. Following this Chapter are the Official Forms 9 and 10. When the proposed Plan is filed with the Petition, the hearing date is usually on the same day as the Meeting of Creditors. Any creditor having objections to the plan may file objections which will beheard at the hearing. At such a hearing, the objecting Creditor is given an opportunity to come forward explain why the creditor feels the Plan should not be approved. As a practical matter, the objections of unsecured creditors will not prevent a plan from being approved if:

As long as the unsecured creditors are paid the minimum amount that would have received had a chapter 7 petition been filed and the debt is properly dischargeable then the objections will be overruled and the plan approved.

The plan must provide payments to the unsecured creditors that will, at a minimum, equal the amount that they would have received had the debtor filed a chapter 7 liquidation instead of a chapter 13 petition. The debtor is not required to pay all of the unsecured debts. Under the bankruptcy law, the debtor is only required to pay that percentage of debts that would have been paid had a Chapter 7 petition been filed. The Bankruptcy Code requires that all unsecured creditors be dealt with in the Plan. Unlike secured creditors, a debtor can not make an agreement with the unsecured creditors to pay them outside of the Plan or in accordance with the terms of their original agreement.

Even if a debt is non-dischargeable, the Plan can nonethelessstructure payments for that debt to be made during the Plan's term. If the debt is not fully paid in the bankruptcy proceeding, the debtor remains liable for payment of the balance after the plan has been completed.

In the same vein as nondischargeable debts are debts with priority claims. Section 1322(a) requires that a Chapter 13 Plan provide for full payment, in deferred cash, of all priority claims unless the holder of the claim agrees otherwise (i,e, agrees to take less than the holder owed or agrees to take payments outside the Plan or after the Plan has been completed). Priority claims are defined under section 507(a) as being:

Priority Claims are listed on Schedule E.

The plan may also provide for the payment of secured debts as well as unsecured debts. Under the Bankruptcy Code, fully secured debts must be paid in full if they are included in the plan. If afully secured creditor is not fully paid off under the proposed Plan, the secured creditor can object to the Plan and therefore not have the secured debt discharged. However, even if the secured debt is not discharged, the payments to be made on that debt can be set by the Bankruptcy Court during the term of the Plan. This is normally what happens to a secured creditor in order for the debtor to avoid a foreclosure. In such an instance, the Plan can be drafted so that the defaults on the debt are gradually make up and the debtor then resumes normal payments. In such an instance, the secured creditor is unable to foreclose of the property. As long as the debtor makes the payments to the secured creditor in accordance with the provisions of the Plan, the secured creditor will not be granted relief from an automatic stay even though are in arrears and it will take a great deal of time to catch up.

In a chapter 13 proceeding, the debtor must make all of the payments ordered under the plan to the Trustee. Upon receipt of the debtor's payments, the Trustee then turns around and pays the creditors the amounts designated un the plan. Generally, the Trustee receives as his or her payment 10% of all payments received as the Trustee's fee.

Payments under the Plan must begin within 30 days after the filing of the plan with the court. The payments must be regularly made, usually on a monthly basis. Some bankruptcy courts will order an attachment of the debtor's wages to assure payments are made under the plan. Most Bankruptcy Courts have local rules regardingthe payments that are to be made under the Plan.

Once the plan has been approved, all that remains is for the debtor to make the payments ordered under the Plan to the Trustee along with costs of the Plan. The major cost of the Plan is the Trustee's fee which is equal to 10% of all the money paid to the Trustee. Because the Trustee is based upon the amount of the money paid to the Trustee, secured debts which are not in default are usually not included in the Plan. In such a situation, the debtor makes the payments outside the Plan and therefore does not have to pay a 10% Trustee Fee for having the payments transmitted to the secured creditor. Where the debtor is in default of a debt with a secured creditor, the debt is handled in the Plan so that the secured creditor can not foreclose on the property securing the debt. In that instance, the debtor must pay the Trustee fee on the payments made to the secured creditor pursuant to the Plan's terms.

The actual drafting of a Plan is relatively simple. All unsecured creditors have to be paid at least what they would have received had the debtor filed a Chapter 7 Petition. Section 1322(a) states that a Plan must:

What this means is that all priority claim holders must be paid under the Plan. The identity and amount of each priority claim holder has already been identified on Schedule J so the Plan will simply set up a payment schedule for those creditors. The minimum amounts which each unsecured creditor should receive under the Plan should have been calculated by use of the worksheet. The amount each unsecured creditor will receive is simply the product of the number of months for which payments will be made times the monthly payment to be made to the creditor. For example if a unsecured creditor is entitled to $3600. The minimum payment the creditor is to receive, in a three year (36 month) Plan, is $100 per month.

The next matter for which the debtor has to decide is whether special classes should be set wherein the unsecured creditors will receive more than their minimum amounts. If so, the creditor must explain what the classes are how the determination is made for placing a creditor in the class. In other words, the debtor may, have special reasons, for wishing to pay some unsecured creditors more than minimum share. For example, the debtor may wish to pay some business creditors 90% and personal creditors 100%.

Secured creditors are treated differently from unsecured creditors in a chapter 13 proceeding. Secured creditors may be treated in one of four ways. In the first instance, each secured creditor is given the option of accepting a proposed payment plan. This usually means that an agreeing secured creditor will be paid less than the creditor is actually owed under the securityagreement. Secondly, each secured creditor may reject the proposed payment plan and stand on their security instrument. In this instance, the creditor must be completely paid off within the term of the plan. The court will not approve any plan which will not pay off an objecting secured creditor within the term of the plan. Interest must be paid on all secured claims handled in the plan.

In the third case, the debtor may surrender the collateral to the secured creditor holding a security interest on it. In such a situation, the secured creditor would become an unsecured creditor to the extent of any deficiency resulting from a proper resale of the property. The last way for a debtor in a chapter 13 proceeding to deal with a secured creditor is to omit the creditor from the plan and continue to make the payments as before the filing.

When dealing with secured creditors it is important to remember that a secured creditors lien only extends to the fair market value of the security. As such, if a secured claim is handled in the plan, once the creditor receives the fair market value of the collateral, the lien is discharged and the secured creditor thereafter becomes an unsecured creditor as to any remaining unpaid balance.

A sample Chapter 13 Plan follows below. The Plan even covers a lien avoidance of a judgment lien placed up the debtors residence. A lien avoidance requires the filing of a motion to avoid the lien (see the CHAPTER LIEN AVOIDANCE for the form of the motion). That motion show be filed concurrently with the proposedPlan so that it can be heard at the Confirmation hearing. The Trustee is calculated as follows: the monthly house payment for 36 months is $19,697.76. To that is added the arrearage payments of $3,285 and interest on it for $295. The total is $23,277.76. Since these are the only payments handled by the Trustee, the fee will be 10% of this amount which is $2,378 plus another $300 to reflect 10% of the $3,000 being paid to the unsecured creditors. If more space is needed to list everything, additional pages can be added as long as the items are properly identified as to the sections they apply.

END OF CHAPTER PREVIEW


CHAPTER 6

THE EFFECTS OF BANKRUPTCY ON THE DEBTOR'S HOME

I. INTRODUCTION

There are several questions that any debtor will have regarding the effect of a Chapter 13 petition on the debtor's home. Will the home be lost?

Will the debtor lose all of the equity in the home?

Is the debt on the home loan dischargeable?

What happens to judgment liens from lawsuits on the property?

All of the above are questions that immediately leap into the mind of anyone considering bankruptcy.

If a debtor owns a home, it is important for the debtor to understand the effects of filing a Chapter 13 petition on that home. As stated throughout the book, in a Chapter 13 Plan the unsecured creditors must receive at least as much in payments under the Plan as they would have received had the debtor filed a Chapter 7 petition. Consequently, it is necessary for a debtor to know how much, of the debtor's equity in the home will be considered in determining the extent of assets available for payment to the unsecured creditors.

Under the federal exemptions and most state exemptions, debtors are permitted to exempt a certain amount of equity in their home from creditors (the homestead exemption). Every debtor must determine the equity in the home that must be paid to the unsecured creditors and factor it into the payment calculations for theunsecured creditors.

There are additional considerations that are also present. The first is that a bankruptcy will not stop a foreclosure from occurring if the payments are not made. While a bankruptcy filing will delay the foreclosure for a few months, it will not bar it completely. To do so would result in simply giving the property debt-free to the debtor. Such is just not done for secured real property.

In place of simply giving the home to the debtor through the federal and state laws, there are exemptions for the debtor's equity in a home to a limited amount. This exempted amount of the debtor's equity in the home is called the "homestead exemption." In most bankruptcies, the homestead exemption is the most important exemption in the entire estate. A few states do not permit a homestead exemption but most do.

Many persons filing for bankruptcy relief are also married. Some states have special laws that exempt property that is held in joint tenancy or tenants by the entirety with a spouse under certain circumstances. In these states, the debtor's interest in the home, if held in joint tenancy or tenancy by the entirety with a spouse, may be exempted regardless of whether or not the state has a homestead exemption when only one spouse files for bankruptcy protection. This chapter covers the laws of those states that permit such exemptions to the extent that is possible in a book of this format.

This chapter informs and instructs concerning what to expect in the event of a foreclosure. This chapter also will cover possible alternatives to maximize the debtor's recovery from any foreclosure.

Because of the importance of both the homestead exemption and possible exclusion of tenancy by the entirety property from the debtor's bankruptcy , the reader, should review the state law and consult an attorney skilled in bankruptcy for possible changes before filing the petition. The bankruptcy law is constantly amended. New exemptions are added every few years and existing exemption amounts are sometimes increased. A careful reader will review state law to ensure the exemption amounts have not been raised. Example: South Carolina raises it homestead exemption from $5,000 to $50,000 in the future. The debtor does not know it. The debtor may lose the $45,000. The trustee will not inform the debtor of the exemptions that are available because the trustee wants as much money in the estate as possible to pay creditors.

Fortunately, it is cheap to check on the state exemptions. Chapter 8 lists state exemptions with their appropriate code section numbers. The debtor can simply go to a set of the state codes, present in all law libraries and many public libraries, and find the particular code section for the exemption in question to see if the exemption has been changed. It is unlikely that an exemption will be revoked or reduced in amount. Usually the exemption will be increased for the debtor's benefit, and new onesmight be added. All law libraries have books on bankruptcy such as Cowans Bankruptcy Law and Practice and Collier on Bankruptcy. Law libraries are in law schools, every state capitol , and most county seats and large cities, all open to the public. The debtor should also consider consulting a bankruptcy attorney. If a foreclosure is being undertaken by a creditor, the debtor must consult an attorney because of the complexity of the law in that area and the procedures that must be followed.

II. HOMESTEAD EXEMPTION ON THE DEBTOR'S HOME

Under both federal and most states' laws, a debtor is permitted to claim an exemption for his equity in real or personal property that he uses as a residence of a limited fixed value. Some states also permit each spouse who is filing bankruptcy, either separately or individually, to claim the full amount of the homestead. Most states, however, do not permit this "doubling" of the homestead exemption. The states that are known to permit or deny doubling are listed in the Chapter 8. It is up to the debtor to determine if doubling is permitted in other states. The simplest thing might be to double when in doubt, and see if the court or trustee object. If so, the doubling will simply be disallowed.

The debtor is the one who must prove that the property on which a homestead exemption is claimed is the debtor's residence. This can be accomplished quite easily by the recordation of a homestead declaration. In fact, some states actually require the filing a homestead declaration prior to filing the bankruptcypetition in order to be able to claim the petition. As a practical matter, a debtor should record a homestead declaration prior to filing the bankruptcy petition whether or not it is required if a homestead exemption is sought. Filing the homestead declaration strengthens the homestead exemption and is proof that the property was the debtor's residence. This will be important evidence if a creditor contests the appropriateness of the homestead exemption. A homestead declaration can be purchased at most stationary stores, notarized and recorded for a total cost of around $20. Given the fact that the declaration may save thousands in exemption, it is a cheap insurance policy.

The amount of the debtor's homestead exemption is calculated by taking the fair market value of the property, subtracting the liens on the property, then subtracting the amount of the debtor's equity up to the amount of the homestead exemption. Any remaining equity in the home is considered available for payment to the unsecured creditors. For example assume that the debtor's home is worth $40,000 and that there is a loan on the property of $19,000. The cost of the Trustee's sale is $2,000, and the state's homestead exemption is $7,500. The results would be as follows:

The above example shows the worst case scenario. The debtor has equity that will be paid to unsecured creditors in the Chapter 13 Plan. There are two alternatives. The first is to sell the house before the bankruptcy and invest the proceeds in new exempt property. The second is to borrow against the equity and invest the borrowed money in exempt property. Caution should be exercised in doing either of the above. Some bankruptcy courts consider such actions an abuse of the bankruptcy law. In this situation, the reader can see the wisdom in consulting a bankruptcy attorney.

A second example more common and beneficial to the debtor exists where the debtor does not have enough equity to cover the homestead exemption. Prior to filing, the debtor should, sell nonexempt assets to apply to the loan on the home. This will increase the debtor's assets after bankruptcy. Example: The debtor's home is worth $40,000, with loans of $30,000 on it, costs of sale of $2,000, and a maximum homestead exemption of $7,500. In addition, the debtor has a nonexempt bank account of $2,000. The debtor will have a homestead exemption of only $500. If the debtor uses the $2,000 bank account (that will otherwise be lost to pay debts) the debtor's equity and homestead exemption will increase to $2,500. Most states, like Maine (14 MRSA section 4422), do not forbid increases to exempt property made within 90 days of the filing of the petition.

III. SETTING ASIDE A JUDICIAL LIEN ON A HOME

A judicial lien is a court judgment requiring the debtor to pay a certain amount of money to a designated person. A judicial lien derives from a lawsuit that results in a monetary judgment against the debtor. When the judgment is recorded, it creates by operation of law an automatic lien against all the real property of the debtor in the county where the judgment was recorded. The recordation of any judgment automatically places a judicial lien on the home of the debtor.

