Bankruptcy Information

This information is provided as a very brief summary of a rather complicated area of the law. It is not possible in this summary to fully discuss all areas of bankruptcy, nor to express all possible problems, benefits, costs or consequences of filing a bankruptcy case. This information should not be understood as legal advice. If you are considering filing a bankruptcy, or if you would like information regarding how a bankruptcy would effect you individually, you should contact a competent attorney to discuss your situation.

If you are an individual or a married couple who needs immediate relief from creditor demands, garnishment, tax levies, threats of repossession, or other debt related problems, filing a Chapter 7 or a Chapter 13 case in the Federal Bankruptcy court may be the answer.

There are a number of different options when filing a bankruptcy. Our firm concentrates our bankruptcy practice on Chapter 7 and Chapter 13 cases. The type of bankruptcy filed varies depending upon individual circumstance. The name "Chapter 7" or "Chapter 13" refers to the chapter of the Bankruptcy Code under which an individual seeks relief. The bankruptcy code is a federal law and is encompassed, for the most part, in Title 11 of the United States Code.

The object of a bankruptcy, whether a Chapter 7 or a Chapter 13 is to rid the debtor of dischargeable debts. Debts (i.e. bills) can be either dischargeable or non dischargeable. Debts that are non dischargeable "survive" the bankruptcy and the debtor may be required to continue payment on those debts to avoid unwanted collection activity on the part of creditors. Whether a debt is dischargeable depends not only upon the type of debt, but also the type of bankruptcy filed. Also, some debts are automatically non dischargeable, while others require an "objection" on the part of the creditor or other interested party. Examples of non dischargeable debts are briefly discussed later.

A bankruptcy is initiated upon the filing of a petition with the United States Bankruptcy Court. The petition in essence requests that the Bankruptcy Court grant the debtor relief from the debts. The bankruptcy petition includes among other information a request for relief of the debts, a list of all creditors (debts), a list of all property belonging to the debtor, and a statement regarding the debtor's financial affairs. This petition is a signed document, which the debtor declares to be a true and correct statement of all of the debtor's assets and all of the debtor's liabilities as well as a true statement of the debtor's financial affairs.

Married persons can either file a joint petition (file together) or may file individual petitions (each individual filing their own). Normally a single petition is filed for married couples. On occasion, only one spouse is liable on the bulk of the debts. In that case it is possible for only one spouse to file a bankruptcy. If the couple has joint debts, debts on which both are liable, the filing spouse's liability is discharged (removed) but the non-filing spouse remains responsible to pay the debt. Unmarried persons can only file an individual petition.

Upon the filing of the petition, the Bankruptcy Court Clerk sends a notice to all creditors listed in the petition, that the debtor has filed a bankruptcy petition. Upon the filing of the bankruptcy petition, an automatic stay is created. The automatic stay acts as a barrier between the debtor and the creditors. The automatic stay prevents creditors from being able to continue all forms of collection activity. The automatic stay prevents, the filing or continuation of lawsuits, the filing or continuation of garnishments, the sending of collection letters, the making of harassing telephone calls, repossession of vehicles, continuation or commencement of foreclosures, and numerous other collection activities. That stay remains in place during the administration of the bankruptcy case or until a specific creditor obtains permission from the court to continue with collection activities.

When the petition is filed the court also appoints a trustee. The trustee is an individual who is appointed to manage the bankruptcy case. The trustee will review the petition and will determine if there are any assets which are not exempt or if there are other matters that need to be handled. As part of the administration and management of the case, a hearing is conducted by the trustee. The hearing is normally set between 30 to 45 days after the day that the petition is filed. That hearing is often called a 341(a) hearing, or the "first meeting of creditors." The function and duties of the trustee will vary depending upon the type of case filed. In a Chapter 7 case, the trustee is responsible to take possession or control of nonexempt property and sell that property for the benefit of the creditors. In a Chapter 13 case, the trustee is primarily responsible for receiving payments from the debtor and distributing those payments to the creditors according to the Chapter 13 Plan.

[Back to Top]

Exemptions

Individuals who file bankruptcy are entitled to keep certain items of property. These items of property are often called exempt property. That means that they are exempt (protected) from creditors, the trustee, and the court. What items are exempt varies from state to state. Some examples of exempt property under Oregon law are as follows:

• Homestead (House with Land) with a value to $30,000.00 in equity for an individual and $39,600.00 for a married couple

• Vehicles with a value of $2,150.00 in equity for each individual (i.e. total of $4,300.00 for married couple)

• Clothing, Jewelry, and other personal items with a value of up to $1,800.00 each individual

• Household Furnishings and Appliances with a value of up to $3,000.00

• A Pistol and rifle or shotgun with a value up to $1,000.00

• Books, pictures, musical instruments, art and other similar items with a value up to $600.00

• 100% of Retirement accounts, 401(k), IRA, PERS, Pensions, and other similar retirement plans

• Cash, money in bank accounts, or other similar property up to $400.00

• Tools of a business or trade to a value of $3,000.00

Some examples of property that is not exempt would include the following:

• Value in property to the extent that it is greater than the "exempt" amount

• Accounts receivable

• Cash Value in insurance policies (unless the beneficiary is other than the debtor or the debtor's estate)

• Tax refunds

• Claims for recovery of money or property unless otherwise exempt

• Tax refunds and other money owed to the debtor

There are also other exempt items of property as well as nonexempt property. What is exempt and what is not is best determined by consultation with an attorney. 

