Florida Law
Florida Bankruptcy Law: Individual
Bankruptcy Law: Individual
If you are falling behind in paying off debts and it appears that you will not be able to make payments as they come due, it is better to take action rather than let your financial situation deteriorate. For many people, the answer to financial problems is to declare bankruptcy, a legal proceeding in federal court that allows a person to be released from the obligation of paying some or all of his or her debts.
It is often said that bankruptcy gives a debtor a fresh start, but filing bankruptcy is not a panacea for all financial problems because it is not painless. Declaring bankruptcy can seriously damage a person's credit rating, making it difficult to establish credit or take out loans. Many people can work themselves out of even very serious debt without ever going near a bankruptcy court, so declaring bankruptcy should not be an automatic first step for someone experiencing financial problems.
The Bankruptcy Code
Bankruptcy law is federal law. The United States Constitution
grants the federal government the exclusive right to
make bankruptcy laws. Pursuant to this authority, the
federal government created the Bankruptcy Code, Bankruptcy
Rules of Procedure and a system of bankruptcy courts
to handle bankruptcies throughout the country. This
is not to say that bankruptcy law is uniform throughout
the nation, however. Although the federal government
has final authority to make all bankruptcy laws, the
Bankruptcy Code grants individual states the power
to deviate from federal rules in limited circumstances.
For instance, the Bankruptcy Code allows a debtor to
keep certain assets, known as exempt assets, that creditors
cannot reach to satisfy a debt. The Bankruptcy Code
gives states the authority to expand the categories
of exempt assets if they choose. Thus, the amount of
assets beyond the reach of creditors differs depending
upon the state in which the debtor files for bankruptcy.
The Bankruptcy Code creates different categories of
bankruptcy, known as chapters, appropriate for different
debtors. The two most common forms of consumer bankruptcy
are Chapter 7 and Chapter 13.
Chapter 7
The vast majority of bankruptcy cases are Chapter 7
cases. Chapter 7 is often called liquidation bankruptcy.
Chapter 7 is commonly used by individuals who want
to walk away from their debt simply, but it may also
be used by businesses that want to terminate their
operations and liquidate their assets. When a debtor
files Chapter 7, the bankruptcy court appoints a trustee
to administer the case. The debtor turns over some
or all of his or her debts and assets to the trustee.
The trustee then liquidates the property by selling
it and dividing the resulting cash among the creditors.
Step 1: Petition and Schedules
A Chapter 7 case begins when the debtor files a petition
with the bankruptcy court. Any individual, partnership
or corporation can file Chapter 7 regardless of the
amount of debt or whether the debtor is solvent or
insolvent. The petition should be filed with the court
serving the area where the debtor lives or where his
or her principal place of business or assets are located.
Along with the petition, or shortly thereafter, the debtor files with the court several schedules listing current income and expenditures, a statement of financial affairs, all executor contracts, existing or potential lawsuits by or against the debtor and any recent transfers of assets. If a debtor does not reveal a debt in these schedules, the bankruptcy court cannot discharge or cancel that debt. Any debt omitted from these schedules is called a nonscheduled debt and is not affected by the bankruptcy.
Step 2: Stay
Filing the petition automatically stops all of the listed
creditors from trying to collect the money owed them.
The stay arises automatically, without any judicial
action, although the court usually does notify creditors
of the filing of the petition. The stay is effective
from the time of filing, even if the creditors do not
receive notice until much later. As long as the stay
is in effect, creditors cannot generally start or continue
actions against the debtor to collect on the debt.
Lawsuits, garnishment actions even telephone calls
to the debtor must cease.
Step 3: Creditors Meeting
After the debtor files a Chapter 7 petition, the court
appoints a trustee to administer the case and liquidate
assets. The trustee usually calls a meeting of the
debtor, the debtor's attorney and the creditors. The
debtor must attend this meeting. Creditors may attend
in order to ask questions and examine documents concerning
the debtor's financial affairs and property. In many
consumer bankruptcies, all of the debtor's assets are
either exempt or subject to valid liens, so there are
no assets for creditors to pursue. In these cases,
known as no asset cases, it is likely that no creditors
will attend the creditors meeting. If it appears that
a case will have assets to pursue, creditors will usually
attend this meeting to gather information about the
case because they plan to ask the bankruptcy judge
to declare some of the debts nondischargeable, or they
plan to challenge the exempt status of some asset,
or they plan to file claims.
