Chapter 13 Bankruptcy

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a great tool to use when trying to save a home from foreclosure. The chapter 13 bankruptcy is also known as the “wage earners bankruptcy.”  In a chapter 13 bankruptcy a debtor makes a monthly payment to the chapter 13 trustee over a period of three or five years, and the payments are applied to repayment of the debts.  All the debts of the debtors that are listed in the petition are discharged at the end of the payment plan.

Eligibility for Chapter 13 Bankruptcy

Section 109(e) of the Bankruptcy Code provides that to be a chapter 13 debtor, the debtor must: 1) Be an individual with regular income or an individual with regular income in that individual’s spouse; 2) Owe non-contingent, liquidated, unsecured debts of less than $307,675 on the date of filing; and 3) Owe non-contingent, liquidated, secured debts of less than $922,975 on that date, 11 U.S.C. §109.

What is an Individual with Regular Income?

The Bankruptcy Code defines an individual with regular income as “an individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan in chapter 13,” 11 U.S.C §101(30). Most courts take a liberal view of what constitutes an individual with regular income. Courts have found that regular payments from ex-spouses, friends, and relatives constitute regular income. Additionally, people who receive public benefits, alimony, pensions, and small business owners are eligible to be a chapter 13 debtor.

Debt Limitations in Chapter 13 Bankruptcy

As noted earlier, a chapter 13 bankruptcy debtor must fit within certain debt limitations. For example, a debtor must have secured debts of less than $922, 975 on the day of filing. An individual or small business may get around this requirement by arguing that only the allowed secured claim (actual value of the collateral) should be considered against the limit on secured debts. For instance, if a debtor has secured debts equaling $925,000 on various pieces of collateral, but the actual value of those pieces of collateral is $920,000 (so all the collateral is over secured), the debtor may argue that the unsecured portion of the claim (the amount of the claim that exceeds the total value of the collateral) should be considered against the limit on unsecured debts rather than secured debts.

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Bankruptcy Eligibility

Bankruptcy Eligibility

Most people know that bankruptcy eligibility rules only allow one to file a chapter 7 bankruptcy every 8 years from the date the action is commenced. However, voluntary or involuntary dismissal of your case also affects your ability to re-file despite not receiving a discharge. As explained below, a person is not eligible to file bankruptcy immediately after dismissing a prior bankruptcy case.

Bankruptcy Code Section 109(g)

An individual lacks bankruptcy eligibility if, within the preceding 180 days, (1) he or she was the debtor in a bankruptcy case dismissed for willful failure to abide by orders of the court or to appear before the court in proper prosecution of the case or (2) he or she requested and obtained voluntary dismissal of a bankruptcy case following the filing of a request for relief from the automatic stay provided by section 362, 11 U.S.C. §109.

Involuntary Dismissal

In the case of an involuntary dismissal, it is not improper to re-file a petition within the 180 day period unless the dismissal was for failure to abide by a court order and it was willful. Normally a re-filing within 180 days will not be challenged unless some party in interest files a motion to dismiss. Failing to pay filing fees or plan payments in a chapter 13 case should not be considered willful so as to preclude a filing within 180 days of involuntary dismissal, In re Howard, 134 B.R. 225 (Bankr. E.D. Ky. 1991).

Voluntary Dismissal

The provision of § 109(g) relating to voluntary dismissals in designed to prevent debtors from repeatedly filing new bankruptcy cases and obtaining new automatic stays after relief was requested or granted in previous cases. Thus, this provision does not apply when there is a voluntary dismissal and a new case after a request for relief from the stay is denied.

Under rare circumstances, courts will enter dismissal orders not based on § 109(g) that prohibit the debtor for filing another case for 180 days. In extremely rare cases, courts may dismiss a bankruptcy case with prejudice, precluding the debtor from ever discharging the debts in that case.

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The Kepple Law Group is highly knowledgeable in bankruptcy matters and can advise clients in all aspects of bankruptcy proceedings.

Chapter 7 Bankruptcy Meeting of Creditors

The Bankruptcy Meeting of Creditors

Most of the time the only appearance a debtor must make in a chapter 7 or chapter 13 bankruptcy case is at the Meeting of Creditors, also known as the 341 hearing which refers to the Section of the Bankruptcy Code requiring the hearing. This is a mandatory hearing that the debtor or debtors must attend to receive a discharge. It is also the part of the bankruptcy process that creates the most anxiety for debtors.

