How is Chapter 13 Bankruptcy different from Chapter 7 Bankruptcy? Chapter 7 Bankruptcy is approximately a three to four month process where the bankruptcy trustee will examine a debtor's assets, determining whether law provides that any of those assets are subject to liquidation for satisfaction of any claims against the debtor (most often law does not provide that debtor's assets are subject to liquidation).
Chapter 13 Bankruptcy is a three to five year payment plan that pays a monthly dividend to the creditors whom file a claim in a debtor's case. The length of the plan and the amount that must be paid to unsecured creditors depends on many factors of an individual's particular circumstances. The Means Income Test Debtors that have significant income will not be eligible for Chapter 7 Bankruptcy. The Means Income Test calculates a debtor's monthly income based on pay records of the six months prior to the date of filing for bankruptcy (social security income is not included in this calculation). That monthly figure will then be multiplied by twelve to calculate an annual income. If that calculated annual income is greater than the Median Family Income for debtor's household size and state, then that individual will be ineligible for a discharge under Chapter 7 Bankruptcy, and may want to consider Chapter 13 Bankruptcy.
To learn more about means testing visit: https://www.justice.gov/ust/means-testing Excess Income in Monthly Budget The bankruptcy petition includes a statement of a debtor's budget. Case law suggests that if a debtor's monthly income exceeds his or her expenses by more than $100.00, then it is abusive to enter a discharge of that individual's debts under Chapter 7 of the Bankruptcy Code because that excess could be used to pay back unsecured creditors in a Chapter 13 Plan.
Usually, if a debtor can pass the Income Means Test, his or her attorney can help determine creative but reasonable solutions to address an excess income problem, however this is not always the case. Illinois's Median Family Income may not be a lot in the Chicagoland area, but in downstate rural areas of Illinois the cost of living is significantly less and the Median Family Income is a very comfortable living. Too Much Equity Under Chapter 7 Bankruptcy a debtor is entitled to exempt a certain amount of property from being taken by the Bankruptcy Trustee to pay unsecured creditors. If the debtor's assets exceed those exemption amounts, he or she may want to instead filed under Chapter 13 Bankruptcy in order to retain all of his or her assets.
To learn more about exemptions please refer to an earlier blog post: https://www.rsmithlawltd.com/will-the-bankruptcy-trustee-take-my-property
Chapter 7 Liquidation Analysis: The amount paid through the Chapter 13 Plan must pay unsecured creditors at least what they would have received had debtor filed for Chapter 7 Bankruptcy, which is the value of debtor's non-exempt assets reduced by the value of the Chapter 7 Trustee Fee as follows:
25% of any amount less than $5,000.00,
10% of any amount exceeding $5,000.00 but less than $50,000.00,
5% of any amount exceeding $50,000 but less than $1,000,000.00, and
3% of any amount exceeding $1,000,000.00.
The most common example of a debtor having too much equity is home ownership that is free and clear of any mortgage or other encumbrances to the property. An individual can only protect $15,000.00 of equity in a home (married couples can protect $30,000.00 if they are both on the deed to the home).
