Bankruptcy is designed to protect individuals, small businesses, and corporations from being overwhelmed by debt. The process involves reorganization and restructuring of debt so that a significant portion of it is discharged or "forgiven", and the remainder is repaid at a lower rate. Bankruptcy is designed to enable an individual or company to continue to function and prevent ongoing harassment from creditors. The two basic types of bankruptcy are liquidation and reorganization.
Discharge in Bankruptcy
There are several types of discharge in bankruptcy, but not all debts are able to be discharged. A secured creditor may enforce a lien to recover property secured by a particular loan, such as an automobile or a house. If the debtor wants to retain such property, payments must be paid to these creditors. Also, while many debts can be discharged, and the debtor who declares bankruptcy can be protected from harassment by most creditors, there are other debts that are deemed to be non-dis-chargeable, including,taxes, penalties, fines, student loans, child support and alimony payments.
Types of Bankruptcy
The various types of bankruptcy are named for the chapters of the U.S. Bankruptcy Code in which they are defined. The two most common forms of bankruptcy filed in the U.S. are Chapter 7 and Chapter 13, and bankruptcies under these chapters are typically filed by individuals or couples. On the other hand, a Chapter 11 bankruptcy is usually filed by businesses.
Chapter 7 bankruptcy is also referred to as liquidation because under this process the bankruptcy trustee takes charge of, and sells, some of debtor's property to pay back a portion of the accumulated debt. Chapter 7 bankruptcy is designed to relieve the debtor of unsecured debts, such as credit card and medical bills. In order to qualify for Chapter 7 bankruptcy, however, the debtor must have little or no disposable income. This means that if you earn too much money, you cannot apply for this type of protection. Chapter 7 bankruptcy, therefore, is usually helpful to low income debtors with few assets, and typically discharges debts within 3 to 5 months.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, unlike Chapter 7, is a form of reorganization of debt. This filing is designed to assist debtors with regular income who can repay at least some portion of their debts through a structured repayment plan. While many debtors, because of their elevated income or asset level, find it necessary to file Chapter 13, there are also other advantages such as the ability to catch up on delinquent mortgage payments. Debtors who file for Chapter 13 are permitted to keep all of their assets as long as they make structured payments to pay off their non-dis-chargeable debts. Chapter 13 bankruptcy plans are usually completed within a period of 3 to 5 years.
Although the vast majority of debtors seeking individual relief from debt file for Chapter 7 or Chapter 13, there are a number of other types of filings used for various purposes. The most common of these is Chapter 11 bankruptcy.
Chapter 11 Bankruptcy is another type of bankruptcy reorganization available to individuals, corporations and partnerships. Where Chapter 13 bankruptcy limits the amount of debt that can discharged, chapter 11 does not. Therefore, Chapter 13 is typically used by businesses undergoing financial struggles and looking to reorganize. Because it is fairly cumbersome for individuals -- being both expensive and time-consuming -- Chapter 11 is generally only used by individuals with debt levels too high for Chapter 13 filing, or by individuals with extraordinarily high assets or complicated finances.
There are a number of other chapters of bankruptcy, such as those applying to family farms or fisheries or designed to relieve municipalities or school districts of overwhelming debt, which can also be deliberated with you by the board certified bankruptcy attorneys at Schneiders & Associates, LLP. If you find yourself burdened with debt that cannot be repaid, you should consult a bankruptcy attorney at Schneiders & Associates, LLP promptly to discuss your best options.
When a person files for bankruptcy protection, his or her assets must be collected by the bankruptcy trustee and liquidated to reimburse debtors before the petitioner’s debts can be discharged. In order to keep bankruptcy petitioners from falling below the poverty line, there are certain assets that can be retained as exempt. This is not an exhaustive list, but covers the most commonly used federal bankruptcy exemptions.
1. Homestead exemption: If a bankruptcy petitioner owns a home, he or she may protect equity in the home. The amount of this exemption in California can range from $22,975.00 to $175,000.00 worth of equity in the home. The amount of the exemption depends on a number of factors including whether a family member lives in the home, age of the home owner, whether the owner is disabled etc., and whether the Debtor is filing using Federal or State exemptions. This issue needs to be carefully considered with legal counsel. If a Debtor owns no home or has no equity, the Debtor can claim a miscellaneous exemption of up to $22,975.00 which will be allocated to other property of the Debtor.
2. Vehicle exemption: Throughout much of the country, it is difficult to work or earn money without an automobile. Federal law allows a person to keep his or her automobile with a value up to $3,675.00. If the car is worth more than the amount allowed by the exemption, an individual may seek additional funds from other exemptions to keep the asset. Alternatively, the vehicle will be sold and the exemption amount given to the petitioner.