[Back to Top]

Creditors

Creditors are people, businesses, or organizations to which money or property is owed. Creditors can be divided into two categories -- Secured and Unsecured. A secured creditor is a creditor that has collateral for the loan. Examples of a secured creditor would be a mortgage company, a vehicle finance company, a furniture store, and others. Unsecured creditors are all other types of creditors. For example, credit card bills, medical bills, legal fees, and the like.

Creditors are treated differently in bankruptcy cases depending upon the type of claim they have. Secured creditors generally have the right to recover their collateral (i.e. the car, the computer) or receive payment. Unsecured creditors have no right to recover property from the debtor.

Certain Unsecured creditors are given special treatment in a bankruptcy. These are called Priority creditors. Among the most common Priority claims in cases filed by individuals would be alimony and child support claims, some taxes, wages owed to employees and others. These creditors are entitled to receive more than other creditors from the bankruptcy and in some cases will survive the bankruptcy all together.

[Back to Top]

A Chapter 7 bankruptcy is intended to give the debtor a fresh start by preventing further collection of dischargeable debts and at the same time allowing the debtor to keep legally exempt property. A Chapter 7 is designed as a liquidation of the debtor's nonexempt property with the goal of paying the proceeds of the liquidation to the creditors. In most Chapter 7 cases, there is no "liquidation" because in most cases there is little or no "nonexempt" property. It is the trustee who is responsible to determine if there is property which can be sold to pay creditors. The trustee, however, must ultimately report to the Bankruptcy Court Judge and therefore the trustee's power is not "unlimited".

Where there is not property to be sold, the trustee files a report with the court indicating that there are no assets, and that no further administration is needed. Where there is property to be sold or recovered, the trustee undertakes to do so. In a case where there are assets, the trustee files a report with the court indicating such. At that time, another notice is sent to the creditors advising them of possible assets and requiring them to file a "Proof of Claim" in the case. Each creditor who wishes to participate in distribution of proceeds must file a proof of claim. If a proof of claim is not filed, the creditor will receive nothing from the debtor's assets. Whether a creditor files a proof of claim or not does not effect the debtor's discharge -- but merely the creditor's right to receive any payment on the debt.

Approximately 90 days from the day that the petition is filed, the court will enter an order of Discharge. The discharge indicates that the debtor is no longer responsible to pay dischargeable debts, and indicates that future attempts to collect upon the debts is forbidden. The discharge does not necessarily close the bankruptcy case, however. In a case where the trustee has taken property to sell, the case will remain open until the trustee has completed distribution and filed a final report. In a case where the trustee has filed a "no asset" report, the case is generally closed upon entry of the order of discharge.

Some debts can not be discharged in a Chapter 7 case. Some examples of claims that will automatically survive a Chapter 7 are:

• Child Support and Alimony Claims

• Some Taxes

• Debts for fines and penalties owed to government

• Student Loans

• Debts acquired by fraud or false representation

• Debts arising due to the operation of a motor vehicle while under the influence of alcohol or drugs

• Debts arising out of willful and malicious injury to an entity or the property of another

• Debts owed to a former spouse arising from a divorce or separation agreement

• Debts not listed in the bankruptcy

This list is not a complete list, but lists many of the most common non dischargeable debts. Some of these, for example taxes, fines and penalties, child support and alimony claims, student loans, debts from injuries sustained due to operation of a vehicle while under the influence, and unscheduled debts, automatically survive the bankruptcy. Others such as debts fro willful and malicious injury, debts acquired by fraud, debts to a former spouse (other than support and alimony), and others require an objection be filed by a creditor. Such an objection must be filed before the case is closed, otherwise the creditor will be forever prevented from filing a claim.

In a Chapter 7 case, debtors will often desire to keep certain debts and continue to make payments to certain creditors. For example, a Chapter 7 debtor may wish to keep a vehicle, a home, furniture or electronics, or other items which are collateral for loans to various creditors. In that situation, the debtor may be required to sign a reaffirmation agreement. A reaffirmation agreement is in essence an agreement between the debtor and the creditor as to the financial arrangements regarding the property the debtor wishes to keep. In the case of an automobile, the debtor would likely agree to continue to make payments according to the contract that existed before the bankruptcy was filled. The creditor would agree to accept those payments according to the terms and conditions of the contract.

Once the debtor signs a reaffirmation agreement, the debtor has approximately 60 days to change his or her mind. If the debtor determines not to reaffirm the debt, after having signed the agreement, the debtor must give written notice to the creditor that the debtor wishes to cancel the agreement. If the agreement is so cancelled, the creditor would have the right to return of the collateral (i.e. the vehicle) however would have no further remedy against the debtor.