Step 4: Claims
After the creditors meeting, the creditors can file
a claim against the debtor with the court. If the case
has nonexempt assets free of security interests, these
will be used to satisfy valid claims.
Step 5: Liquidation, Discharge and Reaffirmation
The trustee's primary role is to sell the debtor's non-exempt
assets in a way that maximizes the amount the creditors
receive for their claims. Revenues from assets subject
to security interests, such as property subject to
a mortgage, is used to satisfy the debt on the particular
asset. A Chapter 7 bankruptcy concludes when the trustee
sells the debtor's property, distributes the cash to
the creditors and discharges the remaining debt. The
discharge extinguishes the debtor's remaining personal
liability on the debt. Certain items are nondischargeable
and thus unaffected by the bankruptcy. Nondischargeable
assets include:
*Alimony and child support
*Most tax obligations
*Most student loans
*Liability for damages resulting from willful or malicious
acts
Creditors can ask the court to deny an individual debtor a discharge. The grounds for denial of discharge are extremely narrow and requests for denial are rarely granted. Grounds for denial include:
*The debtor fails to adequately explain the loss of
assets
*The debtor perjures him- or herself or fails to obey
lawful orders of the court
*The debtor fraudulently transfers, conceals or destroys
property that should be in the estate
Because a secured creditor has rights that permit him or her to seize pledged property, a debtor may want to reaffirm a debt even after it has been discharged if the debtor wants to keep the property. A reaffirmation is an agreement between the debtor and the secured creditor that the creditor will not exercise his or her right to take back the asset so long as the debtor makes payments.
A debtor must wait six years before he or she can file for Chapter 7 again.
Chapter 13
Chapter 13 bankruptcy is often referred to as a wage-earner
plan because it is generally used by people with stable
incomes who want to repay at least some of their debts
but are currently unable to do so. A debtor may file
Chapter 13 bankruptcy if his or her financial crisis
is temporary and he or she thinks that his or her income
will grow enough in the next few years to pay off all
debts. The main advantage of Chapter 13 is that the
debtor is allowed to keep his or her property while
a court-approved repayment plan is in effect. However,
only individuals with less than $100,000 in unsecured
debts and less than $350,000 in secured debts are eligible
to file Chapter 13 bankruptcy. Corporations and partnerships
cannot file Chapter 13 bankruptcy. In addition, the
debtor must have a job or prove to the court that he
or she has the ability to earn a stable income.
Step 1: Petition
The petition required for a Chapter 13 bankruptcy is
similar to that described above for Chapter 7. The
debtor provides the court with the following:
*Lists of all creditors, including the amount and nature
of claims
*The source, amount and frequency of debtor income
*Lists of all property
*Detailed descriptions of the debtor's monthly living
expenses, including food, clothing, shelter, utilities,
taxes, transportation, and medical care
Step 2: Stay
Filing a Chapter 13 petition automatically stays most
actions against the debtor. So long as the stay is
in effect, creditors generally cannot start or continue
lawsuits, garnishment actions or even phone the debtor
demanding repayment. Chapter 13 also has a special
stay provision that prohibits creditors from collecting
consumer debt owed to the debtor by a third person.
Step 3: Plan
Within 15 working days of filing Chapter 13 bankruptcy,
the debtor presents a plan to the court that spells
out how he or she proposes to pay off debts over a
three-year period or, by permission, over a five-year
period. The plan must provide for the full payment
of claims entitled to priority. For reasons of public
policy, the Bankruptcy Code has several categories
of unsecured claims that have priority over other unsecured
claims, including:
*Costs of administering the bankruptcy
*Employees' wages, salaries and commissions
*Contributions to employee benefit plans
*Deposits accepted by the debtor for personal items
or services that the debtor did not deliver
*Taxes
Step 4: Creditors Meeting
A creditors meeting is usually held about 20 to 40 days
after the petition is filed. The debtor and trustee
must attend the conference, but creditors have the
option to attend. The trustee and creditors can question
the debtor about financial affairs and terms of the
plan. Any problems with the plan are usually solved
during or shortly after this meeting.
Step 5: Confirmation Hearing
After the creditors meeting, the bankruptcy court determines
at a bankruptcy hearing whether the plan is feasible
and meets the standards for confirmation set by the
Bankruptcy Code. Creditors are allowed to object to
confirmation. The most common objections are that the
debtor has not pledged sufficient disposable income
to the plan or that the creditors receive less than
they would if the debtor's assets were liquidated in
a Chapter 7 proceeding.