3. Personal property exemptions: These include $1,550.00 for jewelry, $2,300.00 for specialized tools and educational materials related to employment, and $12,250.00 for household goods, appliances, furnishings, clothing, etc.
4. Personal Injury exemption: The proceeds of a personal injury award may be held as exempt up to $22,975.00.
5. Wildcard exemption: A person is permitted to exempt as much as $1,225.00 for any other property he or she wants to keep after the bankruptcy above the other exemptions. This can be applied to increase the amount permissible to another exemption, most commonly the vehicle exemption. If the petitioner so chooses, he or she may opt to use the exemption on liquid assets, leaving the petitioner with more cash on hand after the bankruptcy is complete.
There are a number of other exemptions which may apply. Since situation is different, it is highly advisable to consult with legal counsel before filing bankruptcy. States may make other exemptions available or use different values than the federal exemptions. If you have questions about bankruptcy, contact experienced bankruptcy attorney, William Winfield at www.rstlegal.com.
If an individual filing for Chapter 7 bankruptcy owns an automobile, that vehicle may become the property of the bankruptcy estate used for the purpose of making creditors whole. If the car has a lean on it from the lending institution, the loan must be reaffirmed or redeemed, or the vehicle must be surrendered. If the loan is reaffirmed, the individual who took out the loan must sign a contract agreeing to continue making payments to the lender. The car loan will be unaffected by the bankruptcy, and the debt will not be discharged. An individual in bankruptcy may use the opportunity to renegotiate the terms of the loan for his or her benefit, though the new agreement must be approved by the bankruptcy court.
When an individual chooses to satisfy a car loan through redemption, that person must work with the lender to determine the current value of the automobile. The individual must pay the lender that amount, thereby settling the debt for less than its full value. If a person is not able to meet either of these sets of conditions, the car must be surrendered to the bankruptcy estate and the debt associated with it will be discharged. The creditor cannot take the car until after the bankruptcy is completed unless it files a motion with the court to repossess the vehicle earlier.
If there is no loan on the car, a bankruptcy petitioner still has options available. Both federal and state rules allow individuals to exempt personal possessions and motor vehicles up to a maximum value from the bankruptcy estate. If a bankruptcy petitioner is able to declare the entire value off the car as exempt or if the non-exempt value is negligible, the bankruptcy trustee will allow the petitioner to keep the car. If an automobile in bankruptcy is worth significantly more than the amount allowed by the exemption, the petitioner may pay the trustee the balance between the value of the car and the exempt portion. Alternatively, the petitioner may surrender the automobile to the bankruptcy trustee who will sell it and return the exempt portion to the petitioner. In any case, the petitioner has the right to decide what should happen to his or her car.
There are a number of legal factors to consider when filing bankruptcy, each with its own legal consequences. An experienced bankruptcy attorney at Schneiders & Associates, LLP can help. Please contact us to discuss what is right for you.
When Disfavored Businesses Go To Pot
Marijuana dispensaries are legal businesses under California law, but the distribution of marijuana is a Federal offense. As a result a Marijuana distribution business is not eligible for Federal Bankruptcy Relief.
This issue came up in Colorado recently where Frank Arenas operates a marijuana wholesale business. Mr. Arenas and his wife sought personal bankruptcy relief under Chapter 7 but the case was dismissed because individuals involved in criminal occupations are not allowed to seek relief under the Bankruptcy Code. A Bankruptcy Appellate Panel authored an opinion in which the trio of Bankruptcy Judges sustained the dismissal with these words: ”possessing , growing and dispensing of marijuana and assisting others to do that are federal offenses … Can a debtor in the marijuana business obtain relief in the federal bankruptcy court? No.”
The Tenth Circuit Court of Appeals has granted a stay pending appeal. This marks the first time this issue has been considered at such a high judicial level.
Unless Congress takes the unlikely step of changing Federal marijuana laws, this bodes to be an interesting discussion with potential ripple effects on Counties like Ventura which restrict Marijuana distribution because it still constitutes a Federal Crime.
This issue has caught the attention of scholars and pundits who have scheduled programs on this topic and related issues at upcoming seminars throughout the country. (E.g. an American Bankruptcy Institute Meeting in December 2015 features this topic – “Selling Unusual Assets in Bankruptcy and Their Tax Aspects (Pot, Porn and Puppies)”.)
In the meantime, operators of legal Pot businesses have fewer options for insolvency relief.
William E. Winfield is an attorney at Schneiders & Associates, L.L.P. He has been practicing in creditors’ rights and debtors remedies for 30 years and is board certified in Business Bankruptcy by the American Board of Certification. He is also available for appointment as a Receiver.