Posted By: Scott B. Riddle, Esq. (Ph: 404-815-0164)
Note: This is the next section in the Consumer Guide to Bankruptcy in Georgia, re-typed for the Blog. Comments and questions welcome.
GUIDE TO CONSUMER BANKRUPTCY LAW IN GEORGIA
III. Types of Bankruptcy
1. Chapter 7
Chapter 7 Bankruptcy is often referred to as “liquidation,” and is initiated with the filing of a Chapter 7 Bankruptcy Petition. In its most simple form, Chapter 7 involves the Debtor surrendering all non-exempt assets to the Trustee so the Trustee can sell the assets and distribute the proceeds to the creditors, and in return, the Debtor receives a discharge of most or all unsecured debt.
A Chapter 7 case may be filed by an individual, or jointly by a husband a wife. When the Petition is filed, a Chapter 7 Trustee is appointed to administer the assets of the bankruptcy estate. The estate generally consists of the Debtor’s property that is not subject to exemptions (discussed in detail below). A Chapter 7 case is usually the shortest case in duration, and a Debtor often receives a discharge of some or all debts in just a few months.
Often, the Debtor will not have to attend and court proceedings other than the first meeting of creditors. This meeting is an opportunity for the Chapter 7 Trustee and creditors to ask questions about the Debtor’s petition and schedules, and other issues related to the filing. Most creditors do not attend the meeting, but it is not uncommon for larger creditors to attend and ask questions.
In practice, Debtors are in bankruptcy precisely because they do not have significant assets they can sell to pay debts or because they have already sold the property to stay afloat. Many, if not most, Chapter 7 Debtors get to keep all of their property because the property is subject to exemptions or because the Chapter 7 Trustee believes that the value of the nonexempt property is not worth the time and expense involved in selling the property and distributing the proceeds to creditors. For example, a Debtor may own a home worth $200,000 and the equity (value of the property minus the amount owed on the secured loan) in the home is $25,000. Under Georgia law, a Debtor may exempt $10,000 in equity in the home, leaving nonexempt equity of $15,000. In theory, the Chapter 7 Trustee could seek a sale of the house to obtain the $15,000 in nonexempt equity to distribute to creditors. However, in practice, the attempted sale of the house may lead to a sale price below market value due to the necessity of a quick sale, and the real estate commissions, closing costs and attorney’s fees will often be far more than the $15,000 the Trustee hoped to collect. The same analysis applies to other items, such as clothing, furniture, some jewelry, sporting goods and other household items.
What property will the Trustee claim for the estate? This is determined on a case by case basis, but some examples are excess equity in a primary residence; equity in other real property owned by the Debtor; stamp, coin or firearm collections; automobiles owned free and clear not subject to exemptions; boats, campers and other recreational vehicles; jewelry and furniture in excess of exemptions; stocks and bonds and other interests in corporations or businesses; and, the Debtor’s interest in pre-petition causes of action against others (for example, claims for damages arising from pre-petition automobile accidents, claims against employers, or other claims for recovery). A Bankruptcy lawyer will review a Debtor’s personal property and will be able to determine the likelihood that the Trustee may want to sell some of the property.
1. Who is eligible to file a Chapter 7 petition?
Because of the nature of Chapter 7 – a discharge of debts with no repayment plan – Congress has placed a limitation on who is eligible for a Chapter 7 discharge. The 2005 amendments to Bankruptcy law brought about a test for eligibility known as the “Means Test.” The actual calculations of the Means Test are far beyond what can be discussed in this short Guide, but they can generally be summarized as follows:
- If the Debtor’s household income (including the income of the non-filing spouse) is below the median income for his state (as calculated by the Census Bureau), it is presumed that you qualify for Chapter 7. These figures are updated periodically, and as of the time of this writing (updated for October 15, 2007) are $38,086 for single-person household, $50,001 for a two-person household, $57,254 for a three-person household, $66,711 for a four-person household, and so on.** Household income is determined by the average monthly income for the six month period prior to filing, and not simply the Debtor’s and/or spouse’s salary or income as of the date the Petition is filed. That means that if the Debtor is recently unemployed and has no current income, the six month average may still be above the median and he may want to consider waiting until the average drops below the median. Conversely, if a Debtor was unemployed during much of the previous six months and has recently obtained employment with a salary above the median, he may still qualify for a Chapter 7 because the six month average is below the median.
- Even if you a Debtor is above the median income described above, he may still qualify for a Chapter 7 based upon actual household expenses. The Means Test allows for such items as ongoing medical expenses, care of elderly relatives, tuition expenses, and so on. This does not mean a Debtor is able to create his own budget – many of the allowed expenses have limits – but it does mean that many Debtors who have income above the state median may qualify for a Chapter 7. The general rule for Chapter 7 eligibility is that if one can afford to pay $100 a month toward your unsecured debts, you may need to file a Chapter 13.
- ·If the Debtor received a Chapter 7 discharge in a previous case within 8 years, or a Chapter 13 discharge within six years, unless the debtor paid at least 70% of unsecured claims in the prior case.
Important Note: While there has been a lot of attention placed on the 2005 Bankruptcy law amendments and eligibility for Chapter 7, and discussion that many people are no longer eligible, recent studies have shown that the overwhelming majority of people who would have been eligible for a Chapter 7 prior to the new laws are still eligible for Chapter 7 under the new laws. One should not assume that he or she will or will not qualify until their income, budget and other relevant information has been reviewed by a Bankruptcy lawyer.
2. What happens to my house, cars and other secured debts?
Generally, Debtors must keep making payments on home and automobile loans pursuant to the terms of the respective contracts. If Debtors are behind on these payments, they will likely have to make up any past due balance soon after the petition is filed to avoid foreclosure or repossession. Other secured debts may be treated differently, depending on the nature of the debt or collateral. Some liens may be avoided to the extent they impair an exemption. In some circumstances, such as where the collateral consists of computers, consumer electronics, or household furniture, the value of the property is worth far less than it would cost the creditor to seek repossession.
It is important to note that a Chapter 13 case may be more advantageous to a Debtor who is behind on secured debt, as the Debtor may be able to spread the past due balance over several months through the Chapter 13 plan. The bankruptcy lawyer will review secured debts and identify the issues that may arise with respect to each debt.
3. Who should not file a Chapter 7 Petition?
While most Debtors probably opt for a Chapter 7 if they are eligible, others who technically qualify may choose to file a Chapter 13. For example, if an individual is behind on mortgage payments, a Chapter 13 may allow him to make up the past-due payments over several months. In a Chapter 7, it is more likely a Debtor will have to make up all payments within a short time after filing, or risk foreclosure. If a significant portion of the debts are nondischargeable, such as taxes or student loans, a Chapter 13 plan may allow a Debtor to pay those debts through a plan whereas a Chapter 7 would not necessarily stop creditors’ attempts to seek the entire amount due soon after the Chapter 7 case is closed. Other Debtors may have a personal desire to pay back a small amount to their creditors, even though they could get the debts discharged in a Chapter 7.
These are only a few of the many reasons Debtors may consider filing a Chapter 13 rather than a Chapter 7. A Bankruptcy lawyer will be able to discuss the advantages of each based upon the particular situation.
Scott B. Riddle, Esq.