What is the Purpose of the Meeting of Creditors?

The Meeting of Creditors is the opportunity for creditors to examine the debtor under oath regarding the bankruptcy petition. The trustee assigned to the bankruptcy case will conduct the hearing. With limited exceptions, most chapter 7 debtors will never see a bankruptcy judge. Although they rarely come, all the debtors’ creditors are invited to the hearing.

What Happens at the Meeting of Creditors?

Meetings of Creditors are scheduled in block times so multiple debtors will be scheduled in half hour blocks. The trustee assigned to your case will be seated at the front of the room and begin the half hour block with a short introduction. When your case is called you will approach the trustee’s desk who will swear you in. Before the examination begins the debtor is required to show a state issued photo identification card and proof of social security number. The trustee will begin the examination with standard questions that he or she must ask all debtors. The trustee will then ask specific questions he or she may have based upon the individual petition filed in your case. As stated above, your creditors are also invited to attend the hearing but rarely choose to come. If a creditor decides to attend the hearing, the creditor is subject to limits on the time allowed for examining the debtor because the hearings themselves are limited in time.

Bankruptcy or Other Debt Issues?

The Kepple Law Group is highly knowledgeable in bankruptcy matters and can advise clients in all aspects of bankruptcy proceedings.

Reaffirmation Agreements in Bankruptcy

One of the most common questions I get asked by potential clients is “Can I file bankruptcy and keep my car?” The answer to that question is yes. A potential client can file for bankruptcy protection and keep their car by executing a reaffirmation agreement with the secured creditor.

Navigating the Reaffirmation Agreement

Reaffirmation Agreements are fairly complex and I recommend debtors find legal counsel when entering such agreements. It is important to know that Rule 4008 of the Federal Rules of Bankruptcy Procedure requires that Reaffirmation Agreements be filed with the court no later than 60 days after the first date set for the meeting of creditors. The official form for Reaffirmation Agreements also requires the debtor to state his or her total income and expenses as listed in schedules I and J of the bankruptcy filing. If the debtor’s total income and expenses differ from that in schedules I and J a statement explaining the difference is required.

The Effects of Reaffirming

Executing a Reaffirmation Agreement has serious legal ramifications which the debtor must understand prior to entering such agreements. A debtor essentially renters a contractual obligation with the secured creditor that the bankruptcy filing stayed and provided the opportunity to terminate. The debtor is allowed to keep the collateral and agrees to continue paying on the debt under the original terms. The Bankruptcy Code only allows a debtor to file a chapter 7 bankruptcy once every eight years. Thus, if a debtor reaffirms on a car and suddenly falls behind in the payments for any reason within eight years, the creditor can legally pursue the debtor for payment. A debtor is this unfortunate position cannot file for chapter 7 protections and may find themselves facing a garnishment or lien. A debtor may still rescind a reaffirmation agreement for sixty days after it’s filed or up until discharge whichever is longer. It is critically important that a debtor fully understand the requirements and ramifications of entering a reaffirmation agreement and should seek legal counsel when considering such agreements.

Bankruptcy or Other Debt Issues?

The Kepple Law Group is highly knowledgeable in bankruptcy matters and can advise clients in all aspects of bankruptcy proceedings.

Power to Avoid Judicial Liens in Bankruptcy

As discussed in our earlier blogs, Section 522 of the Bankruptcy Code provides many protections and powers in connection with debtors’ exemption rights. Section 522 gives the debtor an unqualified right to avoid any judicial lien that impairs an exemption, with an exception for domestic support obligation debts. The Bankruptcy Code defines “judicial lien” broadly to include levies, judgment liens, and liens obtained by any other legal proceeding, 11 U.S.C § 101(36). To the extent a creditor’s lien is avoided, the creditor becomes an unsecured creditor and the lien cannot attach to property that the debtor acquires after the petition is filed.

