Creditor’s Rights in Bankruptcy | Your Security Interest

Bankruptcy has become a complicated matter for businesses in Illinois. Businesses must be very careful in protecting their rights through gaining security interest in secured transactions and security agreements when a vendor, customer, or client files for bankruptcy protection.

Security Interests

Contracting for a security interest is an effective way for lenders and other companies to protect themselves in the event of bankruptcy of the borrower or other party. A Security interest is created through security agreements. The parties to a security agreement are the debtor and the secured party. The debtor is the person with an interest in the collateral who owes payment or performance of the obligation secured. The secured party is the lender, seller, or other person in whose favor there is a security interest.

A security agreement is an agreement that creates or provides for a security interest. A security agreement must be authenticated, contain a description of the collateral, and value must be given in exchange for the security interest. These requirements can be met in any order. When these requirements are satisfied, a security interest is said to have attached.  This is important in bankruptcy proceedings.

As you can see, companies must be well advised when creating security interests and drafting security agreements. At Kepple Law Group we can help businesses draft security agreements and create effective security interests so as to ensure the company’s rights are protected in bankruptcy.

Perfecting a Security Interest

To protect its rights in collateral, a company must ensure that its security interest is perfected. A perfected security interest is senior, or prior, to rights of other secured and unsecured creditors of the debtor, the rights of certain buyers, lessees, and licensees of the collateral, and the rights of a trustee in bankruptcy and other lien creditors of the debtor. Most security interests can be perfected through possession, filing a financing statement, control, or automatically. Observing all legal requirements in detail is a must in obtaining a valid security interest.

Bankruptcy Issues in Peoria?

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.

Personal Bankruptcy Basics – Chapter 7 & Chapter 13

Bankruptcy is one of the most misunderstood legal protections in today’s society. Bankruptcy is often given a negative connation. However, a fundamental understanding of bankruptcy, both Chapter 7 and Chapter 13, and its general concepts disposes of the negativity associated with filing for bankruptcy protection. While both corporations and individuals may file for bankruptcy protection, this article addresses personal bankruptcy.

What is Personal Bankruptcy and What Alternatives are Available to the Personal Debtor?

A voluntary personal bankruptcy is a proceeding a debtor initiates seeking relief provided by federal statute – the U.S. Bankruptcy Code. 11 U.S.C. §101, et seq. Federal Courts have exclusive jurisdiction over bankruptcy proceedings, which are usually initiated in the federal court district in which the debtor resides.

 Chapter 7 Bankruptcy Basics

Generally, two types of relief are available for individuals in bankruptcy. The optimal bankruptcy is liquidation under Chapter 7. 11 U.S.C. §701, et seq. A Chapter 7 bankruptcy proceeding and relief are available to individuals who pass a “means test,” which requires the debtor to complete a detailed income and budget form. In a Chapter 7, all of the debtor’s non-exempt assets are collected by the bankruptcy trustee pursuant to the Bankruptcy Code and sold to pay creditors. The debtor’s assets include any legal or equitable interest the debtor has in real and personal property. At the conclusion of the bankruptcy case all the debtor’s debts are discharged. The discharge absolves the debtor from any responsibility to pay debts listed in the bankruptcy petition.

 Chapter 13 Bankruptcy Basics

Another type of relief for debtors under the Bankruptcy Code who have a regular source of income is reorganization under Chapter 13. 11 U.S.C. §1301, et seq. In a Chapter 13 bankruptcy, sometimes called a wage earner reorganization, the debtor proposes a plan for repayment of some or all debts under the Bankruptcy Code. The plan, if approved, is carried out under supervision of the bankruptcy court. The debtor retains possession of all of his or her assets, and all of the debtor’s property is protected from claims of creditors in a Chapter 13. As in a Chapter 7, a debtor is absolved from personal liability for debts listed in the bankruptcy petition. The listing, or scheduling, of debts in the bankruptcy petition is critically important, as debts owed to and claims of creditors that are not scheduled in the petition are not discharged and not subject to the automatic stay, which is explained below..

Automatic Stay in Bankruptcy

Upon the filing of a bankruptcy petition under either Chapter 7 or Chapter 13, the automatic stay provisions of the Bankruptcy Code (11 U.S.C. §362(a)) prevent creditors, with certain limited exceptions (such as alimony, maintenance and support), from initiating or continuing legal actions or other collection efforts from the debtor.  Common examples of collection activities that are stayed are car repossessions, salary and wage garnishments, mortgage foreclosures, and tax levies. Therefore, the debtor receives protection from creditor collection efforts effective immediately upon filing the petition in bankruptcy, a significant benefit. Most courts have ruled that any creditor actions in violation of the automatic stay are void, or at least voidable.

Why File for Bankruptcy Protection?

The two most noted purposes of bankruptcy are a fresh start for the debtor and equity among creditors with the former purpose being far more significant. The fresh start concept is the statutory goal of the Bankruptcy Code. It is designed to allow individuals consumed by debt to free themselves of the debt burden, allowing them to embark on a productive life free of past financial difficulties. The goal is to free the individual from the permanent disability that would prevent him or her from becoming a productive member of society. The Supreme Court has described the fresh start concept as a “new opportunity in life, unhampered by the pressure and discouragement of preexisting debt.”  Local Loan Co. v. Hunt, 292 U.S. 234, 244 54 S. Ct. 695, 78 L. Ed. 1230 (1934).

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.

Bankruptcy Means Test

What is the means test?

The bankruptcy means test is an income based tests which compares the gross income of a debtor to the median gross income level for a household of similar size in the same state. The debtor qualifies for a chapter 7 bankruptcy if their gross income is below or equal to the applicable median gross income level for their state.

A debtor must pass the means test to file a chapter 7 bankruptcy if their income level is above the applicable median income level for their state. The test calculates a debtor’s disposable income after allowing specific reasonable and necessary expenses. The means test has a six (6) month look back period. Thus, a debtor would add up the gross income amount for the six (6) months prior to filing and divide by six (6). The applicable period ends with the last day of the month prior to filing. Thus, if a debtor filed on February 14, 2013, the applicable means test period would be August 1, 2012 to January 31, 2013.

However, it should be noted that some bankruptcy courts allow certain income’s to be prorated over twelve (12) months. A case from Virginia allowed a debtor to prorate an annual bonus for purposes of the means test, In re Meade, —— B.R. ——, 2009 WL 4456211 (Bankr. W.D. Va., Nov. 13, 2009). The court noted that this was a more realistic common sense approach in keeping with what appeared to be the purpose and goals of the Bankruptcy Code.

What is considered income under the means test?

The means test includes all sources of income with limited exceptions. Source of income that are included as income under the means test include, but are not limited to: wages, salary, tips, commissions, gross income from a business or farm, interest, dividends, royalties, rental and real property income, regular child or spousal support, unemployment compensation, pension and retirement income, worker’s compensation payments, annuity payments, and state disability payments.

A few of the exceptions to income under the means test include: social security retirement benefits, social security disability insurance, supplemental security income, and temporary assistance for the needy. Most income derived under the Social Security Act is not considered income.

Casey Kepple Peoria Bankruptcy Lawyer

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.