Unless the judicial lien is removed, it will impair the homestead exemption. Example: A debtor is entitled to a homesteadexemption of $7,500. He has a home valued at $40,000, a mortgage of $19,000 and a judicial lien of $14,000 (arising from a judgment for an automobile accident). Assuming the cost of sale is $2,000, upon the sale the debtor would receive only $5,000 as a homestead exemption.

The bankruptcy code, however, allows all judicial liens on exempt property (such as homesteads,) to be automatically set aside to the extent that they impair the exemption if the debtor requests it. Setting aside a judicial lien is covered in great detail in Chapter 9. All that a debtor is required to do to remove a judicial lien is file the motion as detailed in that chapter and attend the court hearing. It is a simple procedure and could save thousands of dollars of exempt property. No one should ever be afraid of going into bankruptcy court. Remember the purpose of the bankruptcy court is to help the debtor start over again. The judge will be knowledgeable and sympathetic to what the debtor is attempting to accomplish. Avoidance of a judicial lien is automatic. The judge does not have authority to refuse to set aside a judicial lien that impairs a valid exemption. So ask. It will be done.

IV. EFFECT OF BANKRUPTCY ON TENANCY BY THE ENTIRETY PROPERTY

Only about 20 states recognize tenancy by the entirety. It is a special joint tenancy estate between a husband and wife. Neither spouse can obtain a partition of the estate or defeat the right of survivorship of the other spouse. It cannot be terminated by the unilateral act of one spouse.

A tenancy by the entirety is terminated only by:

A tenancy by the entirety is usually not a good method of estate planning, in community property states, because it does not provide a surviving spouse with a stepped-up basis of both halves of the property upon death of a spouse. This could result is a substantial tax liability if the property is later sold.

Under section 522(b)(2)(B) of the Bankruptcy Code, a debtor is permitted to exempt the debtor's interest in property held as tenant by the entirety or joint tenancy to the extent that such interest would have been exempt from process under nonbankruptcy law.

Section 522(b)(2)(B) reads as follows:

(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest, as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable non-bankruptcy law.

In practice the only joint tenancy property of a debtor that has ever been held exempt is that of tenancy by the entirety. The following states permit a debtor to exempt tenancy by the entirety property when the debts of both spouses are not being discharged. In essence that usually means that both spouses are not filing bankruptcy either separately or jointly or that both spouses had not incurred the debt on the property. Only one spouse put the debt on the property, or the debt was not for necessities for the couple:

DELAWARE DISTRICT OF COLUMBIA FLORIDA

HAWAII MARYLAND MASSACHUSETTS

MICHIGAN MISSOURI NORTH CAROLINA

OHIO PENNSYLVANIA TENNESSEE

VERMONT VIRGINIA WYOMING

The U.S. Fourth Circuit Court of Appeal which includes Maryland, North Carolina, South Carolina, Virginia, and West Virginia held in Ragsdale vs. Genesco 674 F.2d 277 (1982) that a creditor can reach property held as tenancy by the entirety in a bankruptcy where both of the spouses are liable on the creditor's claim. A similar result occurred in the Sixth Circuit Court of Appeals (In the Matter of Grosslight 757 F.2d. 773) and the Third Circuit Court of Appeals (In re Thicket 5 C.B.C. 2d 85).

It is important for a debtor to know not only if his state permits property to be held as tenancy by the entirety between spouses but if the property will be exempt in a bankruptcy. For example: In re Ford 1 C.B.C. 2d 840 held that under Maryland law tenancy by the entirety property was exempt under bankruptcy law.

In re Weiss 2 C.B.C. 2d 426 held that since New York law allowed tenancy by the entirety property to be sold under execution, it was not exempt.

In re Gibbons 13 C.B.C. 759 1985, held that tenancy by the entirety property held by a debtor in Rhode Island was not exempt.

If a married person is filing bankruptcy separately and owns property jointly with the spouse, he should consult an attorney to determine if the joint property can be exempted under state law. Generally, if a debtor lives in one of the states and the nonfiling spouse is not obligated to pay the debt on the property, the debtor'sinterest is exempt. Consulting a bankruptcy attorney to determine if such property is exempt can only save a great deal of money because the value of the property can be protected from unsecured creditors.

V. FORECLOSURE ON DEBTOR'S HOME

A. INTRODUCTION

Usually, the straw that breaks the camel's back, the act that finally results in the debtor filing for bankruptcy relief, is the foreclosure on the debtor's home. Foreclosure happens in accordance with state law based upon the security agreement the lender has on the property. There are two general types of security agreements that a lender may employ and the remedies that the lender has resulting from a borrowers breach depends on the type of security agreement employed. The two types of security agreements are a deed of trust and a mortgage.

A deed of trust has become the preferred means of security liens on real property and is employed in most states. Under a deed of trust, the borrower (called the trustor) signs a promissory note for the loan on the property. The promissory note is then secured by a deed of trust given by the borrower (trustor) to a third party (trustee). Under the deed of the trust the trustee is given the authority to seize the property without going for permission if the borrower fails to makes the payments. Under the law of most states, if the borrower fails to make the payments on the loan, the trustee will give a 20 day notice to pay. If the back payments are not made, then the trustee sets the property for sale in another 90 days. Atthis point the loan has to be paid in full. If the loan is paid off, the property is sold at a public sale and the debtor loses all interest in the property. Any proceeds left after the loan and costs of the sale are paid are returned to the buyer. In most states, if there is a balance left owing, a deficiency judgment can be obtained against the borrower. Some states, such as California, have enacted antideficiency legislation holding that there cannot be deficiency judgments for purchase money loans on residential property. In addition, some states like California, hold that there cannot be deficiency judgments for property sold under the power of sale of a deed of trust. The debtor does not have any right to redeem any property sold by a trustee under a power of sale.

A mortgage is a straight security agreement on the property. When the borrower fails to make the payments, the lender must go to court and sue for the court to grant a judgment against the borrower. The lender then has the sheriff sell the home at an execution sale. The proceeds are used to pay the loan and the costs of sale. Any remaining proceeds are returned to the borrower. Most states permit deficiency judgments on judicial sales under a mortgage foreclosure. Some states, like California, have antideficiency legislation on purchase money residential property. Most states give the borrower one year to redeem the property. The borrower redeems the property by paying the buyer the price paid for the property at the judicial sale. Because a borrower might redeem the property, many potential buyers are not interested in bidding on the property. That plus thefact that judicial foreclosure on a mortgage can take a year explains why lenders prefer deeds of trust.

Regardless of which method of foreclosure is used, both security agreements give the lender the right to accelerate the loan on default (that is declare the outstanding balance entirely due and payable). It is this acceleration that usually results in the filing of bankruptcy.

B. AUTOMATIC STAY

Once the bankruptcy is filed any attempt by the debtor to foreclose on the debtor's home or any other property is stopped in its tracks under the automatic stay of the bankruptcy law. Until the automatic stay is lifted, no creditor can repossess or sell any property of the debtor.

At first blush, it seems that filing a bankruptcy petition would protect the home. Such protection is only fleeting. The lender on the property can and will, unless the back payments are forthcoming, make a motion with the court to lift the automatic stay as it relates to the debtor's home. If the debtor cannot reinstate the back payments and make the future payments, the court will usually lift the stay and permit the foreclosure to continue.

Any proceeds left after the sale are used to pay first the lender and then the costs of sale. The remaining proceeds are split as follows: the debtor is given the amount of the homestead exemption and the rest is given to the trustee for payment to the debtor's creditors.

In any sale during a bankruptcy either by a creditor or a trustee, the debtor should make sure that there is enough to assure payment of the homestead exemption. This can be accomplished by selling nonexempt property prior to the bankruptcy using the proceeds to increase the debtor's equity in the home.

In the same vein, the debtor should ensure that unused equity in the home will not be lost before filing a bankruptcy petition. This can be accomplished by taking a loan for the equity over the homestead amount and using it to purchase exempt property. Where a home is involved, a debtor should consult a bankruptcy attorney for advice as to the state's homestead exemption and planning.

C. THE CHAPTER 13 PLAN

Under a Chapter 13 Plan, the debtor pays his debts from income, not from the sale of debtor's property. The debtor does not have to sell the debtor's home even though it may contain equity that would not be exempt under a Chapter 7 petition. A Chapter 13 petition automatically cancels the acceleration of the loan. The debtor will present a plan to be approved by the court that will spread out the repayments of the missed payments, late charges and interest over a span of time of five years or less.

The plan may also provide for the payment of secured debts as well as unsecured debts. Under the bankruptcy code, fully secured debts must be paid in full if they are included in the plan. If secured creditors are not fully paid in the plan, they can object and no discharge of their debts will be granted.

A debtor is not required to deal with a secured creditor in the plan and may continue to deal with them outside the plan. The main reason for listing a secured creditor is to deter a foreclosure. As long as the plan provides for the curing of a default and the resumption of normal payments in a responsible time, the court would prevent the secured creditor from proceeding with a foreclosure action. If the debtor cannot cure the default and resume paymentswithin the plan, the court will release the debt from the automatic stay and permit the creditor to foreclose on the property. The debtor is required to pay interest on the debt of any creditor covered under the plan.

Secured creditors are treated in one of four ways. First, each secured creditor is given the option of accepting a proposed payment plan. This usually means that an agreeing secured creditor will be paid less than the creditor is actually owed under the security agreement.

Second, each secured creditor may reject the proposed payment plan and stand on his security instrument. The creditor must be completely paid within the term of the plan. The court will not approve any plan which will not pay an objecting secured creditor within the term of the plan. Interest must be paid on all secured claims handled in the plan. Third, the debtor may surrender the collateral to the creditor holding a security interest on it. The secured creditor becomes an unsecured creditor to the extent of any deficiency resulting from a proper resale of the property.

Fourth, the debtor may omit the creditor from the plan and continue to make payments as before the filing.

When dealing with secured creditors it is important to remember that a secured creditor's lien extends only to the fair market value of the security. If a secured claim is in the plan, the lien is discharged once the creditor receives the fair market value of the collateral, and the secured creditor becomes an unsecured creditor for any remaining unpaid balance. Interest must be paid on any payments to secured creditors under the plan. Interest is only to be paid on principal. The debtor does not pay interest on the interest portion of any delinquent payment.

A Chapter 13 Payment Plan must be approved by the bankruptcy court to discharge the debtor from unpaid portions of the debts. The procedure for obtaining court approval is straight forward and has been discussed in Chapter 5.


CHAPTER 7

THE EFFECT OF BANKRUPTCY ON THE DEBTOR'S PENSION

INTRODUCTION

Under the bankruptcy law, a debtor's pension and retirement benefits and any other property are assets of the debtor's estate. A debtor must pay the unsecured creditors the minimum to which they would have be entitled had the debtor filed a Chapter 7 petition: The value of any portion of a pension or retirement plan of a debtor that is not exempt must be paid to the unsecured creditors.

To be able to keep some or all of the pension, the debtor's pension must be exempt in whole or in part under whichever schedule of exemptions (state or federal) the debtor employs. Many pensions are not exempt under state of federal law. These pensions will be lost in a bankruptcy filing.

If a debtor is retired and receiving benefits prior to the filing of the bankruptcy petition, many states will exempt the pension benefits received (usually up to 75%) if needed for support.

Whether or not a pension is deductible depends first on whether the debtor is using the state or federal exemptions. Pensions that are exempt under state exemptions are not always exemptible under the federal exemptions and vice versa.

Another horrendous effect on a pension that can occur as a result of the bankruptcy is a huge tax bill that is not dischargeable. In the situation where either the debtor or debtor'semployer has been making tax deferred contributions to the plan (contributions that are taxable once the debtor starts drawing from the plan), when the trustee takes the assets in the pension plan it is treated as a distribution to the debtor and placed with the trustee. Even though the debtor does not get the pensions, the debtor must pay income tax on the tax deferred contributions. A debtor having a pension plan should consult with a bankruptcy attorney prior to filing the bankruptcy and review current bankruptcy law. If the reader does not wish to consult with an attorney specializing in bankruptcy, he should at least review the state exemptions, starting with those listed in this chapter, to see if the pension exemption has been changed. It is quite possible, given the frequency of the changes to the bankruptcy code, that pensions that are not now exemptible will be so when the reader becomes involved in a bankruptcy.

Still there are a few things that can be done to minimize or prevent a partial or total loss of pension benefits.

II. EXEMPTING A PENSION UNDER FEDERAL LAW

Bankruptcy Code Section 522(d) created a list of exemptions. The federal exemptions can be used in place of the debtor's state exemptions provided the law of the debtor's home state permits the debtor to use them. Only the following 13 states and the District of Columbia permit a debtor an option to use the federal exemptions instead of the state exemptions:

CONNECTICUT HAWAII MASSACHUSETTS MICHIGAN

MINNESOTA NEW JERSEY NEW MEXICO PENNSYLVANIA

RHODE ISLAND TEXAS WASHINGTON WISCONSIN

VERMONT

Under Bankruptcy Code Section 522(d) only those pensions that covered under the Employee Retirement Income Security Act (ERISA) are exempt to the extent needed for support. Almost all private retirement plans are covered by ERISA while most state and local government pension plans are not covered by ERISA. Before a person residing in one of the above states or the District of Columbia elects to use the federal exemption, he must know if his pension is covered by ERISA.

It is easy to find if a plan is covered by ERISA. In order to determine if a pension plan is ERISA qualified, the employee merely calls the pension plan administrator and asks if the plan is covered. The employer and the union should have the name and phone number of the plan administrator readily available. If the pension plan is not governed by ERISA, the federal pension exemption cannot be used, and the person might consider using the state exemptions instead.

Section 522(d)(10)(E) reads as follows regarding the determination of which pension benefits are exemptible under the federal exemptions:

Under this federal exemption, only that part of the pension that is "reasonably necessary for the support of the debtor and any dependent of the debtor" is exempt. To determine the amount of the benefits from a ERISA pension that are exempt, the court will look at the following:

From all of these factors, the bankruptcy court will determine how much of the debtor's pension payments are needed for the debtor's support. It is possible that even though the pension may be governed by ERISA, it may not be needed for the debtor's support and thus it will entirely lost in the bankruptcy.

