Bankruptcy and Workouts
Fortis LLP’s Bankruptcy Practice focuses on Chapter 11 and Chapter 13 Bankruptcy.
CHAPTER 13 BANKRUPTCY
A Chapter 13 bankruptcy is beneficial to a debtor in situations where non-exempt assets need to be protected, such as where there is equity in a home (above the homestead exemption limit) or when a house is in foreclosure or a car is near repossession.
Once the petition is filed, the Chapter 13 bankruptcy will promptly stop a foreclosure or a repossession and all the past due amounts may be put into the Chapter 13 plan and be paid to the court (i.e., that is to the Trustee) and disbursed to creditors over a 3 year or 5 year court approved payment plan period. Additionally, Chapter 13 is typically intended for petitioners who have household income above the state prescribed mean income and/or fail the Means Income test (which would have disqualified such petitioners for a Chapter 7).
In a Chapter 13 bankruptcy, a payment plan is approved by the court. The debtor will make monthly payments to a court appointed trustee. The debtor will be required to pay back some or all of the debts over a 3-year or 5-year period. The amount of the payment is based on the amount of the petitioner’s income and expenses. For secured loans like home mortgage or vehicle loans, petitioners have the option to continually pay these loans using the affirmation of debt process, or alternatively, petitioners can put any arrearages on these loans into the Chapter 13 plan and restructure the payments. Chapter 13 can also stop repossessions or foreclosures by allowing petitioners a 3-year or 5-year period to catch up the back payments through a court approved payment plan. Petitioners might also choose the option to surrender property and be relieved of the debt instead.
Once the Chapter 13 bankruptcy is filed, the United States Bankruptcy Law prohibits all creditor’s collection attempts, including telephone calls. Approximately 30 days after the Chapter 13 is filed with the court, petitioners are required to make an appearance in front of the court appointed trustee and the judge. The court and the trustee need to make sure that the debtors know and understand what payments will be required of the debtors and to make sure the debtors have enough income to make those payments. Once petitioner has completed the payment plan and has made all payments, the court will enter a discharge order which relieves petitioner of all liability for all debt stipulated in the Chapter 13 payment plan.
The court cost to file a Chapter 13 petition is $310 (as of August 2015). There are also two (2) financial management courses that must also be completed by each Debtor, as now required by the BANKRUPTCY REFORM ACT OF 2005. The attorney fees for a Chapter 13 case will depend on the nature and complexity of each case.
CHAPTER 11 BANKRUPTCY
The Chapter 11 bankruptcy is many times referred to as Business Debt Reorganization. In a Chapter 11 bankruptcy, the debtor remains in possession of all assets and the ongoing business.
A Chapter 11 bankruptcy allows a business to continue to operate without the day to day burden of their pre-existing debt obligations. It gives a business an opportunity to develop a plan to restructure debt and to relieve the business of leases and contracts that are economically unfeasible. In a typical Chapter 11 bankruptcy proceeding, management continues to run the day-to-day operation of the business. Many significant business decisions may require court approval, such as liquidating the assets of the business. Chapter 11 is also intended for those individuals whose secured and unsecured debt levels exceed the maximum allowable under Chapter 13, and unfortunately, of the chapters, Chapter 11 is and tends to be the most complex of all Chapters. As such, costs, legal fees and expenses associated with a Chapter 11 filing are substantially higher. The current filing fee alone (not including legal fees and expenses) for a Chapter 11 is $1,717 (as of August 2015).
BANKRUPTCY REFORM ACT OF 2005
The largest reform of the United States Bankruptcy Law in 25 years took effect on October 17, 2005—the Bankruptcy Reform Act of 2005 (“Bankruptcy Reform”). Under the Bankruptcy Reform petitioners filing bankruptcy must now provide the following:
- credit counseling certificate prior to the filing of bankruptcy;
- proof of income for the six months prior to the filing of the bankruptcy;
- a copy of the debtor’s most recent tax return; and
- a financial counseling certificate prior to the discharge of the bankruptcy.