Additionally, for a reaffirmation agreement to be enforceable against the debtor, it must be filed with the Bankruptcy court. If the debtor is represented by an attorney, the attorney must also sign the agreement, prior to it being filed with the court. If the debtor is not represented by an attorney, the court must hold a hearing and the court must "approve" the agreement before it has binding effect upon the debtor.

In some cases, creditors do not send reaffirmation agreements. This does not mean, however, that the debtor is not able to voluntarily continue payments to creditors. A bankruptcy discharge prevents creditors from further collection of discharged debts. It does not prevent a debtor from paying a creditor if the debtor desires to do so. At times a debtor wishes to continue payment even though the debt is discharged, either for personal reasons, or because the debtor believes that so doing will help rebuild credit, or because the debtor wishes to maintain a good relationship with a given creditor. Again, payment to discharged creditors is not required, however, voluntary payment is not prohibited.

[Back to Top]

There are other types of bankruptcy other than Chapter 7 and Chapter 13. Among these are Chapter 9, Chapter 11, and Chapter 12 cases. Chapter 11 cases are generally reserved for business debtors or debtors with large amounts of debt. Chapter 12 cases are reserved for family farmers. Chapter 9 cases are reserved for Municipalities (government). Our firm does not handle Chapter 9 or Chapter 12 cases, and rarely will handle a Chapter 11 case. However, depending upon individual circumstance we would certainly be willing to discuss the possibility.

[Back to Top]

A Chapter 13 case is a reorganization of the debtor's financial affairs which allows debtors with regular incomes to make affordable, often reduced payments on their obligations. Such payments are made for a specified period of time, usually not less than 3 years and not more than 5 years. The payments are made according to a court confirmed (approved) plan. The plan is proposed to the court by the debtor and / or the debtor and the debtor's attorney. The plan is reviewed by the trustee, who either recommends confirmation or objects to the confirmation.

A Chapter 13 plan must satisfy certain requirements in order to be confirmed or approved by the court. The plan, among other things, must provide for payment to the trustee of all of the debtor's disposable income. It must provide for payment of secured creditors. It must provide for payment in full of all priority claims. The plan must also provide that unsecured creditors get (over time) as much from the Chapter 13 as they would have received from a Chapter 7 liquidation. Therefore, it is not necessary that all creditors be paid all that is owed to them.

A Chapter 13 is particularly attractive when foreclosure is threatened or even filed, or when there are unfiled tax returns or other tax concerns. A Chapter 13 may also be a good alternative when non dischargeable debts such as those incurred by fraud, child support or others are a concern. Additionally, a Chapter 13 may be a good alternative when the debt owed to a secured creditor (i.e. on a vehicle), is much greater than the value of the collateral. A Chapter 13 may also be beneficial to a sole proprietor who wishes to continue operation of a business without interference by the court or by creditors.

In a Chapter 13 monthly payments are made to the trustee. The trustee will then take the payments and distribute the money among creditors according to the plan. Generally, the payments are first paid to administrative claims such as the trustee's fees, second to secured creditors (such as mortgage arrearage, vehicle payments, payments on furniture and the like), third to priority creditors (such as support claims and taxes), and last (if at all) to unsecured creditors (such as credit cards, medical bills, etc.).

In a Chapter 13 case the discharge of debts does not occur until all payments under the plan have been completed. That means for at least 3 years and up to 5 years the case remains open. If a debtor fails to follow the plan, by failing to make payments, for example, the case can be dismissed and no discharge granted. If, however, all payments are made under the approved plan, the court will, at the end of the plan, enter a discharge of all dischargeable debts -- thereby giving the debtor the fresh start desired.

Chapter 11 and Chapter 12

There are other types of bankruptcy other than Chapter 7 and Chapter 13. Among these are Chapter 9, Chapter 11, and Chapter 12 cases. Chapter 11 cases are generally reserved for business debtors or debtors with large amounts of debt. Chapter 12 cases are reserved for family farmers. Chapter 9 cases are reserved for Municipalities (government). Our firm does not handle Chapter 9 or Chapter 12 cases, an rarely will handle a Chapter 11 case. However, depending upon individual circumstance we would certainly be willing to discuss the possibility.

 

[Back to Top]

Debt is a tremendous burden upon society. It is the cause of many failed relationships and other hardships. For this and other reasons, Congress has created bankruptcy laws. Bankruptcy is designed to allow a fresh start whenever possible.

Whether you need immediate relief from the pressure and stress associated with too much debt, or whether you need advice about how to legally plan for a future bankruptcy, or whether you wish to explore some ways to avoid bankruptcy, rebuild your credit, deal with tax issues, or deal with creditors outside of bankruptcy, perhaps our firm can be of assistance.

Again, this information is not intended as legal advice, but rather a brief summary of basic information. Our firm offers an initial consultation at no charge and we would be happy to meet to discuss your individual situation. As you may already be aware, your main office is located in Salem, Oregon. You may reach us at (503) 362-6528. We are unable to respond to questions presented by email, however, if you would like to schedule an appointment, you may send an email to info@gunnlawfirm.com.
 

[Back to Top]