A recent Supreme Court case (Patterson vs. Shumate 1191 L.Ed2d 519 1992) held that, regardless of whether federal or state exemptions are used an ERISA pension plan having a transfer restriction (which means it could be transferred or assigned) isnot part of the bankruptcy estate. Under this decision an ERISA pension with a transfer restriction is totally excluded from the bankruptcy estate and not just for the benefits needed for support. Under this case the participant in an ERISA plan would probably exempt the entire pension plan rather than just the portion needed for support as permitted under the limited federal exemption. Congress may change the effect of this case. Had Congress originally intended to exempt ERISA plans, it would have done so outright rather than by implication. Likewise, Congress would not have created a limited federal exemption for pension plans. Still, until Congress passes legislation to change the Supreme Court's interpretation, ERISA plans will remain totally exemptible.

If a pension is to be lost because it is not an ERISA plan or the debtor does not need it for support, the reader should consult an attorney specializing in bankruptcy for alternatives that will save some of the pension.

III. EXEMPTING A PENSION UNDER STATE LAW

A. NON-ERISA PENSIONS

Most governmental state pensions are not covered under the ERISA. Therefore, unless there is a specific exemption under state law for a state pension plan, a state or local pension will be lost when the person covered by the state or local government files for bankruptcy. Some states have specifically enacted laws to exempt all plans for state or local public employees, but most states have enacted only limited exemptions for certain public employees. Onlythose non-ERISA plans that have been exempted, under state law, are exempt in bankruptcy. A public employee should check to determine if his pension plan is exempt before filing a bankruptcy petition.

As with non-ERISA state pensions, non-ERISA private pensions will not be exempt unless there is a specific state law making them exempt. A few states will exempt private pension plans if the benefits are needed for support. Most states do not exempt private plans whatsoever. This is where the problem lies: Many state pensions of public workers are exempt while those pensions of the average citizen are not exempt. This is a case of government employees looking out only for themselves. It is unfair for a state to exempt only government pensions and not those pensions of the average citizen. Yet, such is usually the case. If a debtor has a private pension that is not listed in Chapter 8, the debtor must consult a bankruptcy attorney before filing.

In the Chapter 8 the state exemptions regarding pensions are listed. Pension exemptions, however, may change. Usually more exemptions will be added or the amounts of the existing exemptions will be increased. It is unlikely that an existing exemption will be deleted. If a person having a pension is filing for bankruptcy relief, he should confirm the information in chapter 8 by either reading the state code or consulting a bankruptcy attorney.

B. EXEMPTIONS OF ERISA PLANS UNDER STATE LAW

Many states, but not all states, have specific exemptions for ERISA pensions. These states are listed in Chapter 8. Some ofthese states exempt the entire plan while others exempt only those payments needed for support. Unfortunately, the United States Supreme Court (Mackey vs. Lanier Collections Agency & Service, Inc. 486 U.S. 825, 100 L.Ed 2d. 836) ruled in a collection case that a state could not grant an exemption for ERISA plans. Georgia had a law, as many states do, that prevented a creditor from attaching a debtor's ERISA plan. The Supreme Court held that the ERISA act superseded state law when it stated:

"We hold that ERISA does not forbid garnishment of an ERISA welfare benefit plan even where the purpose is to collect judgments against plan participants. Moreover, we agree with the Georgia Supreme Court that the anti-garnishment provisions found in Section 18-4-22.1 is pre-empted by ERISA, the judgment is affirmed."

Since ERISA does not forbid creditors in a nonbankruptcy case from attaching the plan, state law cannot prevent the attachment. The question that remained open for several years was whether or not a debtor who was using the state exemptions could exempt an ERISA pension and, how much of the pension could be exempted.

In contrast, the Circuit Court of Appeals for the Tenth Circuit (Gladwell vs. Harline 950 F2d 669; 1991) permitted a debtor to exempt his ERISA pension under the federal nonbankruptcy exemption. In addition, both the Fourth Circuit Court of Appeals (Anderson vs. Raines 907 F2d. 1476) and the Sixth Circuit (Forbes vs. Lucas 924 F2d. 597) held that ERISA pensions are not to be considered part of the debtor's estate. These courts reason that it is irrelevant whether or not the pensions are exempt since a trustee cannot take them under any circumstance. These Courts of Appeals cover the following states: Fourth Circuit (Illinois, Indiana and Wisconsin); Seventh Circuit (Maryland, North Carolina, South Carolina, Virginia and West Virginia).

The Supreme Court in its decision, Patterson vs. Shumate 119L.Ed2d 519 1992 has settled the matter. The case dealt with the excludability from a bankruptcy estate of an ERISA plan in Virginia, a state that does not permit the use of federal exemptions. The Supreme Court ruled that an ERISA pension plan having a transfer restriction (which means it could be transferred or assigned) is not part of the bankruptcy estate regardless of whether federal or state exemptions are used. Thus, under this decision an ERISA pension plan with a transfer restriction is totally excluded from the bankruptcy estate and not just for the benefits needed for support.

The United States Supreme Court held as follows:

Taken together, the U.S. Supreme Court's Mackey and Patterson decisions mean that an ERISA pension can be taken by creditors prior to a bankruptcy but are exempt from any attachment for the benefit of the debtor's creditors after a bankruptcy petition is filed. If a large pension is involved, the debtor should consult a bankruptcy attorney for the most current statement of the debtor's state law regarding pension exemptions.

IV. WHAT CAN BE DONE IF THE PENSION IS NOT EXEMPT

If the pension is not exempt under either state or federal law, and is not an ERISA pension, the debtor has a couple of options available although somewhat extreme. The debtor could:

Because a pension is an important part of a person's future, any reader who determines that his pension is not or may not be exempt must consult an attorney specializing in bankruptcy.

V. EFFECT ON IRA'S AND SEP'S

Two of the most common type of retirement plans for individuals are the Individual Retirement Accounts (IRA's) and Simplified Employee Plans (SEP's). A debtor who has a large amount invested in such plans should consult a bankruptcy attorney before filing for bankruptcy relief.

IRA's and SEP's are considered part of a bankrupt's estate and thus could be lost in a bankruptcy. There is no federal exemption for IRA's and SEP's under 11 USC 522(d)(10)(E) whereas there arefor other ERISA plans. The bankruptcy courts have denied an exemption for IRA's and SEP's because plans are under the substantial control of the debtor and there is no assurance that they will be used for the debtor's support (In re Pauquette, 1984, 38 BR 170, In re Hersey, 1988, 88 BR 47, In re Velis, 109 BR. 64). The bankruptcy court (In re Shackleford, 1983, 27 BR. 372) rejected the argument that IRA's and SEP's were not part of the estate under the non-bankruptcy law exemptions.

The best chance a debtor has to keep IRA's, SEP's and Keogh plans are under the state exemptions. Many states specifically exempt such plans to the extent they are necessary for support. For example, New York does (In re Fill, 1988, 84 BR 332) and California does as well (In re Dalaimo, 1988, 88 BR 268). Still, as with federal exemptions, there are some states which do not exempt IRA's, SEP's or Keogh Plans because of the substantial control the debtor has over the plan (See Louisiana In re Talbot 15 BR 536, Oregon In re Mace, 1978, 16 CBC 254, Nebraska Education Asst. Corp. vs. Zellner 827 F2d 1222).

To the best extent possible, the Chapter 8 lists those states that permit IRA's, SEP's and Keoghs plans to be exempted. The laws for these states frequently change. Therefore, before filing a petition for bankruptcy relief when such a plan exists, the reader should review the current status of the law either by reading the indicated statutes with any amendments and, better still, consulting a bankruptcy attorney.

END OF CHAPTER PREVIEW


CHAPTER 8

EXEMPTIONS AVAILABLE TO A DEBTOR

I. INTRODUCTION

The most important concept in a Chapter 13 proceeding is that the debtor must pay to the unsecured creditors at least as much as they would have received had the debtor filed a Chapter 7 petition. Therefore, to determine the minimum amount that the unsecured creditors must receive under the Chapter 13 Plan, the debtor must know what property in his estate is exempt and thus not payable to the unsecured creditors.

A bankruptcy starts with the premise that all of the property belongs in the estate and under the management of the trustee. Then that property that the debtor claims is exempt is removed from the bankruptcy estate. The debtor keeps the exempt property regardless of what happens to the rest of the estate.

The Bankruptcy Code provides the means for a person to get from under bone-crushing debts and start over. It provides a fresh start for the debtor. Since it would be difficult to start over if totally broke, a debtor is given the opportunity to keep some of the property in the estate to begin a new life.

Property is not counted in determining the amount of money to be paid the unsecured creditors under the Chapter 13 Plan to the extent that it is classified as exempt. There are two sets ofexemptions. There is a set of federal exemptions and there is a set of state exemptions that for each state has for its citizens. Each set of state exemptions is different from the federal and the other states.

I. FEDERAL EXEMPTIONS

A. WHEN THE ELECTION TO USE THE FEDERAL EXEMPTIONS IS MADE

The bankruptcy code provides a set of exemptions. These exemptions printed in a schedule following this chapter. When Congress passed the bankruptcy code, it did not intend to overrule or preempt any state law regarding exemptions. To avoid that happening, Congress has given each state the right to decide whether its residents could use the federal exemptions.

Only 13 states and the District of Columbia have permitted its citizens the option of using the federal exemptions instead of the state exemptions. Those 13 states are:

CONNECTICUT DISTRICT OF COLUMBIA HAWAII

MASSACHUSETTS MICHIGAN MINNESOTA

NEW JERSEY NEW MEXICO PENNSYLVANIA

RHODE ISLAND TEXAS VERMONT

WASHINGTON WISCONSIN

A citizen of any of the above jurisdictions has the option of using the applicable state exemptions or the federal exemptions. The exemption election is total. A person must elect to use all of one set or the other. A person cannot use some of the federal and some of the state exemptions.

In deciding which set of exemptions is to use, the debtorshould compare the sets and use the one that is most beneficial. Example: The federal homestead exemption is $7,500 whereas the Wisconsin one is $40,000; the Wisconsin state exemption is better. On the other hand, the Virginia homestead exemption is only $5,000 but when the other Virginia exemptions are figured (which are not in the federal), it might still be better to opt for the state set.

To assist the reader in comparing the exemptions, they have been placed in groups. Not only should the reader compare both state and federal exemptions but also those of other states. It might be beneficial for a person to move to another state and live there for three or more months before filing for bankruptcy. The person will have available that state's exemptions as well as the choice of the federal exemptions, depending on which state the debtor chose.

B. WHEN THE ELECTION TO USE FEDERAL EXEMPTION IS NOT MADE

If the debtor is not permitted to use the federal exemptions or does not wish to do so, there are several exemptions available under the general federal law for use with the state exemptions. No state can prevent its citizens from taking these nonbankruptcy exemptions along with the state exemptions. These particular nonbankruptcy exemptions cannot be taken if the debtor elects to use the federal set of bankruptcy exemptions.

These special exemptions do not derive from the bankruptcy code. Rather they derive from statutes throughout the United StatesCode. These special nonbankruptcy exemptions follow the end of this chapter. When making an election between federal and state exemptions (in those states permitting it), a person should not forget to compare the federal bankruptcy and nonbankruptcy exemptions. It might prove more advantageous to use the state exemptions with the federal nonbankruptcy exemptions than just the federal exemptions alone.

II. STATE EXEMPTIONS

Every state has its own list of property that a citizen may claim as exempt from attachment. In a bankruptcy, this list of exemptions determines what property a debtor is allowed to claim as exempt if the federal bankruptcy exemptions are not used.

Following this chapter are the exemptions of the 50 states and the District of Columbia. A person considering a bankruptcy will review the exemption schedule of his state of residence (or the District of Columbia) with the nonbankruptcy exemptions schedule. If the debtor lives in a state that permits its citizens to use the federal exemptions, he should compare the two schedules.

The only way to compare schedules is to consider the values of the estate property that will be claimed as exempt. Example: Having a $7,500 homestead exemption does not help if the debtor does not have a homestead. Still, knowing that an exemption is available gives a person the incentive to sell nonexempt property and invest the proceeds in exempt property prior to filingbankruptcy.

A debtor should select and maximize those exemptions that will permit the most money or property to be kept after the bankruptcy. To maximize the property to be kept after bankruptcy, the debtor should elect the most favorable set of exemptions (federal or state-plus-the-nonbankruptcy set) and attempt to maximize his exemptions by increasing his equity in exempt property to the extent permitted.

If a person's equity in exempt property exceeds the amount of the exemption, the person should consider either selling the property prior to the bankruptcy and reinvesting the proceeds in other fully exempt property or borrowing against the property to reduce the equity and investing those proceeds in exempt property. Any equity in exempt property is essentially lost in a Chapter 13 proceeding because the debtor must pay the value of that equity to the unsecured creditors. Example: A person has a home with an equity of $10,000. The homestead exemption is $7,500. In a bankruptcy, the overage will be lost. If the debtor borrows $2,500 against the house, the equity is reduced to the homestead limit. The money may then be used to buy a car which may also be exempt. While such planning is possible, the debtor should consult with a bankruptcy attorney first to determine how such actions are viewed in the bankruptcy court where the petition will be filed.

ALABAMA

(ALL STATUTES REFER TO THE ALABAMA CODE)

GENERAL EXEMPTION

There is a $5,000 general exemption on any personal property by Statute 6-10-6. In 1983, the Bankruptcy Court for Alabama in the case IN RE MORRIS 30 B.R. 392 denied the application of this exemption to insurance proceeds.

GOVERNMENT BENEFITS

The following government benefits are exempt:

1. Aid to AFDC, aged, blind and disabled by statute 38-4-8.

2. Black lung benefits (pneumoconiosis) by statute 25-5-179.

3. Compensation to victims of crimes by statute 15-23-15.

4. Prisoner of war benefits by statute 31-7-2.

5. Unemployment compensation by Statute 25-4-140.

6. Worker's Compensation benefits by Statute 25-5-86.

HOMESTEAD EXEMPTION

In Alabama Code statute 6-10-2, there is a $5,000 homestead exemption on real property or a mobile home. The property cannot exceed 160 acres. A homestead declaration must be recorded before any sale of the property. A husband and wife filing for bankruptcy relief may double this exemption (each can take the full amount).