Property Subject to the Power to Avoid Judicial Liens

The power to avoid judicial liens extends to every type of exempt property, without limitation, including property exempted under a wild card exemption. The wild card exemption is an exemption that can be applied to any property of the debtor. Unlike some of the other avoiding powers, the lien need not have been obtained within a certain time period before the bankruptcy petition. The lien may also be avoided if it was obtained after the filing of the petition on a prepetition debt. Even if the lien has caused the property to be repossessed or removed from the debtor’s possession, it can be avoided, forcing the return of the property.

Limitations on the Power to Avoid Judicial Liens

If the lien only partially impairs the exemption, only that part may be avoided.  Additionally, if an interest in joint property is subject to process and is thus nonexempt only because of a judicial lien, then that judicial lien should be avoidable to the extent the property could otherwise be exempted. In any case, there should be no doubt that, to the extent a creditor has a judicial lien on the interest of only one of two co-owners, and that interest may be claimed as exempt under Section 522, the creditor’s lien is avoidable. National Consumer Law Center, Consumer Bankruptcy Law and Practice (8th ed. 2006).

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The Kepple Law Group is highly knowledgeable in bankruptcy matters and can advise clients in all aspects of bankruptcy proceedings.

Utilizing Exemptions in Bankruptcy

As discussed in our earlier blogs, Section 522 of the Bankruptcy Code provides many protections and powers in connection with debtors’ exemption rights. The amount of property that may be claimed as exempt can be greatly increased, if necessary, by careful exemption planning. For example, cash in a bank account that cannot be claimed as exempt can be used to pay down a mortgage to create equity which can be claimed as exemptions

Avoiding Powers of Debtor

The power of the debtor to avoid transfer is expansive. Section 101(54) defines “transfer” to include any lien, execution sale, setoff, or any other mode of disposing of or parting with an interest in property, whether voluntarily or involuntarily, including foreclosure of the debtor’s equity of redemption. If the interest in property involved fits within the exemption scheme utilized by the debtor and if the interest is impaired by a transfer of a type covered by Section 522, then that transfer may be avoided. However, if only a portion of the transferred property may be claimed as exempt, the transfer may be avoided only to that extent.

How to Use Avoiding Powers with Federal Rules of Bankruptcy Procedure

The Federal Rules of Bankruptcy Procedure provides that lien avoidance actions shall be by motion with the exception of a chapter 11 which requires an adversarial proceeding initiated by a complaint. It may be possible to include in a chapter 13 plan provisions which effectuate the avoidance of transfer upon confirmation. Although the Rules provide that a motion or complaint are necessary in a “proceeding” to avoid a lien, it can be argued that when the lien is avoided in the plan, no separate “proceeding” is necessary. It is the debtor’s burden to file a lien avoidance motion. If none is filed, all liens on the debtor’s property, including otherwise exempt property, will normally survive the bankruptcy.

Limitations on Avoiding Powers of Debtor

The Bankruptcy Rules do not set a time limit for debtor lien avoidance. Lien avoidance is a personal right which does not affect the administration of the bankruptcy case, thus there is no need for the bankruptcy case to be reopened in order for the debtor to avoid a lien. However, actions to avoid transfers under section 522(h) are subject to a two year statute of limitations. The clock starts on the two year time period upon the order of relief or the date the case is closed or dismissed, whichever is earlier.

In our next blog in our bankruptcy series we will talk about a debtor’s power to avoid judicial liens.

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Bankruptcy Exemptions

The most powerful tool for a debtor is Section 522, which governs the debtor’s rights related to exempt property. When a debtor files for bankruptcy protection all of his or her property becomes part of the bankruptcy estate and under control of the bankruptcy court. The bankruptcy exemptions allow a debtor to free his or her property from the constraints of the bankruptcy court. Creditors cannot reach exempt property to satisfy their claims against the debtor.

What is Exempt Property?

Exempt property refers to the property of the debtor that the trustee is not permitted to liquidate and the debtor is permitted to retain in a chapter 7 liquidation. Other than the exempt property, virtually all of the debtor’s interests in property that have value are transferred to the trustee for the benefit of creditors. In a chapter 13 case, all property and earnings acquired during the pendency of the case are part of the estate. The estate’s interest in such property is no greater than the debtor’s interest at the time of filing the bankruptcy petition.