Example: Debtors, husband and wife, own a $50,000 home together, the deed is free and clear of any mortgage or lien, and they want to file for bankruptcy. If they file for Chapter 7 Bankruptcy it will be the Bankruptcy Trustee's legal duty to administer the sale of that home for the benefit of unsecured creditors. Regardless of what the home sells for, if the debtors assert their homestead exemption they are entitled to $30,000.00 of the proceeds from the sale of the home. The remaining funds will be used to pay the realtor, the trustee, and any unsecured creditors that file a timely claim in the Bankruptcy case. Alternatively debtors can file for Chapter 13 Bankruptcy, keep their home, and pay back their unsecured creditors over the next three to five years, in an amount equal to what those creditors would have received had debtors filed Chapter 7 Bankruptcy and surrendered their home. Recently Received a Bankruptcy Discharge In order to prevent abuse of the Bankruptcy Code, congress enacted laws limiting the frequency individuals may receive a discharge. A Debtor may NOT receive a discharge under Chapter 7 of the Bankruptcy Code if he or she has already received a discharge under Chapter 7 for a case that was commenced within the last eight years; or if he or she has received a discharge under Chapter 13 for a case commenced within the last six years (unless the Chapter 13 Plan is completed that pays 100% of unsecured creditors, or 70% of such claims AND the plan was proposed in good faith and best efforts were made, then no waiting period for Chapter 7 is required). Home Foreclosure Upon filing for Bankruptcy debtors enjoy the Automatic Stay, a protection preventing creditors from continuing any collection activity (i.e. solicitation, litigation, attachment, garnishment, foreclosure, etc.). A creditor can motion the Bankruptcy Court to lift the Automatic Stay, and may succeed under niche circumstances; however a court generally will NOT lift the stay for a mortgage lender if the plan provides that the loan be brought current before the expiration of the three to five year Chapter 13 Bankruptcy Plan.
Example: Debtor files for Chapter 13 Bankruptcy while significantly behind on both his home mortgage and another mortgage secured by a beach house, intending only to bring the home mortgage current and surrendering the beach house. The creditor for the home mortgage WOULD NOT likely be successful on a motion to lift the Automatic Stay because debtor intends to cure that mortgage and become current through the Chapter 13 Bankruptcy Plan. However if the creditor for the mortgage on the beach house motioned the Bankruptcy Court to lift the Automatic Stay, that creditor WOULD likely succeed because the debtor has no intention of making any further payment on that note. License Suspension If a debtor's license is suspended because of a debt owed to another arising out of an automobile accident where debtor did not carry insurance, then the debt owed to the individual or the individual's insurance company can be discharged in a Chapter 7 Bankruptcy, and the license may be reinstated upon paying a fee and providing proof of insurance required by law. However, fines payable to the government, like traffic citations, are NOT dischargeable under a Chapter 7 Bankruptcy.
Under a Chapter 13 Bankruptcy Discharge debtors are entitled to a discharge of non-criminal traffic offenses, which in Illinois include offenses that are NOT misdemeanor or felony. Therefore, if a debtor owes a government entity excessive parking fines and/or non-criminal moving violations, and as a result faces license suspension or has already had their license suspended; then by filing for Chapter 13 Bankruptcy a Debtor can maintain his or her driving privileges while possibly only paying a small portion of his or her fines.
Police or Regulatory Power: Actions or proceedings by a governmental unit to enforce its Police or Regulatory Power, like license suspension, are unaffected by the Automatic Stay. Whether an action constitutes a government Police or Regulatory Power is an evolving topic with sparse case law, therefore it is difficult to state with specificity a rule for making such a determination. However, a general interpretation of current case law suggests that if the purpose of the action is to collect money for the state or municipality, then it's likely outside the Police or Regulatory Power exception, and the automatic stay prevents collection activity. On the other hand, if the purpose of the action is to promote public health, welfare, morals, or safety, then it falls within the Police or Regulatory Power exception to the Automatic Stay and actions against a debtor may be maintained.
Example: Debtor has license suspended for failure to maintain required liability insurance on his vehicle. The failure to maintain required liability insurance does not relate to health, welfare, morals, or safety; therefore, upon filing for bankruptcy, any action taken against the debtor for this debt is a violation of the Automatic Stay and debtor must be given the opportunity to reinstate his or her license. However, the offense of failure to maintain required liability insurance is a misdemeanor, this means the debt cannot be discharged through bankruptcy because it is a criminal fine. If the criminal fine is not satisfied prior to the closing of the Bankruptcy case, then the state or municipality may continue collection activities.
Example: Debtor has license suspended for failure to maintain required liability insurance on his vehicle, then subsequently is convicted for driving while license suspended. Illinois is interested in promoting public safety by causing all drivers to possess a valid driver's license, therefore actions against a debtor for driving while license is suspended is NOT a violation of the automatic stay, and debtor must wait until the expiration of the suspension to reinstate his or her license.