INSURANCE

There are several exemptions for different types of insurance proceeds in Alabama law:

1. Annuity proceeds of $250.00 per month are exempt by Statute 27-14-32.

2. Benefits from fraternal societies are exempt by Statute 27-24-27.

3. Benefits from mutual aid associations are exempt by Statute 27-30-25.

4. Disability benefits of $250 per month are exempt by Statute 27-14-31.

5. Life insurance proceeds when the debtor-beneficiary is the insured's spouse are exempt by Statutes 6-10-8 and 27-14-29.

6. Life insurance proceeds when the debtor-beneficiary is the insured's exempt child by Statute 6-10-8.

7. Life insurance proceeds when the insurance policy prohibits payment of the proceeds being made to the debtor-beneficiary's creditors are exempt by Statute 27-15-26.

PERSONAL PROPERTY

Alabama has exemptions for the following personal property:

1. Books by Statute 6-10-6.

2. Church pew by Statute 6-10-5.

3. Family pictures and portraits by Statute 6-10-6.

4. Funeral plot by Statute 6-10-5.

5. Needed clothing by Statute 6-10-6;

6. Property of a business partnership by Statute 10-8-72.

RETIREMENT BENEFITS

The following retirement benefits are exempt:

1. An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability under Section 541(2) of the Bankruptcy Code the pension from the bankruptcy estate of whether federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442).

2. Judges are exempt only to the extent of payments being received by Statute 12-18-10.

3. Law Enforcement Officers by Statute 36-21-77.

4. State Employees by Statute 36-27-28.

5. Teachers by Statute 16-25-23.

TOOLS OF THE DEBTOR'S TRADE

By Alabama law, arms, uniforms, equipment which the debtor is required to keep as a member of the National Guard by statute 31-2-78.

WAGES

There is an exemption of 75% of earned but unpaid wages under 6-10-7.

ALASKA

(ALL STATUTE REFERENCES ARE TO THE ALASKA STATUTES)

GENERAL EXEMPTION

None.

GOVERNMENT BENEFITS

The following government benefits are exempt:

1. By Statute 9.38.015:

(a) Compensation to victims of crimes.

(b) Alaska longevity bonus.

(c) Federally exempt public benefits.

2. Unemployment compensation by Statute 23.20.405.

3. Worker's Compensation benefits by Statute 9.38.015.

4. One-half of permanent fund benefits by Statute 43.23.065.

5. General Relief by Statute 47.25.395.

6. Aid to AFDC by Statute 47.35.395.

7. Aid to the aged, blind and disabled by Statute 47.25.550.

HOMESTEAD EXEMPTION

By Alaska Code Statute 9.38.010, there is a $54,000 homestead exemption. If joint owners file for bankruptcy, the total exemption is $54,000.

INSURANCE

There are several exemptions for different types of insurance proceeds by Alaska law:

1. Benefits from fraternal societies are exempt by Statute 21.84.240.

2. Disability benefits by Statutes 9.38.015 and 9.38.020.

3. Insurance proceeds for wrongful death or personal injury to the extent of exempt wages by Statute 9.38.030.

4. Life insurance proceeds when the debtor-beneficiary is the insured's spouse or dependent are exempt, to the extent of exempt wages by Statute 9.38.030.

5. Life insurance or annuity contract with a value of $10,000 by Statute 9.38.025.

6. Medical and hospital benefits by Statute 9.38.015.

PERSONAL PROPERTY

Alaska has exemptions for the following personal property:

1. By Statute 9.39.015:

(a) Funeral plot.

(b) Medical aids.

(c) Child support payments.

(d) Liquor licenses.

(e) Alaska fisheries permits for limited entry.

2. By Statute 9.38.020:

(a) Books, family pictures, portraits and heirlooms of $3,000.

(b) Jewelry of $1,000.

(c) Motor vehicles with equity of $3,000.

(d) Pets worth of $1,000.

3. Recoveries for personal injuries and wrongful death to the extent of exempt wages by Statute 9.38.030.

4. Alimony to the extent of exempt wages by Statute 9.38.030.

5. Recoveries for damaged property by Statute 9.38.015.

6. Business partnership property by Statute 9.38.100.

7. Building Materials by Statute 34.35.105.

RETIREMENT BENEFITS

The following retirement benefits are exempt:

1.An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability under Section 541(2) of the Bankruptcy Code that excludes the pension from the bankruptcy estate of whether or not federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442.)

2. ERISA, IRA and Keogh benefits deposited more than 120 days before filing the bankruptcy relief by Statute 9.38.017.

3. Public employees by Statute 9.38.015.

4. Teachers but only for benefits increasing by Statute 9.38.015.

5. Other pension plans but only for payments being received to the extent of exempt wages by Statute 9.38.030.

TOOLS OF THE DEBTOR'S TRADE

By Alaska law there is an exemption for books, tools and implements used in the debtor's trade to $2,800 by Statute 9.38.020.

WAGES

Weekly earnings of $350 are exempt. If the debtor is the sole wage earner for the household it is $550 by Statutes 9.38.030 and 9.38.050.

ARIZONA

(ALL STATUTES REFER TO THE ARIZONA REVISED STATUTES)

GENERAL EXEMPTION

None.

GOVERNMENT BENEFITS

The following government benefits are exempt:

1. Unemployment compensation by Statute 23-783;

2. Welfare benefits by Statute 46-208;

3. Worker's compensation benefits by Statute 23-1068.

HOMESTEAD EXEMPTION

By Arizona Code Statute 33-1101, there is a $100,000 homestead exemption. A married couple may not double this exemption.

INSURANCE

There are several exemptions for different types of insurance proceeds By Arizona law:

1. Benefits from fraternal societies are exempt by Statute 20-881.

2. Life Insurance with a cash value of $2,000 per dependent of a total of $10,000 by Statute 20.1131.

3. Benefits from group life insurance by Statute 20-1132.

4. Health, accident or disability benefits by Statute 33-1126.

5. Life insurance proceeds when the debtor-beneficiary is the insured's spouse or dependent are exempt to $20,000 by Statute 33-1126. A married couple may double this exemption.

6. Life insurance with a cash value to $1,000 per dependent to a total value of $5,000 by Statute 33.1126. A married couple may double this amount.

PERSONAL PROPERTY

Arizona has exemptions for the following personal property:

1. Household goods, appliances, family pictures, portraits and heirlooms to $4,000 by Statute 33-1123. A married couple may double this exemption.

2. Enough food and fuel to last 6 months by Statute 33 1124. A married couple may double this exemption.

3. Bible, bicycle, sewing machine, typewriter, funeral plot, firearm to a total of $500 by Statute 33-1125. A married couple may double this exemption.

4. Books to $250. Animals to $500. Musical instruments to $250. Medical aids. Clothing to $500. Books to $250. All are exempt by Statute 33-1125. These exemptions may be doubled by a married couple.

5. Motor vehicles with equity to $1,500 (or $4,000, if disabled) by Statute 33-1125. A married couple may double this exemption.

6. In lieu of a homestead exemption (renters) there is an exemption for a rent or security deposit to $1,000 or one and a half times the rent, whichever is less. Also a bank deposit account with $150 is exempt by Statute 33-1126. A married couple may double the exemptions.

7. Recoveries for sold and damaged property by Statute 33-1126. A married couple may double this exemption.

8. Minor's child earnings are exempt by Statute 33-1126.

9. Business partnership property by Statute 29-225.

RETIREMENT BENEFITS

The following retirement benefits are exempt:

1. An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability By Section 541(2) of the Bankruptcy Code that excludes the pension from the bankruptcy estate whether or not federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442).

2. ERISA for qualified deposits made more than 120 days prior to filing for bankruptcy relief by Statute 33-1126.

3. Firefighters by Statute 9-968.

4. Board of Regents by Statute 15-1628.

5. Elected officials by Statute 38-811.

6. Police by Statute 9-931.

7. Public Safety personnel by Statute 38-850.

8. Rangers by Statute 41-955.

9. State employees by Statute 38-26.2.

TOOLS OF THE DEBTOR'S TRADE

By Arizona law the following property used in the debtor'strade or business is exempt:

1. By Statute 33-1130;

(a) Books, tools and implements (not including vehicle) in the debtor's trade to $2,500.

(b) Farm equipment and animals to $2,500. A married couple may double this exemption.

2. Arms, uniforms and equipment that a debtor is required to keep by Statute 33-1130.

3. Teaching aids for a teacher in Statute 33-1127.

WAGES

There is an exemption of 75% of earned but unpaid wages or pension benefits by Statute 33-1131.

ARKANSAS

When a debtor uses the state exemptions or the exemptions of the District of Columbia, the debtor is permitted to also claim the following nonbankruptcy exemptions:

GENERAL EXEMPTION

None.

GOVERNMENT BENEFITS

1. Railroad workers' unemployment insurance under 45 U.S.C. Section 352(e).

2. Social Security benefits under 42 U.S.C. Section 407.

3. Veteran's benefits under 38 U.S.C. Section 3101.

HOMESTEAD

None.

INSURANCE

The following insurance benefits are exempt for a debtor not using the federal exemptions:

1. Group life insurance for the military under 38 U.S.C. Section 770(g).

2. Death and disability benefits to government employees under 5 U.S.C. Section 8130.

3. Death and disability payments to harbor workers and longshoremen under 33 U.S.C. Section 916.

4. Death and disability payments for military service under 42 U.S.C. Section 1717.

PERSONAL PROPERTY

The following personal property is exempt for a person using the state exemptions of District of Columbia:

1. Seaman's clothing under 46 U.S.C. Section 11110.

2. Savings accounts of military deposits while on duty outside the U.S. under 10 U.S.C. Section 1035.

3. Tribe benefits for Klamath Indians residing in Oregon under 25 U.S.C. Sections 534 and 545.

4. Survivor's benefits for military service under 10 U.S.C. Section 1450.

5. Benefits for lighthouse workers' survivors under 33 U.S.C. Section 916.

6. Benefits for survivors of Judges, judicial directors, U.S. court directors under 28 U.S.C. Section 376.

RETIREMENT BENEFITS

The following retirement plans can be claimed as exempt by a debtor using state exemptions or the exemptions of the District of Columbia:

1. An anti-alienation provision in an ERISA qualified pension constitutes a restriction on transferability by Section 541(2) of the Bankruptcy Code that excludes the pension from the bankruptcy estate whether or not federal or state exemptions are used by the debtor (Patterson vs. Shumate 112 S.Ct. 2442).

2. CIA employees under 50 U.S.C. Section 403.

3. Civil Service employees under 5 U.S.C. Section 8346.

4. Foreign Service employees under 22 U.S.C. Section 4060.

5. Military employees under 10 U.S.C. Section 1440.

6. Railroad workers under 45 U.S.C. Section 231m.

7. Military honor roll pensions under 38 U.S.C. Section 562.

TOOLS OF TRADE

None.

WAGES

The following exemptions exist for debtors using the state exemptions or the District of Columbia exemptions:

1. 75% of earned but unpaid wages under 15 U.S.C. Section 1673.

2. Seamen's wages while on a voyage and pursuant to a written contract under 46 U.S.C. Section 11111.

END OF CHAPTER PREVIEW


CHAPTER 9

LIEN AVOIDANCE

The reader must realize by now that a Chapter 13 proceeding the bankruptcy generally does not affect the amount of money that ultimately must be paid to secured creditors. While secured creditors may have their payment schedules adjusted, most secured creditors will not have their interests in the collateral securing their debts reduced or eliminated. The sole exceptions are in the areas of judgment liens and nonpurchase money liens on exempt consumer goods. These liens can be set aside or avoided with the effect that the creditor generally becomes an unsecured creditor and is treated accordingly. The major exception to setting aside a judgment lien is where a judgment is based upon child or support claims. The Bankruptcy Act of 1994 prohibits a debtor from avoiding such judgment liens even though they may impair otherwise permitted exemptions under either state or federal law.

It is common for a debtor in a Chapter 13 proceeding to want to avoid paying a judgment lien or nonpurchase money lien on exempt property. The purpose of the bankruptcy law is to provide a reasonable means for the debtor to begin again when the debtor's debts are such that they cannot all be paid. Toward this end, the U. S. Congress and state legislatures have created an overall scheme of exemptions.

Often the debtor's exempt property will be encumbered by ajudicial lien or a security interest that prevents the exemption. Unless the lien can be removed from the property in some fashion, the debtor will be unable to claim an exemption on the property. If the exemption is not claimed, it will be lost in the bankruptcy. It tends to defeat the purpose of the Bankruptcy Code to give a debtor exemptions but allow them to be cancelled because of liens on the property. Congress attempted to resolve this problem by permitting a debtor to reduce or avoid altogether a lien on certain personal property.

I. DEFINITION

Under section 522(f) of the Bankruptcy Code a procedure is created whereby a debtor may eliminate or reduce the amount of liens on certain exempt property:

Lien avoidance permits the debtor to reduce or remove liens on otherwise exempt property to the extent they impair an exemption. In other words, if the property would be an exemption under whatever exemption schedule the debtor employs (the federal or state schedule), the lien may be removed from the property if it is one of the following:

A. JUDICIAL LIEN. A judicial lien is a lien created by virtue of a court decree or judgment (usually resulting from a lawsuit). For example, assume that a debtor has had a judgment taken against him. Recordation of the judgment, by the judgment creditor, creates a lien on the real property of the debtor that impairs the debtor's homestead exemption. The debtor can seek to have the judicial lien reduced to the extent of the homestead exemption.

Judicial liens can be avoided on any exempt property of the debtor, including real estate, automobiles, and pensions.

In order to get a loan, the lender sometimes has a debtor execute a "confession of judgment" for use against the debtor in the event the debtor defaults on making the loan payments. A confession of judgment permits the creditor to go to court immediately upon a debtor's default and get a judgment against the debtor without ever serving a complaint or giving the debtor an opportunity to offer a defense. A confession of judgment is used in conjunction with a security agreement. Under the law, however, a confession of judgment is construed more liberally as a judiciallien. A lien secured by a confession of judgment can be avoided as a judicial lien, even if it might not be avoidable as a nonpurchase security interest. (In re Fisher 13 B.R. 286, 1981, and In re Gardner 685 F.2d 106).

