Chapter 7

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Chapter 7 is titled "Liquidation". It is what used to be known as a "straight bankruptcy", where the person going through bankruptcy gets rid of all the debt that can be gotten rid of, takes his or her "exemption" (an amount of property the client is allowed to keep) and simply gets a fresh start in life. Not all debts are forgivable in bankruptcy. The most common of these are delinquent and ongoing child and spousal support, back taxes, and claims resulting from the dishonesty or willful misconduct of the debtor. In Pennsylvania, we normally claim the "federal exemption", a list of assets stated in the Bankruptcy Law, where the person going through bankruptcy can claim some or all of the equity in his or her home, car, furnishings, wardrobe, a bit of jewelry and an allowance toward the tools of the trade and the cash surrender value of life insurance, among other things. Individuals claiming protection under chapter 7 are required to undergo counseling before the case is filed, and to take a short course in consumer education after the case is filed and before the case is approved. We arrange for the counseling, available over the internet, or by toll free conference call. Check elsewhere on this website for more details about counseling and consumer education.

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Chapter 13

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The classic Chapter 13 situation involves homeowners who are in trouble with their home mortgage. Typically, the homeowner has fallen behind in several monthly payments, due to any of a number of causes - unemployment, illness, divorce, etc. The homeowner is able to resume the monthly payment, but the lender doesn't want to entertain anything but a complete catch up payment - all the missing months, all at once, in a lump sum. Chapter 13 gives the homeowner bankruptcy protection, and gives the homeowner the opportunity to catch up on the loan a little at a time. Here is an example. The loan payment is $1,000 per month. The arrearage is 6 months. With late charges, the total to catch up is $6,600.00. Over a 60 month plan, the homeowner would pay the $1000 directly to the lender, and $110 monthly to the chapter 13 trustee, plus a bit more to cover the trustee commission. Some of the time, part of the lawyer fee can be paid in monthly as part of the plan as well, plus any other arrearages on car loans or back taxes on the home. Chapter 13 is only available to people, not to corporations or partnerships or LLC's. There is a debt limit in Chapter 13 of $1,010,650 in secured debt and $336,900 in unsecured debt. A person is required to stay in chapter 13 for a minimum of 36 months, no matter what his or her income. If the household income is above the median for the client's home state, then the client must stay in chapter 13 for 60 months. Individuals claiming protection under chapter 13 are required to undergo counseling before the case is filed, and to take a short course in consumer education after the case is filed and before the case is approved. We arrange for the counseling, available over the internet or by toll free conference call. Check elsewhere on this website for more details about counseling and consumer education.

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HOPE for Homeowners

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On July 30, 2008, the President signed this statute into law. It calls for a voluntary program, where mortgage lenders voluntarily submit portfolios of loans to the Secretary of Housing and Urban Development. The Secretary then works with the lender and the homeowner to change the terms of the mortgage to mutually acceptable terms. In order to put the law into action, the bureaucracy must set up administrative procedures, and that has taken time. The program is in its infancy. Some lenders are not participating in the program, and there is no legal mechanism to force any lender to participate. It is too early to tell for sure whether this program may hold off or prevent foreclosures. It might be of some use for your case.

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Dealing with Back Taxes

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The IRS has strong authority to collect back taxes. They can freeze your bank accounts and take most of your paycheck. They can seize and sell assets of any kind. The tax bill goes up and up each month, because the Government charges 1% per month in penalties and somewhere in the vicinity of 8% per year in interest on unpaid taxes. If you get a collection notice from the IRS, don’t ignore it. Give us a call. We can help with an Offer in Compromise, (Form 656) where you and IRS agree on a lesser amount, usually because you won’t live long enough to pay the whole thing. We can also assist with an Installment Agreement (Form 433-D), where you can pay the whole thing, but just need some time. You can also clean up your back taxes over a five year period in a chapter 11 or chapter 13 proceeding in the Bankruptcy Court.

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Counseling and Consumer Education

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The 2005 law also imposes a counseling requirement as a pre-condition to filing the case and a consumer education requirement as a further condition for approval of your case once it is filed. The counseling must be done by a non-profit agency approved by the US Department of Justice. While the statute doesn’t say so, it is our opinion that counseling is designed to introduce the client to the possibilities of a debt management program as an alternative to bankruptcy. It is also a bit of an insult to bankruptcy lawyers, as if the lawyer would put a client into a bankruptcy that wasn’t needed. Check elsewhere on this website for more details about debt management.

The consumer education requirement mandates that the client take a course, usually an interactive video or audio program over the internet, or over a conference call circuit. The course is designed to give the clients information about budgeting and credit to help them avoid another bankruptcy down the road. Our office will arrange for the counseling and education required in your case.

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Chapter 11

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Chapter 11 is simply titled "Reorganization". It is designed to save the sick business. There is no debt limit. However, businesses with debts less than a total of $2,190,000, are classified as "small businesses", and face additional paperwork requirements. Under chapter 11, the company reorganizes its debts, a polite term for settling them at a discount. The reorganizing company is called the "debtor-in-possession". Business operations continue during the reorganizing process. The debtor-in-possession is required to divide the various creditors into classes, for example: unsecured creditors, shareholders, bondholders, and a class for each secured creditor. The distinguishing feature of chapter 11 is that the creditors get to vote on the plan, whether to accept its terms or reject it. In order to get a plan approved, a majority in number and 2/3rd in dollar amount of each class must vote to accept, requiring a strong consensus among all parties. The process is clearly a collaborative effort, not just a unilateral proposal by the debtor-in-possession. The statute provides for the creation of a committee of unsecured creditors. In bigger cases, there may be other committees as well: retired workers, bond holders, the labor union, and so on. The Office of United States Trustee, a unit of the Department of Justice, oversees the entire process. Chapter 11 is costly, but it can revive a business, and save jobs and dreams.

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Your Own Business

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We have available on request a little business planning book called "Why Businesses Fail, and How to Avoid the Same Problems" (David Dunn, © 2008, all rights reserved). You must have a plan before you start. What product or service will you provide? At what price? With what wholesale cost to acquire your inventory (if applicable)? Facing what competition? With what fixed expenses for utilities and insurance and rent and the like? We can help you to get a feel for what is involved in going into business for yourself. We offer decades of insight and experience in helping people pick up the mess they made of their businesses by doing things the wrong way.

If you are already in business, we can help you advance to the next level. Maybe you should incorporate, or form a Limited Liability Company, or a partnership. Maybe the sole proprietorship is a good enough form of business organization for what you do. In any event, give us a call. We can help.

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The Means Test

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The 2005 Law is the result of years of lobbying Congress by the credit card industry. Prior to the 2005 law, people could claim chapter 7 bankruptcy, and get rid of all their credit card debt without paying anything. The Means Test is designed to encourage (or force) people to claim chapter 13 protection instead of chapter 7, where they make at least a partial settlement with their credit card debts. Here is how the Means Test works. To begin the means test, answer this question: Is your current monthly income, times 12, above the median annual income for a household of your size in your home state? If that number, based on a 6-month running average of pay stubs and other income, is below the median, then the means test is done. If it is over the median, then you must deduct from current monthly income a set of "allowable" expenses, based on IRS statistics for the average cost of food, clothing, personal care, transportation, housing, health care and certain insurance premiums. If the monthly payments on the secured debt for your home and vehicles are above the statistical norm, adjustments are made in your favor. When all of that is done, if you have $110 or more left over, without regard to credit card and other unsecured payments, then there is a "presumption of abuse" if you try to claim bankruptcy under chapter 7. That puts pressure on you to claim chapter 13, and make settlement with your unsecured creditors.

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