Exemptions do not affect valid security interests or other liens on property of a debtor. The debtor must pay the amount of the lien to remove it from the property; only the value of the interest remaining after deduction of the lien amount needs to be claimed as exempt.

What Can I Claim as Exempt in my Bankruptcy?

In most states, a debtor may choose from two sets of exemptions. A debtor may choose to utilize the exemptions provided by state law or the exemptions provided by federal bankruptcy and non-bankruptcy law. Debtors may choose federal exemptions if their state of domicile has not “opted out” of the federal exemptions. This allows states to pass laws prohibiting the use of federal bankruptcy exemptions. Thirty-states have passed such a law and in those a states a debtor may only utilize state and federal non-bankruptcy exemptions.

How to Determine the Applicable Exemption

The Bankruptcy Code attempts to discourage debtors from moving and changing their domicile to states with more generous exemption laws before filing. The state exemption law that applies to a debtor is determined by the state in which the debtor’s domicile has been located for the 730 days (24 months) immediately preceding the petition filing date. If the debtor’s domicile has not been located in a single state for the 730 day period, the applicable state exemption law is that of the state in which the debtor was domiciled for the 180 days immediately preceding the 730 day period, or in which the debtor was domiciled for the longer portion of such 180 day period. If the effect is that the debtor is ineligible for any exemption, he or she may elect the federal exemptions. Thus, a debtor will always have access to exemptions.

In the next article in our bankruptcy series we will talk about Illinois and Arizona exemptions.

Bankruptcy or Other Debt Issues?

The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.

The Bankruptcy Estate in Peoria, Illinois

In Peoria, Illinois, just as anywhere else in the country, the bankruptcy estate describes the aggregation of property rights that come under the control of the court in a bankruptcy case. The estate is created upon the commencement of the case and it generally consists of all interests of the debtor in any kind of property as of that time. A basic understanding of the scope of the bankruptcy estate helps prevent misunderstandings related to filing for bankruptcy protection.

What Property of the Debtor is Part of the Bankruptcy Estate?

Almost all property of the debtor becomes part of the bankruptcy estate upon the filing of a bankruptcy petition. The estate includes property recovered by the trustee, proceeds of property already in the estate, pre-petition causes of action possessed by the debtor such as a personal injury claim, and interests in insurance policies. In a chapter 13 case, all property and earnings acquired during the pendency of the case are part of the estate. The estate’s interest in such property is no greater than the debtor’s interest at the time of filing the bankruptcy petition.

Most property acquired by the debtor after the commencement of the case does not come into the estate. Additionally, there are exceptions for specific types of property acquired within 180 days of filing the petition that exclude it from the estate. These exceptions include property acquired by inheritance, spousal property settlements or divorce decrees, or property acquired as a beneficiary of a life estate. The 180 days begins the date the bankruptcy petition is filed.

The Bankruptcy Estate and Jointly Owned Property

When a co-owner of property files for bankruptcy protection, his or her partial interest in the property becomes part of the bankruptcy estate. However, the bankruptcy code provides protection for the other, non-debtor co-owner.

Most debtors, when represented by a competent bankruptcy attorney, can exempt all or almost all of the property of their estate. Most of the time, even if property cannot be exempted, and thus can be taken and sold by the trustee, such property is of little interest to the trustee because of the cost of liquidation, and is therefore abandoned by the trustee.

Bankruptcy or Other Debt Issues in Illinois?

The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.

How Does Bankruptcy Affect Pensions, Tax Refunds & EIC?

A good understanding of the important details of the bankruptcy estate can help a debtor take full advantage of the right to file for bankruptcy protection.

Pensions and the Bankruptcy Estate

Sections 522(b)(3)(C) and d(12) of the Bankruptcy Code permit a debtor to exempt, usually without any limitation, all funds in most types of retirement plans. There is a $1,000,000 cap, waivable by the court, only with respect to IRA accounts that were not rolled over from another type of plan. A debtor should defer either the filing or the rollover to ensure the filing takes place while the funds are in a qualified plan. Two types of retirement accounts do not qualify under ERISA and therefore are not entitled to its protection. These accounts are certain pensions established by governmental entities and individual retirement accounts (IRAs). It should be noted that IRAs may be exempted from the estate under applicable state law.