B. STATUTORY LIEN A statutory lien imposed on the debtor's property is different from a judicial lien. A statutory lien is one imposed by operation of law automatically, such as a mechanic's lien or a lien from a divorce decree. Most statutory liens cannot be avoided; judicial liens can. Yet, some statutory liens can be avoided by the trustee under section 545:

To perfect a statutory lien, the creditor is required to comply with all of the filing requirements under state law. Example: A mechanic's lien requires that appropriate notices be filed within set time periods with the county recorder and be followed by a lawsuit. If the filings are not made, the lien lapses.

The majority of liens are judicial, not statutory, in nature and can be avoided to the extent they impair an exemption.

C. NONPURCHASE MONEY SECURITY INTERESTS.

In addition to judicial liens that can be avoided on any exempt property, liens on nonpurchase money security interests can be avoided for the following property:

As with a judicial lien, the nonpurchase money security lien must attach property that would otherwise be totally or partially exempt. A nonpurchase money security interest is defined as a lien given as a pledge or collateral for a loan. For example, assume that George borrows $5,000 from Ed and signs a security agreementputting his house up for collateral to Ed. George has given Ed a nonpurchase money security interest on the house. Motor vehicles are not specifically mentioned as the type of property for which a nonpurchase money lien can be avoided. Therefore, unless the motor vehicle qualifies for an exemption under "tools of the trade," the lien on it cannot be avoided in this manner. Still, a lien on a motor vehicle might be avoided if it met the requirements for a judgment lien.

II. HOW THE AMOUNT AVOIDED IS CALCULATED

Once it is determined that a lien on exempt property can be avoided, the next matter is to decide how much of the lien is avoidable. The amount of the lien avoidance depends on how much the exemption is allowed on the property, the size of the lien on the property and the value of the property.

If all of the property is exempt, then the size of the lien makes no difference because the entire lien will be avoided. Example: In Pennsylvania, sewing machines are exempt. A judicial lien or nonpurchase security lien on a sewing machine will be entirely avoided regardless of the amount.

Remember, lien avoidance merely avoids a lien that inhibits a full exemption: it does not cancel any part of a debt. If the property is worth more than the exemption limit, the lien is reduced to guarantee the exemption , secure the remainder to the creditor, and provide the creditor an unsecured lien for the balance owed. For example. assume that Ohio permits an exemption of$200 for a piano. The piano is worth $400 and the creditor has a lien of $500. The court will reduce the value of the lien to $200, giving the creditor an unsecured lien for $300.

The lien avoidance works as follows:

After the lien avoidance, the debtor still owes $200 secured by the piano and $300 that is unsecured. If the lien balance is not paid, the creditor can still foreclose. When he sells the piano, it may bring only $350. He must then pay the debtor $200 (the exempted amount) and retain $150. He now has two unsecured liens: One for $300 and one for $50 (the amount the piano sale did not bring to him).

III. PROCEDURE

After the debtor has determined that a lien on exempt property is avoidable, the next step is to list the property on which the lien is to be avoided on the "Statement of Intention" that is filed with the court. If the creditor objects to the lien avoidance (which almost always happens) the debtor must petition the court to avoid the lien. The bankruptcy court will not reduce or eliminate a lien on its own discretion. The bankruptcy code requires that the debtor request lien avoidance from the court.

The procedure for a debtor to request lien avoidance is relatively simple and moderately painless. The request for lien avoidance is made in the form of a motion. A pleading (a writing requesting lien avoidance) is filed with the court and mailed to the creditor having the lien. The creditor may object to the lien avoidance and file a pleading in opposition to it. The creditor cannot prevent a lien avoidance if it is proper under the law. The most that a creditor can do is contest the fair market value given to the property in the calculation of the amount of lien to beavoided if there is a valid exemption available.

Following this chapter are sample forms for motions seeking lien avoidance. A debtor wishing to avoid a lien can retype the correct lien avoidance form inserting the debtor's information where indicated and file it with the court.

The steps for filing a motion are simple:

If arguments are necessary, the debtor speaks first and simply says that the property would be exempt under the applicable state or federal exemption and states the current value of the property. The creditor responds, but his reply is limited to challenging the right to claim the exemption and challenging the value of the property. The judge decides whether to grant or deny the lien avoidance. Usually, the judge announces the decision from the bench. Sometimes the judge will take the matter under submissionand mail the decision to each of the parties in a few days.

The one thing to remember is that nothing is final until the discharge is granted. Therefore, if mistakes are made in the form of the motion or in giving notice, the hearing might be dropped (taken off calendar so that it can be redone), but the creditor will not lose his rights under the bankruptcy because of such procedural errors. The debtor will simply be allowed to do it again, this time knowing the mistakes to be avoided.

IV. EFFECT OF STATE LAWS ON LIEN AVOIDANCE

Several states have laws that prevent a debtor from engaging in lien avoidance when state exemptions are used. The validity of these had been in question for many years. In re Pelter 16 C.B.C. 306 (1986) held that even if the state "opts out" of the federal exemption scheme under Section 522(d) there is no similar option under 522(f): The debtor's lien avoidance powers remains intact.

Finally, in its decision Owen vs. Owen 114 L.Ed.2d 350,111 S.CT 1833 the United States Supreme Court held that a debtor was permitted to avoid a lien even though state law (Florida) prohibited the lien avoidance.

In its decision, the Supreme Court stated:

As a result of this decision, the Supreme Court made it clear that where a lien impairs an exemption that would otherwise be allowed if not for the presence of the lien, the lien can be avoided.

V. FORMS

Following hereafter are 8 basic forms that should be adequate in the bankruptcy courts for all 50 states and the District of Columbia:

1. Notice of Motion to Avoid Nonpossessory Nonpurchase Money Security Interest

2. Motion to Avoid Lien

3. Proof of Service

4. Order Avoiding Lien

5. Notice of Motion to Judicial Lien

6. Motion to Avoid Lien

7. Proof of Service (completed)

8. Order Avoiding Lien (completed)

9. Lined paper (2 sheets)

END OF CHAPTER PREVIEW


CHAPTER 10

THE MEETING OF CREDITORS AND CONFIRMATION HEARING

A debtor in a Chapter 13 proceeding is required to make a minimum of two court appearances. These court appearances are the Meeting of Creditors and the Confirmation Hearing for the proposed Chapter 13 Plan. The Bankruptcy Court prefers to set both the Meeting of Creditors and the Confirmation Hearing for the same day, but that does not always occur. If the proposed Plan is filed with the Petition, the court will set the two matters for the same date. Otherwise, the matters are separately scheduled. Local rules should be consulted for any special requirements for the Plan that may affect the filing.

I. THE MEETING OF CREDITORS

Under section 341 of the Bankruptcy Court, the trustee is required to hold a meeting of creditors within a reasonable period of time after the filing of the bankruptcy petition. Notice of the time and place of the meeting will be mailed to the debtor and all of the designated creditors by the clerk of the bankruptcy court.

Section 341 reads as follows:

The meeting of creditors is conducted pursuant to section 341 by the trustee. In order not to intimidate the parties and to allow free and unhindered discussion and possible settlements, the bankruptcy judge is specifically ordered by the law not to preside over or even attend any meeting of creditors. The clerk of the bankruptcy court usually presides over the meeting, but the creditors may elect another presiding officer under Rule 2003.

Bankruptcy Rule 2003 calls for the first Creditor's Meeting to be held between 20 and 40 days of the filing of the Petition. Under Rule 2003 if the court designates the place for the meeting and there is no clerk regularly assigned at that place, the time in which to hold the meeting is extended to 60 days.

The usual location of the Creditors Meeting is where the regular sessions of the bankruptcy court are held. The court, however, may designate other locations for the Meeting that are convenient for the parties. The time and place of the Meeting is not set in stone and can be delayed or changed for various reasons, such as a motion to dismiss the Petition or illness of any of the parties. In some courts, postponement of the Meeting is easy; in others it is more difficult. Basic questions are asked of the debtor at the Meeting by the trustee and then by the creditors.

The purpose of the Meeting is for the creditors to examine the debtor to ensure that all the debts and assets of the debtor have been listed. Bankruptcy Rule 2004(b) governs the scope of thedebtor's examination and reads as follows:

Secured creditors are particularly interested in their collateral. In fact, most of the secured creditors will want to know where their collateral is located, its condition and how the debtor determined its value. Understandably, the secured creditors will be somewhat hostile if the debtor is attempting to reduce or eliminate a lien on the property through a lien avoidance. Even so, there is nothing that they can do about it if the law permits the lien avoidance on the exempt property. If the creditors become overly obnoxious, the debtor can complain to the clerk, who will admonish the creditors.

The trustee is required to notify the debtor that there are other bankruptcy chapters that the debtor might be able to use instead of a Chapter 13 proceeding. Primarily, there is a Chapter 7 liquidation, and farmers can avail themselves of the special Chapter 12 proceeding; some debtors can use the more complicated Chapter 11 reorganization proceeding.

The debtor should be prepared for some form the following questions:

BY THE TRUSTEE

Creditors and secured creditors, in particular, will usually ask some version of the following:

Ordinarily, there is only one Creditor's Meeting. Still, if the first meeting is not completed or new information (such as an undisclosed creditor) later arises, more Creditor Meetings may be held.

II. CREDITORS OBJECTIONS

A. TO EXEMPTIONS CLAIMED BY DEBTOR

If after the meeting a creditor objects to an exemption claimed by the debtor, the creditor uses Bankruptcy Rule 4003 to file objections with the court. Bankruptcy Rule 4003:

If creditor objections are filed, a hearing will be scheduled to determine if the exemption should be denied. The burden of proof is entirely on the creditor. Unless ordered to do so by the local rules of court, the debtor is not even required to file a response to the creditor's objections. Given the importance of exemptions, the debtor should consult a bankruptcy attorney.

B. TO DISCHARGE OF A DEBT

Usually only a secured creditor will object to an exemption claimed by a debtor. The exemption usually will apply to property that is collateral for the secured creditor's debt. In contrast, it is usually an unsecured creditor who objects to discharge of a debt. Most of the discharged debts in any bankruptcy proceeding are unsecured in nature, and unsecured creditors are affected by a debtor filing for bankruptcy protection. When a debt is discharged, it does not have to be paid (see Chapter 9).

Section 523 of the Bankruptcy Code states that a creditor mayobject to a discharge of the following debts:

Bankruptcy Rule 4007(d) governs the procedure in which a creditor objects to a discharge of a debt. Rule 4007(d) reads as follows:

Under the bankruptcy law, a creditor must file a complaint to challenge dischargeability based on false representation or financial statement, fiduciary fraud, theft, embezzlement or wilful and malicious injury within 60 days of the meeting of creditors.

If a creditor objects to a discharge, the debtor should see a bankruptcy attorney. If the creditor loses and the debt is discharged, the court will usually order the creditor to pay the debtor's attorney fees.

III. CREDITORS' CLAIMS

In order for a creditor to be paid under the Plan, thecreditor must file a Proof of Claim (Official Form 10) with the clerk of the bankruptcy court within 90 days following the Meeting of Creditors. The Court provides the Claim formto the Creditors. The Bankruptcy Code permits the trustee, debtor, co-debtor or guarantor of a creditor to file the Proof of Claim on behalf of the creditor. The creditors are given notice by the clerk of the bankruptcy court using an Official Form 9, Notice to Creditors. This notice states when the Meeting of Creditors is to be held and with the time for the filing of claims.

Under Bankruptcy Rule 3002(c), there are four exceptions to the 90 day period allowed for filing Proof of Claims. These exceptions deal with (1) claims by governmental units, (2) claims by infants or incompetents, (3) unsecured judgment claims, and (4) claims arising from the rejection of executory contracts. All of the above may be filed at such time as the court may direct provided they do not unnecessarily hinder or delay the administration of the case.

Bankruptcy Rule 3004 permits both the trustee and the debtor to file a claim on behalf of a creditor who has not filed a claim on or before the First Meeting of Creditors. This is an important provision because it can be used to get nondischargeable debts and partially secured debts before the court for payment under the Plan. If the creditor subsequently files a Proof of Claim, it will supersede the claim filed by the trustee or debtor on the creditor's behalf. If no claim is filed by or on behalf of asecured creditor, and the creditor is not included in the plan, the lien held by that secured creditor is not discharged upon completion of the Chapter 13 plan.

A Proof of Claim can be filed by persons other that the creditor. A person or entity who is liable with the debtor on a debt to a creditor (such as a partner or guarantor on a loan) may file a Proof of Claim on behalf of that creditor. The claim must be filed within 30 days of the expiration of the 90 day period for filing claims. If the name of the creditor is unknown, the person may file the claim in his own name.

This provision in the Bankruptcy Code establishes a procedure to prevent a debtor avoiding debts involving a partner or guarantor who has not filed for bankruptcy protection. By allowing the co-debtor to file a claim in a debtor's bankruptcy on behalf of their joint creditor, the codebtor ensures that the debtor will pay something on their joint debt. Without this provision, the creditor could simply refuse to file a claim and proceed solely against the co-debtor or guarantor who has not filed bankruptcy. The effect of this could be that the debtor filing for bankruptcy protection would pay nothing on the joint debt whereas the codebtor would have to pay the entire debt. Should the creditor also file a Proof of Claim, the creditor's filing will supersede any claim filed by a codebtor on the creditor's behalf.

All Proof of Claims must be filed with the clerk of the bankruptcy court where the Chapter 13 Petition is filed. Somecourts, under local rules, require the Proof of Claims to be filed in duplicate. Whenever a claim is based on a written document (such as a contract), supporting documentation must accompany the claim. This will usually mean a copy of the contract or other written document that is the basis for the claim against the debtor's estate.

Under Bankruptcy Rule 3001(d) when a creditor claims a security interest in property held by the debtor, the creditor is required to attach documentation proving that the security interest has been perfected. Unless such evidence accompanies the claim, the creditor will not be given secured status: he will be treated as an unsecured creditor.