If the plan is approved by the bankruptcy court, a portion of the debtor's paycheck will go to a court-appointed trustee who divides the money among the debtor's creditors. The creditors are prohibited from garnishing wages or repossessing property.
Step 6: Discharge
A Chapter 13 debtor is entitled to a discharge if he
or she successfully completes all payments under an
approved plan. The discharge releases the debtor from
all debts provided for or disallowed under the plan.
Creditors provided for under the plan may not start
or continue actions against the debtor to collect a
discharged obligation.
Advantages of Chapter 13 over Chapter 7
Filing Chapter 13 bankruptcy has advantages over Chapter
7 liquidation. Unlike Chapter 7 bankruptcy, there is
not a six-year waiting period before the debtor can
file bankruptcy again. Thus, with only a few exceptions,
the debtor can file Chapter 7 bankruptcy at any time
after filing Chapter 13 bankruptcy. This means that
if the debtor finds that he or she cannot make the
payments specified in a Chapter 13 bankruptcy plan,
he or she can still act to discharge debts through
a Chapter 7 liquidation. The nondischargeable debts
under a Chapter 13 bankruptcy are generally the same
as the nondischargeable debts in a Chapter 7 bankruptcy.
However, a Chapter 13 bankruptcy allows the debtor
to discharge a few more types of debts than does a
Chapter 7 bankruptcy.
If the debtor owns an unincorporated business, such as a freelance consulting business, he or she can continue to own and operate the business under a Chapter 13 plan. Under a Chapter 7 liquidation, a bankruptcy court may order that such a business or its assets be sold. Also, the automatic stay of a Chapter 13 bankruptcy protects any co-signers of consumer debts, whereas a Chapter 7 offers only very limited protection of others who may share the debtor's obligations.
Finally, certain homeowners may prefer a Chapter 13 bankruptcy because in many instances it allows them to make up past payments on their mortgage. When someone falls behind in making mortgage payments or is in actual default, a lender quite often accelerates the payments. For a debtor in this situation, filing a Chapter 13 bankruptcy may allow him or her to decelerate or reduce those monthly payments and may even reinstate the mortgage by wiping out a prior default. However, this advice also applies to a homeowner considering a Chapter 7 bankruptcy. If saving a house is the primary reason for filing bankruptcy, it is wise to talk through all the possibilities with an attorney because the laws governing this area are extremely complicated and it is easy to make a costly misstep.
Conversion
The Bankruptcy Code allows a debtor to convert a Chapter
7 case to Chapter 13, or vice versa, as long as the
debtor meets the eligibility requirements of the new
chapter and the case has not previously been converted
from the new chapter. In other words, the debtor is
not allowed to repeatedly convert the case from one
chapter to another.
Involuntary Bankruptcy
Unlike the types of situations already described, where
the debtor willingly chooses to file bankruptcy, in
an involuntary bankruptcy, creditors force the debtor
into bankruptcy. Under certain conditions, creditors
can petition the bankruptcy court to initiate a Chapter
7 (but not a Chapter 13) bankruptcy against a debtor.
The court will only accept such a petition if it is
signed by at least three creditors who are owed a total
of at least $5,000 in unsecured debt. If a debtor has
fewer than 12 unsecured creditors, however, just one
unsecured creditor owed at least $5,000 can file an
involuntary bankruptcy petition.
Involuntary bankruptcy is rare, but if someone does file a petition against a debtor in bankruptcy court, the debtor has an opportunity to file an answer to the petition and refute any charges made against him or her by creditors in the petition. If the judge sides with the debtor, the court dismisses the petition and can make the creditors pay reasonable attorneys' fees and any money the debtor lost in defending the case. In addition, if the judge decides that the petition was filed in bad faith, the court may also award the debtor punitive damages.
Effects of Declaring Bankruptcy
The old adage that it is better to know how to swim
before jumping into deep water applies to anyone considering
filing bankruptcy. Its principal effects are as follows:
*Poor Credit RatingConsumer laws allow credit agencies
to list on reports of a person's credit history all
of his or her bankruptcy filings in the preceding 10
years. This means that mortgage companies, banks, credit
card companies, landlords, employers and all others
who can legally obtain a copy of a person's credit
report will know about his or her troubled financial
past. Filing bankruptcy can make it difficult to obtain
credit for those 10 years.