Tax Refunds, the Earned Income Tax Credit and the Bankruptcy Estate

The right to receive a tax refund is property of the estate as is a property interest in excessive withholding by an employer which becomes a part of a refund after the filing of the bankruptcy. When such withholdings do result in a refund, the refund is prorated over the entire year with the pre-bankruptcy portion part of the estate. Trustees usually do not check for a tax refund or excessive withholdings as they are usually eligible for exemption.

The earned income tax credit is always excludable from the estate because a debtor can have no legal interest in the credit prior to receiving it or by claiming it on a return. A credit cannot be determined until the end of the tax year; thus, it should not be included in the estate when a bankruptcy petition is filed prior to the end of the relevant tax year.

In the next article in our bankruptcy series we will talk about exemptions and how to remove property from the bankruptcy estate.

Are you in Central Illinois and have a Bankruptcy or Other Debt Issue?

The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.

Student Loan Bankruptcy | The Undue Harship Test

Student loan debt is becoming a national crisis as banks wrote off $3 billion of student loan debt in the first two months of the year, up 36% from the previous year. Student loan debt is not dischargeable in bankruptcy with limited exceptions. However, a recent decision from the Central District of Illinois Bankruptcy Court, and upheld by the United States Court of Appeals for the Seventh Circuit, has provided new case law allowing the discharge of student loans in bankruptcy.

Student Loan Bankruptcy in Peoria, Illinois

The Bankruptcy Code excludes student loans from discharge “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor”, 11 U.S.C. §523(a) (8). A finding of undue hardship requires that the debtor satisfy each part of a three part test: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made a good faith efforts to repay the loans, In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993), quoting Brunner v. New York State Higher Education Services Corp. 831 F.2d 395, 396 (2d Cir. 1987).

The United States Court of Appeals for the Seventh Circuit has decided a case that is important in the area of discharging student loan debt in bankruptcy. In Krieger v. Educational Credit Management Corporation, 12-3592 (7th Cir. 2012), the bankruptcy judge found that Susan Krieger, the debtor, could not pay the debt now or in the foreseeable future. The debtor was living with her seventy five year old mother in a rural area. The debtor and her mother had a few hundred dollars between them every month from governmental programs. The debtor did not have the resources to move in search of employment prospects and her car was a decade old and needed repairs. She also did not have internet access. Educational Credit Management Corporation argued that parts (2) and (3) of the undue hardship test had not been satisfied.

The bankruptcy judge ruled that Ms. Krieger satisfied the undue hardship test. The bankruptcy court found that the debtor made a good faith effort to repay the debt and the lender had not argued the debtor had resources to sustain a wider geographic job search. The bankruptcy court also noted that the debtor paid off as much of the student loan debt as she could with her divorce settlement.

The district court disagreed and reversed the bankruptcy court. The district court found that the debtor could have looked harder for jobs and lacked a showing of good faith because she failed to enroll in a 25-year repayment schedule. The Seventh Circuit Court of Appeals reversed the district court noting that under its standard of review it must find the bankruptcy court’s findings of fact clearly erroneous to reverse. The court noted that the evidence in the record supported the factual findings of the bankruptcy court and it was improper to reverse it.

Concurring Opinion in Krieger

In an interesting concurring opinion in Krieger, a Circuit Judge concurred with the majority opinion based on the standard of review, but preferred the district court’s analysis. The opinion noted that the debtor was fifty-three years old, in good health, and essentially gave up looking for a job. The judge was concerned that with so many people carrying student loan debt and struggling to make payments on their loans, the public may see this case as an excuse to avoid student loan obligations. The court pointed out that a quality and expensive education is no longer a guarantee that a good job will ensue. The debtor has the option to enter a twenty-five year repayment plan which limited payments to 15% of disposable income. Under the plan, the debtor would have paid zero dollars unless she obtained a job paying $17,000 annually and after twenty-five years the debt is forgiven. According to the concurring opinion, this was a better option than erasing what should be an undischargeable debt given the debtor’s age, good health, and solid education.

As you can see, debtors must be well advised when deciding to include debts in bankruptcy. At Kepple Law Group we can help clients make such decision so as to ensure the client’s obligations and liability are no greater than necessary.

Bankruptcy or Other Discharge of Debt Issues?

The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.