A creditor is usually permitted under Bankruptcy Rule 3006 to cancel a previously filed claim simply by filing a Notice of Withdrawal with the Court. The exceptions to a creditor voluntarily cancelling a claim without court approval are:

The claim can only be cancelled after a hearing in the court with due notice being given to the trustee, debtor and other creditors affected by the cancellation of the claim. Unless the court orders otherwise, any authorized withdrawal of a claim, constitutes withdrawal of any related acceptance or rejection by the creditorof the debtor's Plan.

Just because a claim is filed does not mean that it will or has to be paid. Both the debtor and trustee may object to a claim that either feels should not be paid. Objections to a claim filed by a creditor must be in writing and filed with the clerk of the bankruptcy court pursuant to Bankruptcy Rule 3007 which reads as follows:

An objection to the allowance of a claim shall be in writing and filed. A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor in possession and the trustee at least 30 days prior to the hearing. If an objection to a claim is joined with a demand for relief of the kind specified in Rule 7001, it becomes an adversary proceeding.

When an objection to a claim seeks more than the mere denial of a claim (for example the quieting of title to property or the determining of the priority of other liens), the matter is converted into a full adversary proceeding. In such an event, the matter is then treated as a separate lawsuit under the Bankruptcy Court as governed by Bankruptcy Rules 7001 et seq. Local rules should be consulted before filing any objections to claims because some courts have additional requirements.

If no objection is filed against a claim, it deemed allowed. If, however, a proper objection has been filed, followed by proper notice to the parties, the court will hold a hearing on the objections. Under Section 502 (b) all claims against which objections are filed must be allowed except those for which:

Under section 502(d), the claim of a person or entity holding property recoverable by the trustee or is a transferee of a voidable transfer must be disallowed unless the person or entity either pays the amount or transfer the property to the trustee.

Under section 502(e) the court is required to disallow any claim for reimbursement or contribution by an entity that is liable with the debtor provided security for the debt to the extent that:

This section deals with the claims of a codebtor or guarantor against the debtor for the payment of a joint creditor's debts. This again relates back to where a codebtor or guarantor may file a claim on behalf of a joint creditor.

In determining whether to grant or deny an allowance for a claim, the court is required under section 502(c)to estimate:

Under this section, the court is required to estimate the value of contingent claims which might result in a delay or otherwise interfere with the administration of the case. In applying this section the court must distinguish between core and noncore proceedings. A bankruptcy court has authority over all core proceedings. Noncore proceedings are the province of the district court.

A bankruptcy court may not issue a final order or judgment in a noncore proceeding without the consent of the parties. Under 28 USC 157(b)(2)(b), proceedings to liquidate or estimate personal injury or wrongful death claims against the estate for the purposes of effecting a distribution are specially held not to be core proceedings. They are thus not within the jurisdiction of the bankruptcy court and thus not part of the Plan unless the parties agree otherwise.

If a claim is disallowed by the court, the creditor may make a motion for reconsideration of that denial pursuant to Bankruptcy Rule 3008. A decision to allow or disallow a claim may only be reconsidered for cause (for good reason).

When a creditor is a secured creditor, the extent of his lien on the secured property is the value of his interest in the property. The balance of his claim over the value of his interest in the collateral is unsecured. Section 506(a) states:

The gist of section 506(a) is that a secured creditor cannot have a lien on secured property for a value greater than the property is worth. The value of the creditor's lien in the secured property shall be determined while considering the purpose of the valuation and the proposed disposition or use of the property.

The significance of having the secured property valued is that the debtor need only pay the secured creditor the value in the plan of the secured property. To the extent that the secured lien exceeds the value of the property, the secured creditor will be treated as an unsecured creditor. The partially secured creditor will be paid as a secured creditor only to the value of the collateral, the remaining balance of the debt will be treated as an unsecured debt and usually discharged. Example: A secured creditor has a lien of $5,000 on property worth $3,000. The court will reduce the value of the lien to $3,000 with the remaining $2,000 being an unsecured debt. Thus once the creditor receives $3,000 in payments on the secured debt, the lien on the property is paid, even though the creditor may not have received any of the remaining$2,000 owed as an unsecured debt. The court has the power to confirm such an arrangement under section 1325(a)(5)(B).

In a situation where the Plan calls for the secured creditor to receive full payment of the allowed claim, the creditor's objections to the Plan will not stop its confirmation. As long as the secured creditor will receive the value of the collateral under the Plan even though, the creditor will not be fully paid because the debt is undersecured, the Plan will be confirmed. This is called the "cramdown" aspect of a Chapter 13. Local rules should be consulted in determining how local courts deal with cramdowns. In some courts, cramdowns may also be imposed against partially secured creditors who only hold mortgages or liens against the debtor's residence.

The payment of allowed secured and unsecured claims are treated differently. Payments to secured creditors, if so provided in the Plan, may commence immediately upon confirmation of the Plan following the payment of the priority administrative claims or their waiver under section 1326(b)(1). Included in the priority administrative claims are the unpaid portion of the filing fee and the trustee's fee.

Payments to the unsecured creditors do not begin until the period for filing claims has run, not when the Plan was confirmed. This delay gives the debtor and the trustee an opportunity to review the unsecured creditor claims and decide whether or not to file objections to them. Some bankruptcy courts have adopted localrules that govern when the unsecured creditors should begin receiving payment under the Plan. Under Bankruptcy Rule 3021, the members of a special class of unsecured claims may receive their payments earlier if the Plan provides for their early or immediate payment and all of the claims in the class have been approved. Under Bankruptcy Rule 3010(b), the trustee is not to make any payments below $15 without a court order. Payments less than $15 are to be accumulated until more than $15 is held for a creditor and then are paid. This is a convenience for the trustee in order to avoid sending checks and maintaining paperwork for small payments.

One point for a debtor to bear in mind is that the statute of limitations under state law for a claim is tolled while the debtor is protected in bankruptcy. If the discharge is not granted because the petition is dismissed or withdrawn by the debtor, the statute of limitations on a debt will continue from the time when the debtor originally filed the bankruptcy petition.

Here is another factor to bear in mind from 11 USC 108 (c). If another entity (such as a law or a court judicial proceeding order or an agreement between the parties) sets a time for filing a legal action in a court other than in a bankruptcy court and that time had not run prior to the debtor's filing of Chapter 13 petition, the time to file shall not expire until the latter of the end of the period (including any suspensions of the period occurring on or after the commencement of the case) or 30 daysafter notice of the termination or expiration of the automatic stay on the creditor's claim. In short the statute of limitations runs against the debtor the latter of (1) date of expiration if no bankruptcy filed, (2) 30 days after the order of the discharge, (3) 30 days after the notice of no discharge or (4) 30 days after the notice of dismissal of the case.

IV. CONFIRMATION HEARING

Either immediately or at a later date after the Meeting of Creditors, there is a hearing to confirm the debtor's Chapter 13 Plan. In a Chapter 13 proceeding, the debtor is required to submit for court approval a written Plan for the payment of creditors over a period of years. The Plan must last for three years and with court approval may be extended to five years. The plan must provide payments to the unsecured creditors that will, at a minimum, equal the amount that they would have received had the debtor filed a Chapter 7 liquidation instead of a Chapter 13 petition. The debtor is not required to pay all of the unsecured debts.

The procedure for obtaining court approval is set forth in the Bankruptcy Code. The bankruptcy proceeding begins when the debtor files the Chapter 13 Petition. Following the filing, notice of the debtor's filing is given to the creditors which places an automatic stay on any collection actions by the creditors. The debtor then prepares and files with the court the proposed Chapter 13 payment Plan. Copies of the proposed Plan are served upon the trustee and each of the creditors.

A hearing date is then set for the confirmation of the Plan. Any creditor having objections to the Plan may file objections; they will be heard at the Hearing. As long as an unsecured creditor is paid the minimum amount he would have received had a Chapter 7 petition been filed and the debt is properly dischargeable, his objections will be overruled and the Plan approved.

The most common objection to the Plan is that the debtor is not paying all of the unsecured creditors an amount equal to at least as much as each unsecured creditor would have received had the debtor filed a Chapter 7 petition( instead of a Chapter 13 Petition). To determine how much the unsecured creditors receive, the debtor determines what property in the estate is exempt from attachment by unsecured creditors and what property is not exempt from unsecured creditors. The value of such nonexempt unsecured property is totalled, and that is the minimum value that must be split among the unsecured creditors. Each unsecured creditor is given a minimum payment amount based on that creditors percentage share of all creditors. Since the payment schedule for the Plan extends over several years (no more than five years), it is permitted to pay a creditor more than the minimum amount as long as each unsecured creditor receives at least as much as he would have received if a Chapter 7 petition had been filed at the beginning.

Another objection to the Plan is that unsecured creditors are treated differently. This is a technical objection since it is permitted in a Chapter 13 proceeding to treat unsecured creditorsdifferently under certain circumstances. The Bankruptcy Code permits a debtor to establish classes of unsecured creditors whose debts are paid in different percentages. As long as the classes are established in good faith and with a legitimate reason, the debtor may pay the creditors of one class a higher percentage of their debt than creditors of another class.

Secured Creditors may object to the treatment of their secured claims in the Chapter 13 proceeding. A proposed Plan may also provide for the payment of secured debts as well as unsecured debts. Under the Bankruptcy Code, fully secured debts must be paid in full if they are included in the plan. This means that the Bankruptcy Court cannot reduce the amount of the money owed to secured creditors.

The Bankruptcy Court can, however, structure the payment of that debt for the period of time that the debtor is in bankruptcy. If secured creditors are not fully paid in the Plan, they can object and no discharge will be granted on their debts. A debtor is not required to deal with a secured creditor in the Plan and may continue to deal with him outside the Plan.

The main reason for listing a secured creditor is to deter a foreclosure. As long as the Plan provides for the curing of a default and the resumption of normal payments in a responsible time, the court will prevent the secured creditor from proceeding with a foreclosure action. If the debtor cannot cure the default and resume payments within the Plan, the court will release thedebt from the automatic stay and permit the creditor to foreclose on the property. The debtor is required to pay interest on the debt of any creditor covered under the Plan.

Secured creditors are treated in one of four ways. In the first instance, each secured creditor is given the option of accepting a proposed payment Plan. This usually means that an agreeing secured creditor will be paid less than the creditor is actually owed under the security agreement.

Second, each secured creditor may reject the proposed payment Plan and stand on his security instrument. The creditor must be completely paid within the term of the Plan. The court will not approve any Plan which will not pay an objecting secured creditor within the term of the Plan. Interest must be paid on all secured claims handled in the Plan.

Third, the debtor may surrender the collateral to the secured creditor. The secured creditor becomes an unsecured creditor to the extent of any deficiency resulting from a proper resale of the property. Fourth, the debtor may omit the creditor from the plan and continue to make the payments as before the filing.

When dealing with secured creditors it is important to remember that a secured creditor's lien only extends to the fair market value of the security. If a secured claim is handled in the plan, once the creditor receives the fair market value of the collateral, the lien is discharged, and the secured creditor becomes an unsecured creditor for any remaining unpaid balance.

Following the Confirmation Hearing, the court will either approve or reject the Plan. The court and the debtor may while in court restructure the Plan into a form acceptable to the Court. Once an acceptable Plan is submitted, the Court will approve it.

Once court approval for a debtor's plan has been received, it is the trustee's responsibility to receive the debtor's payments ordered under the Plan. The trustee then makes the payments to the debtor's creditors pursuant to the court-approved Chapter 13 Plan. Generally, the trustee receives 10% of all payments as the trustee's fee.

Payments under the Plan must begin within 30 days after the filing of the plan with the court. The Plan must be filed within 30 days of the filing of the Chapter 13 Petition. The payments must be regularly made, usually on a monthly basis. Some bankruptcy courts will order an attachment of the debtor's wages to assure payments are made under the Plan. These payments are then transmitted to the creditors in accordance to the payment schedule set up in the approved Plan. The trustee also has the power to bring or defend lawsuits on behalf of the bankruptcy estate.

Once the Plan has been completely fulfilled according to its terms, the debtor is given a discharge of all dischargeable debts. If the plan cannot be fully completed, the debtor can seek a partial discharge for certain debts as discussed in the Chapter 12.

A Chapter 13 Plan is not final and can be modified by the court upon the debtor showing good cause (such as a reduction inearnings). The debtor may convert a Chapter 13 Petition to a Chapter 7 liquidation at any time provided the debtor has not filed a previous Chapter 7 petition within the previous 6 years. In addition, the debtor may dismiss the Chapter 13 at any time prior to completion of the plan and thereafter be treated as though the bankruptcy petition had never been filed.


CHAPTER 11

AMENDMENT OF THE PETITION

I. INTRODUCTION

It is not uncommon for a debtor's circumstances to change during the Chapter 13 payment period and affect the debtor's ability to complete the Plan as approved. It may therefore become necessary to amend both the Petition and the Plan so the debtor can receive a Chapter 13 discharge. The bankruptcy petition is intended to reflect the life of the debtor. If that life changes, the Petition may have to be amended to reflect those changes.

From the contents of the Petition, a long measure of the debtor's life can be reconstructed. Given that fact, it is not surprising and perhaps even expected that the Petition will be incomplete or mistaken about certain aspects of a person's life. It is a rare person, with not much of a life, who can condense his life into 20 or so odd pages when specific detail is required.

Amendments exist to correct mistakes on the Petition that could otherwise jeopardize or limit a debtor's discharge. There is a filing fee of $20 every time an amendment is filed, but that is usually punishment for filing an amendment. The most common mistakes that necessitate the filing of an amendment are:

Failure to do so will result in discharge being denied to the debtor. Following this chapter is a format of a change of address for a debtor. It should be filed with the bankruptcy court along with a proof of service showing that a copy was mailed to the trustee. (See the Chapter 9 for discussion of the proof of service).

II. PROCEDURE

Bankruptcy Rule 1009 governs when an amendment to a petition can be filed. Rule 1009 reads as follows:

Under Rule 1009, an amendment can be filed at any time. The steps to amending a schedule are simple and easy to follow for any debtor wishing to amend the petition:

If the meeting of creditors has been held and new creditors are being added, the court will have to hold a second meeting of creditors. Since it is the debtor's fault that a second meeting is being scheduled, some courts require the debtor to notify the creditors of the time and place of the meeting. If so, the debtor will simply mail the notice with a proof of service to each creditor. The debtor should ask the clerk if the debtor is required to give the notice for this second creditor meeting.

If the first meeting of creditors has not been held, either the clerk or the debtor (depending on local rules) will send a copy of the Notice for Creditors meeting and the amendments to the newly listed creditor along with a proof of service. From this point foreword, the case will proceed as though the amended material had always been part of the original petition.

III. MODIFYING THE PLAN

A debtor may modify a proposed plan at any time prior to the confirmation of the plan by the court. The debtor still has the right to amend or modify the plan even if a Confirmation Hearing is scheduled. Any modification of the plan still must comply with the requirements in sections 1322 and 1323 as discussed in the Chapter 5.

After the Plan has been confirmed by the court, the plan canonly be modified with court approval. To obtain court permission to modify a Plan, the debtor must file a Motion to Modify with the court. The procedure for filing a motion is described in Chapter 9. After the motion to modify is filed, the court will schedule a hearing on the modification. The creditors of the debtor may once again come forward at the hearing and object to the modified plan.

Under section 1329(a), a Plan can only be amended after confirmation upon the request of a debtor, trustee or creditor to:

The person seeking the modification of the Plan has the burden of proving that good cause exists for the modification. The requirement for good cause is eased somewhat when the debtor is the person seeking the modification. Changes in the debtor's financial or personal situation still must be shown, but these changes do not have to be terrible in nature or extremely significant to the plan. In contrast, if the debtor's financial situation improves (such as getting a better job or winning a lottery) so that more disposable income is available, either the trustee or any unsecured creditor may request modification of the plan to have higher payments made to the unsecured creditors. As a general rule minor changes in a debtor's condition will not support modification of the plan by the trustee or a creditor.

At a hearing on a motion for modification, a secured creditor who has previously either accepted or rejected the plan is deemed to also have accepted or rejected the new proposed modified plan unless the new plan changes the creditors's rights or the creditor changes his previous plan acceptance or rejection.

The court will decide at the hearing whether or not the plan changes the claim of any secured creditor and whether or not the debtor's modified plan should be approved. If approved, the modified plan becomes the new payment plan for the debtor. A sample modified plan follows this chapter. The motion should be accompanied with a copy of the proposed plan as modified. This is nothing more than the original plan with the necessary changes made (such as reduction of monthly payments). A Proof of Service must accompany the motion (see Chapter 9 for the form).

IV. APPROVAL OF A CONSUMER DEBT

A consumer debt is defined, under USC section 101(8) to be one that was incurred primarily for a personal, family or household purpose rather than for business or investment purposes.

Often while a Chapter 13 proceeding is in effect, the debtor needs to borrow money or obtain credit to purchase the necessities of life. This can play havoc with the payments due under the Chapter 13 Plan. Holders of certain post-petition claims may file claims for payment with the trustee under the plan. Section 1305(a) permits the proof of post-petition debts to be filed for a debt:

Under section 1305(b), a qualifying post-petition claim is treated the same as any other claim except that its determination date is the date that the claim arose.

The important thing for a debtor to remember when dealing with consumer credit is that trustee approval should be obtained before obtaining the credit. Section 1305(c) reads as follows:

If trustee approval was not obtained prior to the creditor rendering the credit and such approval was practicable (a yes or no could have easily been obtained), the claim is not to be allowed.

Section 1328(d) reads as follows:

Even if the claim were to be subsequently allowed by the court, if the trustee's approval was practicable and not obtained before the credit was granted to the debtor, the debt is dischargeable in the bankruptcy proceeding. For this reason, the debtor should seek trustee approval before seeking to incur a consumer debt during the plan period. Following this chapter is a sample completed form for seeking such trustee approval.

END OF CHAPTER PREVIEW


CHAPTER 12

DISCHARGE

Congratulations! When a person has reached this point, the hard parts are over. When the Judge swings his gavel the case is over. It is the rare bankruptcy case that will have anything else occur after the bankruptcy. The debtor has had to go through the meeting of creditors, prepare a Plan, go through a Confirmation Hearing and other hearings to decide whether or not any complaints to set aside the automatic stay and any motions regarding exceptions or objections to the debtor's discharge should be granted

I. WHEN THE PLAN HAS BEEN FULLY PERFORMED

A complete Chapter 13 discharge (one granted when the Plan has been fully performed) is granted under Section 1328 (a) and is broader than a Chapter 7 discharge. A discharge under section 1328(a) discharges the debtor from all but:

If the plan has been fully performed and no objections to discharge have been filed, most courts will not hold a discharge hearing. This is a practical attempt to accelerate the case and streamline the court's work load. Once the Plan has been fully performed and no objections to the discharge are filed, the granting of the discharge is just a ministerial act that does not really need a hearing or attendance by the debtor. The courts that do require attendance at the hearing (consult local rules) do so more to instill the solemnity of the event in the debtor than for any practical or legal purpose. When no hearing is required because the Plan has been fully performed, the debtor is simply mailed an order stating that the final discharge is granted. The case is over for all intents and purposes.

II. FAILURE TO COMPLETE THE PLAN

In many cases, a debtor is simply unable to complete the Plan as it was originally approved. The debtor is not permitted toreceive a complete discharge because the Plan has not been fully performed. The questions that the debtor must answer are: "What do I do next?" "What are my options?" In fact, when the debtor is unable to complete the Plan, he has three options available. The debtor may (1) dismiss the case, (2) convert the Chapter 13 proceeding into a Chapter 7 proceeding or (3) seek a partial Chapter 13 discharge.

A. DISMISSAL OF THE CASE

When the debtor fails to complete the Chapter 13 Plan, the Bankruptcy Code permits the debtor to dismiss the case voluntarily. In addition, the Bankruptcy Code also permits the creditors, to seek an involuntary dismissal. The debtor can dismiss the case and be treated by the creditors as though the debtor had never filed a bankruptcy petition. The debtor will owe the creditors the entire amount that would have been owed had the Chapter 13 petition never been filed (after taking into account any payments that were made through the Plan). This alternative is seldom pursued in a Chapter 13 proceeding. Usually when this alternative is executed, it is because the debtor never really intended to complete the Plan and was only looking for a breathing space under the Automatic Stay. Such a debtor always intended to pay his debts but merely needed time to reorganize without creditor interruption. This has often occurred where a home or other real property was being foreclosed at the same time that the debtor was attempting to sell it. The debtor would dismiss the petition, complete the sale and then paythe creditors when a buyer was found.

Dismissal of the Petition is covered under Section 1307. Court approval must be obtained to have a dismissal of the Petition. A debtor under Section 1307(b) has an absolute right to dismiss a case at any time that has not been converted to a Chapter 7. Section 1307(b) reads as follows:

(b) On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.

Under Section 1307(b) the debtor has an absolute right to dismiss the Chapter 13 case at any time provided the case has not been converted into a Chapter 7 proceeding. The debtor files a motion to dismiss under Section 1307(b) with notice to the trustee to obtain the dismissal. Since the debtor has an absolute right to dismiss, local rules should be consulted to determine if a hearing will be held on the motion or if it will be granted automatically.

Under Section 1307(c) any party in interest, which means any creditor or the trustee, can file a motion with the court seeking an order involuntarily dismissing the Petition or converting it into a Chapter 7 proceeding. Once the motion is filed, the clerk will set a hearing and notice will be given to all creditors, the debtor and the trustee. Upon a hearing on the motion, the court will render its decision on whether to grant or deny the motion. Under Section 1307(c) the grounds for involuntarily dismissing a petition or converting into a Chapter 7 petition are limited to:

Unless one of the above grounds are satisfied, neither a creditor not the trustee can obtain an order involuntarily dismissing the debtor's Chapter 13 case or converting it into a Chapter 7 petition.

Following this chapter is a sample motion for a debtor to dismiss a Chapter 13 Petition under section 1307(b).

B. CONVERSION OF A CHAPTER 13 CASE INTO A CHAPTER 7 CASE

The second alternative for the debtor when he cannot complete the Plan is to convert the Plan into a Chapter 7 case. A debtor has the right to convert a Chapter 13 case into a Chapter 7 case at anytime. Section 1307(a) reads as follows:

(a) The debtor may convert a case under this chapter to a case under Chapter 7 of this title at any time. Any waiver of the right to convert under subsection is unenforceable.

When a Chapter 13 case is converted to a Chapter 7 case, the debtor's estate will be liquidated and the creditors paid in accordance with the bankruptcy law pertaining to Chapter 7 cases. The assets in the estate, to the extent that they are not exempt, will be liquidated by the trustee and paid to the secured and unsecured creditors. The debtor will lose all of the nonexempt assets in the estate and receive a Chapter 7 discharge.

The conversion of a Chapter 13 case into a Chapter 7 case will automatically terminate the services of a Chapter 13 trustee. A new trustee will be appointed by the court to handle the Chapter 7 case. In most instances, the Chapter 13 trustee is reappointed as the new Chapter 7 trustee but the appointment is not automatic. The former Chapter 13 trustee must turn over all records of the case to the newly appointed Chapter 7 trustee and file a final report with the court within 30 days of the case's conversion.

Under Bankruptcy Rule 1019(5), when a debtor converts a Chapter 13 into a Chapter 7 case after the confirmation of the Chapter 13 Plan, the debtor is required to file certain amended schedules with the court. Besides others, a schedule of assets acquired since the original filing of the Chapter 13 Petition, postpetition debts not previously reported and any executory contracts and unexpired leases entered after filing the originalpetition must be filed.

All creditor claims previously filed in the Chapter 13 case will be deemed filed in the Chapter 7 case as well. This conversion establishes new time periods for filing of claims, filing of complaints for the dischargeability of debts and filing of objections to discharges. All schedules and inventories previously filed by the debtor in the Chapter 13 case are deemed filed in the new Chapter 7 case. In a conversion to a Chapter 7 case, the debtor must file a Statement of Intention within 30 days of the conversion or the first meeting of creditors whichever is earlier. The Statement of Intention will state on what exempt property, if any, the debtor intends to avoid a judicial lien or redeem by paying fair market value. Also debts which the debtor intends to reaffirm will be listed in the Statement of Intention.

More information on the effects of a Chapter 7 bankruptcy can be obtained by reading the companion book Chapter 7 Bankruptcy by these authors.

Following this chapter is a sample motion for the conversion of a Chapter 13 case into a Chapter 7 case. The motion must be served on the trustee (see Chapter 9 for the form of the Proof of Service to be used). Usually no hearing is held on a motion to convert a Chapter 13 case into a Chapter 7 because the right of the debtor to do so is absolute. Local rules should be consulted on this issue.

C. RECEIVING A PARTIAL DISCHARGE UNDER SECTION 1328(B)

The third and most popular alternative is for the debtor to seek a partial discharge of the case under Section 1328(b). A partial discharge relieves the debtor of all debts except for:

In a partial discharge, the debtor is released from the obligation to pay the discharged debts.

Section 1328(b) reads as follows:

A partial discharge under Section 1328(b) will only be granted when the debtor, through no fault of the debtor, was unable to completethe Plan, modification of the Plan (as discussed in chapter 11) is not feasible and the unsecured creditors have received at least as much as they would have received had the debtor originally filed a Chapter 7 petition. If the debtor had paid the unsecured creditors more than they would have gotten had the debtor filed a Chapter 7 petition, the discharge can be granted even though more payments are still due under the Chapter 13 Plan. The unsecured creditors must always receive at least as much as they would have received had the debtor filed a Chapter 7 petition before the debtor can receive any Chapter 13 discharge regardless of whether it is a full discharge or a partial discharge.

To obtain a Section 1328(b) discharge, the debtor must file a motion requesting a partial discharge. At least 30 days notice must be given to the creditors for their filing any objections to the partial discharge. A hearing is then held on the granting of the discharge. If no complaint is filed against the discharge, the debtor usually does not have to appear. If a complaint is filed, the debtor must appear. To receive a Section 1328(b) discharge, the debtor must have paid each unsecured creditor at least as much as the creditor would have received had the debtor filed a Chapter 7 Petition instead of the Chapter 13 Petition.

A partial discharge under Chapter 13 is not as broad as a Chapter 7 discharge. Some debts that could be discharged under a Chapter 7 bankruptcy and would be discharged under a full Chapter 13 discharge will not be discharged under a partial Chapter 7bankruptcy. If the debtor has debts dischargeable under a Chapter 7 discharge but not under a partial Chapter 13 discharge, the debtor should consider converting the case into a Chapter 7 case. In deciding whether to convert the case, the debtor must determine whether he has any nonexempt property that would be lost in a liquidation under a Chapter 7 case. Following this chapter is a sample motion for seeking a partial discharge under Section 1328(b).

END OF CHAPTER PREVIEW


CHAPTER 13

LIFE AFTER BANKRUPTCY

INTRODUCTION

For the vast number of people who file for bankruptcy protection, their case is closed when the court issues the final discharge, and they can begin to enjoy the bankruptcy's promise of new life. Yet, for a few persons, their contact with the bankruptcy court, trustee or creditors does not end with the final discharge. There are special circumstances that sometimes arise, that like a rubber band, pull the debtor back into the bankruptcy court despite the final discharge. The most frequent situation that is likely to result in the debtor returning to bankruptcy court after a final discharge occurs because either a creditor or the trustee seeks to revoke the final discharge.

Another set of problems arise, not from the bankruptcy court, from third parties and their relations to the debtor once they learn of the bankruptcy. In certain segments of our society, the filing for bankruptcy relief carries with it a personal stigma. While such stigma may attach personally, it cannot legally be attached to the debtor. Therefore, a debtor suffering discrimination because of the bankruptcy should be aware of how the law handles and redresses such discrimination.

I. EFFECT OF THE CHAPTER 13 BANKRUPTCY ON COMMUNITY PROPERTY

One of the most common questions that arise both before andafter a Chapter 13 proceeding is what effect will the bankruptcy filing have on community property. The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.

There is no requirement that married couples file a joint bankruptcy petition or even that both spouses file bankruptcy. Each spouse may file bankruptcy separately. In addition, one spouse alone may file bankruptcy, and the other spouse may elect not to do so. Generally, if a married couple intends to file bankruptcy, it is more advantageous for them to file a joint petition rather than two separate petitions. The decision of the spouses as to how to file may be governed by the status in which they reside. The effect of state law on the classification of property, as either community or separate property, may make the filing of both spouses in bankruptcy necessary to protect their rights.

Treatment, under bankruptcy law, is different for married couples when one spouse files for bankruptcy protection in a community property state as opposed to one filing in a separate property state. In a bankruptcy proceeding filed in a community property state, all community property is included in a debtor's estate regardless of whether or not the debtor's spouse files for bankruptcy. Bankruptcy law states that all community property, not just the debtor's half interest, is included in the estate if the debtor's creditors can attach it under state law absent the bankruptcy. Example: Husband and wife own a piece of real propertyas community property. Under state law, both spouses have equal management and control over the property as joint owners. As a result, when the husband files bankruptcy, the trustee will take all of the property and sell it to satisfy the husband' creditors even though the wife never filed bankruptcy.

For this reason, in a community property state, when one spouse files, the other spouse usually files to protect the spouse's interest in the community property. The fact that in a community property state the community property interest of the married, nonfiling spouse can be attached, in the other spouse's bankruptcy is one of the drawbacks in having community property.

The inclusion of a nonfiling spouse's community property in the bankruptcy estate of the filing spouse is required under Bankruptcy Code section 541(a)(2):

There is a potential benefit to the nonfiling spouse in having all of the community property included in the filing spouse'sbankruptcy. The community creditors of both spouses are permitted to share in the distribution of the community property pursuant to section 726(c) which reads as follows:

Community creditors of the nonfiling spouse are prevented from subsequently moving against any new community property acquired by the nonfiling spouse under Bankruptcy Code Section 524(a)(3):

Since the non-filing spouse may be losing community property, it may be possible in a community property state, for the nonfiling spouse to receive a discharge of community property debts without filing a bankruptcy petition.

In contrast to community property, the separate property of the nonfiling spouse cannot be attached to pay the debts of the spouse filing bankruptcy. Separate property in a community property state is defined as property acquired by a spouse prior to marriage or after marriage by gift, devise or bequest but not through the work of either spouse.

Any state that is not a community property state is a separate property state. The bankruptcy estate of a married debtor in a separate property state consists of the debtor's separate property and only one-half of the jointly owned property with the debtor's nonfiling spouse. The separate property of the nonfiling spouse is not included in the filing spouse's bankruptcy estate.

II. SUBSEQUENT FILING OF A CHAPTER 7 PETITION

A debtor who receives a discharge in a Chapter 13 case, regardless of whether it is a full discharge under Section 1328(a) or a partial discharge under Section 1328(b) will usually be required to wait six years from the date of filing the Chapter 13 petition before being able to file a Chapter 7 bankruptcy petition.

Section 727(a)(9) reads as follows

A debtor is not permitted to file a Chapter 7 petition within six years of filing a Chapter 13 case unless the debtor had either paid all of the unsecured creditors in the earlier Chapter 13 case 100% of their claims (paid them in full) or paid the creditors atleast 70% of the claims, and the Plan had been proposed in good faith, and the debtor's best efforts were used to pay more. If a debtor pays 70% of the claims of all unsecured creditors, the debtor might still be denied permission to file a Chapter 7 petition within the six year period if the court finds that the debtor could have paid the creditors more. The court may believe the debtor did not use best efforts to pay the creditors more. Actually, if a debtor has paid the unsecured creditors 70% of all their claims, the court usually grants permission to file a Chapter 7 petition within the six year period.

III. AN ATTEMPT TO REVOKE A DEBTOR'S FINAL DISCHARGE

In an extremely rare situation, a trustee or a creditor may seek to have a debtor's final discharge set aside. The debtor should run, not walk, to the nearest bankruptcy attorney. Setting aside a bankruptcy discharge is a difficult thing for a trustee or a creditor to do. Any attempt to do so must be viewed as serious and backed with some degree of evidence.

The grounds for setting aside a final discharge that was granted to a debtor are set forth in Bankruptcy Code Section 727. Generally, the grounds for revoking a discharge are:

The time for bringing a complaint to revoke a discharge is set forth in Section 727(e). If the revocation is sought because of an alleged fraudulent act of the debtor, the complaint must be filed within one year of the date of the final discharge was granted. Where the revocation is sought for concealment of assets or failure to obey a court order, the complaint must be filed before the latter of one year of the granting of the discharge or the date the case is closed.

If the complaint for revocation of the discharge is granted, the debtor is immediately liable again for payment of all the debts that had been discharged. In addition, all of the redemption and reaffirmation agreements that the debtor entered will likewise be rendered null and void. For this reason, a debtor must see an attorney specializing in bankruptcy if a complaint to revoke a discharge is filed.

IV. DISCRIMINATION

It would be worthless for a person to file if the bankruptcy would prevent the debtor ever again holding a job or getting credit. For many years, the filing of a bankruptcy petition was viewed as a scarlet letter branding a person as undesirable and unemployable. That is no longer the case.

A. GOVERNMENT DISCRIMINATION

Section 525(a) of the Bankruptcy Code prevents any governmentagency from discriminating against a person solely because the person sought protection under the Bankruptcy Code. Section 525(a):

Under this section, no government agency, be it state or federal, can deny a person who has been granted bankruptcy relief, any government employment, assistance, education, license or any other benefit that is available to a person who has not filed for bankruptcy relief. If a person who owes the government money files for bankruptcy relief and has the debt discharged, the government cannot thereafter use the failure to pay the discharged governmental debt as grounds for denying any type of government license or benefit. The government is treated no differently than any other of the debtor's creditor. When a person is granted a bankruptcy discharge, all dischargeable governmental debts are immediately canceled. Canceling a debt has the same effect as paying it, therefore a government agency cannot use the nonpayment of a discharged government debt as justification for any type of discrimination.

If a government agency wrongly discriminates against an individual because of the granting of a bankruptcy discharge, theperson can file a discrimination lawsuit against the agency and win, if that was the only reason for the discrimination.

B. PRIVATE DISCRIMINATION

Section 525(b) of the Bankruptcy Code also prohibits discrimination by an employer because of the filing of a bankruptcy petition. At one time it was common for an employer to fire any employee who filed a petition for bankruptcy. Such is no longer the case. A person cannot be denied employment, fired, transferred, denied training benefits available to other employees or in any other manner discriminated solely because the person sought protection under the bankruptcy law.

In fact many states forbid outright an employer asking an employee or prospective employee whether or not a bankruptcy petition has ever been filed. These states view the question as improper since the information cannot be used in an employment decision.

Any person who has been granted a discharge and is denied employment after admitting in a job application that he once filed bankruptcy has an excellent case of discrimination against the prospective employer and should consult an attorney.

V. REESTABLISHING CREDIT

Once a person has filed for bankruptcy protection, that information will remain on the records of the credit reporting agencies for 10 years. The information that the debtor filed bankruptcy will always be a public record. Credit agencies,however, can only report it for 10 years. To wit: After 11 years a person doing a credit check on a debtor cannot get knowledge of the bankruptcy from the credit report but can get it from the court.

In some instances, filing bankruptcy actually can increase a person's credit worthiness. Once discharge has been granted, the person cannot file bankruptcy again for six years, and the debtor has had most of his debts discharged. A potential lender may view the person as being a better risk than someone who has not filed bankruptcy. A lender looks at the income of the borrower and the outstanding debts when deciding to make a loan. If the borrower has a good job and no debts because of the bankruptcy and cannot seek bankruptcy for seven years, he may appear a favorable candidate for a loan.

On the other hand, credit card companies probably will not give a credit card to a person who has filed a bankruptcy petition, at least not for a period of time after the discharge was granted. In fact some credit card companies will cancel their cards once they discover that the person has filed for bankruptcy, even if their accounts are not being discharged. Not having a credit card can be a major problem . Many businesses, such as car rentals or hotels, will not do business for cash.

The alternative is to obtain a debit card: A secured account with a bank. With a debit card, a person deposits a fixed amount into the account and is given a credit card with the limit beingthe amount in the account. The card is fully secured by the money in the account. The interest rates on these debit accounts are high, but they are only game in town until a regular credit card can be obtained.

VI. REOPENING THE CASE BY THE DEBTOR

Section 350(b) of the Bankruptcy Code vests the bankruptcy court with full discretion to reopen a case when good cause is shown. Usually, it is a creditor who asks for the reopening of the case to have certain discharged debts reinstated.

There is no express time limitation for reopening an estate for cause shown. (Brust vs. Irving Trust Company 129 F. Supp 462). The motion should state the facts which give rise to the reason or cause for the reopening of the case. The court will then take judicial notice of the original case and all of the pleadings. After the hearing on the motion, the court will render its order. If the motion is granted, the order cannot be attacked in a collateral action. The reopening does not automatically reinstate the trustee.

Usually, a debtor will seek to reopen a case for one of two reasons. The first is that a creditor had been mistakenly omitted and it is necessary to have that creditor's debt discharged. The second reason is that the debtor wishes to amend the exemptions in the original petition, usually because of after-acquired property.

Once the court determines that the equities of the case justify reopening, the newly added creditor or other creditorswhose interests will be affected will be given an opportunity to present their opposition. After the presentation of the motion, the court will decide whether the debtor's requested relief is proper. Generally, it is difficult for a debtor to convince a court to reopen a case. For that reason, the debtor must do everything possible to assure that all creditors and property are duly listed.


INDEX

Amendment of the Petition 385

Procedure 388

Modifying the Plan 390

Approval of a Consumer Debt 392

Chapter 13 Plan 10,69,193,200

Hearing 193

Priority Claims 195

Secured Creditors 198

Unsecured Creditors 197

Common Bankruptcy Questions 5

Attorney Fees 39

Automatic Stay 25-27

Changing Nonexempt Property Into Exempt Property 23

Chapter 7 Definition 6

Chapter 13 Definition 7,8

Chapter 13 Plan 10,11,12

Child or Spousal Support 14

Collection of Discharged Debt 28,34

Community Property 20

Debt Payments Before Filing 23

Discrimination for Filing 31

Effect on Evictions 28

Exempt Property 16,29

Exemptions 21

Filing Chapter 13 Petition 8,20,25

General Exemptions 22

Homestead Exemption 33,210

Income Tax Discharge 37

Lien Avoidance 35,325

Marital Homestead 40

Newly Discovered or after Acquired Property 19

Nondischargeable Debts 15,48

Nonexempt Property 16,23

Objections to Discharge 15,28,30

Pension 35,221

Plan Payments 11

Property Acquired after Filing 18,19

Property Not Yet Received by The Debtor 18

Property Taxes Dischargeable 38

Secured Creditors 13

Separate Property 21

Student Loans 36,54

Tenancy-by-the-entirety Property 23,211

Trustee 8 Unsecured Creditors 9

Unsecured Debt 9,14

Using both a Chapter 7 To a Chapter 13 32

Willful and Malicious Debts 38

Discharge 401

Failure to Complete the Plan 403

Dismissal of the Case 403

Conversion of the Case into a Chapter 7 405

Partial Discharge 407

Exemptions 236

Election to Use Federal Exemptions 238

Non-bankruptcy Federal Exemptions 331

State Exemptions 240

Home 212

Homestead Exemption 215

Setting Aside a Judicial Lien 217

Tenancy in the Entirety Property 218

Foreclosure 220

Automatic Stay 222

Chapter 13 Plan 223

Lien Avoidance 335

Judicial Liens 338

Non-purchase Money Security Interests 340

Procedure 342

State Laws 344

Life after Bankruptcy 417

Community Property Effect 419

Subsequent Filing of a Chapter 7 Petition 421

Creditor's Attempt to Revoke Discharge 423

Discrimination

By Government 425

By Private Individuals 426

Reestablishing Credit 426

Reopening the Case 428

Meeting of Creditors 362

Creditors' Objections

To Exemptions 367

To Discharge 367

Creditors Claims 369

Nondischargeable Debts 47

Nondischargeable Unless an Exemption Exists 47

Income Taxes 47

Property Taxes 48

Unlisted Debts 48

Court Ordered Child and Spousal Support 50

Fines, Penalties and Forfeitures 53

Debts Incurred While Intoxicated 55

Previously Undischarged Debts 57

Student Loans 53

Dischargeable Debts Unless a Creditor Objects 58

Fraudulent Debts 59

Debts for Willful and Malicious Acts 60

Debts from Embezzlement, Larceny or

Breach of Fiduciary Duty 61

Pension 35,226

Exempting a Pension under Federal Law 227

Exempting a Pension under State Law

Non-ERISA Pensions 230

ERISA Plans 231

Options When Pension Not Exempt 233

IRA's and SEP's 234

Preparation of the Petition 100

Application to Pay Fee in Installments 178

Attorney Fees 183

List of Creditors 164

Notice to Individual Consumer Debtor 190

Preparation of the Voluntary Petition 110

Schedule A Real Property 131

Schedule B Personal Property 133

Schedule C Property Claimed as Exempt 137

Schedule D Creditors Holding Secured Claims 139

Schedule E Creditors Holding Unsecured Priority

Claims 143

Schedule F Creditors Holding Unsecured Nonpriority

Claims 148

Schedule G Executory Contracts and Unexpired

Leases 152

Schedule H Codebtors 154

Schedule I Current Income for Individual Debtors 156

Schedule J Current Expenditures for Individual

Debtors 159

Statement of Financial Affairs 115

Summary of Schedules 161

Questionnaire 87

Steps in a Bankruptcy Action 62

Getting the Rules and Forms 62

Emergency Filing 64

Preparation of the Petition and Filing 65

Meeting of Creditors 67 Trustee's Management 67

Chapter 13 Plan 69

Motion to Set Aside Lien 72

Creditor's Motion to Set Aside Automatic Stay 73

Discharge Hearing 74

Debtor's Reopening of the Case 76

U.S. Bankruptcy Courts 81