*Creditor ScrutinyOne of the first events in a bankruptcy
proceeding is a meeting between the debtor and all
of his or her creditors. At this meeting, the creditors
and a court-appointed trustee are allowed to examine
all of the debtor's financial records, such as bank
statements and loan documents, and ask questions about
how money has been spent. For anyone with anything
unsavory or illegal to hide, such as gambling debts
with a bookie, a bankruptcy proceeding can be incriminating.
*CostUnderstandably, bankruptcy attorneys are very careful
about a client's ability to pay legal bills. Most bankruptcy
attorneys usually collect enough money in advance from
their near-bankrupt clients to handle a typical bankruptcy
filing. This may be more than some clients can pay,
especially if there is any contest with creditors.
In addition, the trustee in charge of a bankruptcy
case is paid by commission, a percentage of the money
that he or she distributes to pay creditors.
Other Forms of Bankruptcy
There are two other kinds of bankruptcy filings that
are not discussed more fully in this chapter because
of their limited relevance to consumers. Knowing about
them, however, can help one better understand bankruptcy
options.
Chapter 9
Chapter 9 is a very rare form of bankruptcy available
only to municipalities.
Chapter 11
Chapter 11 is available for individuals, but is generally
used by troubled corporations and partnerships. Chapter
11 allows the debtor to remain in operation while working
out a reorganization plan in which the debtor proposes
a plan of paying or settling the debts. The creditors
vote on the reorganization plan, and it must also be
approved by the court. Chapter 11 is designed to preserve
a viable business that would otherwise be lost in a
liquidation.
Chapter 12
The federal Bankruptcy Code contains several provisions
available only to family farmers. These provisions
are known as Chapter 12 and are designed to allow family
farmers to remain in the business of farming while
reorganizing and attempting to pay off their debts.
Chapter 12 offers the family farmer several advantages
over other bankruptcy reorganization chapters because
it recognizes the seasonal nature of most agricultural
income, the difficulty of predicting in advance how
much a farmer will profit from a crop, and the fact
that most farmers need much more credit than do most
individuals. Chapter 12 was originally scheduled to
be repealed on October 1, 1993, but the repeal date
was pushed back to October 1, 1998. All cases commenced
or pending under Chapter 12 by October 1, 1998, and
all matters or proceedings relating to such cases will
proceed and be determined as if Chapter 12 had not
been repealed.
Chapter 12 is only an option for farmers who receive at least half of their income from farming operations and have no more than $1.5 million in debt. At least 80 percent of that debt must be related to the farming operations, not including debt on the farmer's principal residence.
A Chapter 12 bankruptcy filing is similar to a Chapter 11 corporate reorganization bankruptcy or a Chapter 13 personal reorganization bankruptcy. After a farmer files for Chapter 12, a stay is imposed and all actions of creditors to collect debt from the debtor must cease. If a creditor believes it deserves special protection, it can seek relief from the stay, requiring the debtor to give adequate protection to the creditor. Adequate protection under Chapter 12 is similar to adequate protection in other forms of bankruptcy but the terms are far more favorable to the farmer.
After filing for bankruptcy, the farmer has 90 days to file a plan of reorganization with the bankruptcy court. The reorganization plan must reveal all the farmer's debt and detail how he or she plans to repay the debt over three to five years. If the plan meets all of the requirements of Chapter 12, the bankruptcy court must approve it at a hearing held within 45 days of filing. Creditors are given an opportunity to file objections to the plan, but cannot veto it.
After filing for Chapter 12, the farmer almost always is allowed to continue operating the farm. An interested party can request that the farmer be removed from the farm, but a bankruptcy judge will only do so if the farmer is guilty of fraud, dishonesty, incompetence or gross mismanagement of his or her affairs.
The reorganization plan is supervised by a court-appointed trustee. During the plan, the farmer makes periodic payments to the trustee who then pays creditors according to the terms of the plan. Should the farmer be removed for one of the above mentioned reasons, the trustee steps in to manage the farm. At the end of the plan period, the court discharges any remaining debts, with certain limited exceptions, and the debtor is given a fresh start.
Transfers to Avoid Losing an Asset in Bankruptcy
Some transfers that are valid outside the context of bankruptcy are invalid in bankruptcy. The Bankruptcy Code empowers a bankruptcy trustee to invalidate certain transfers made prior to a bankruptcy filing.
Fraudulent Conveyances
The Uniform Fraudulent Transfer Act is designed to remove
any temptation a debtor may have to hide property by
giving it to a relative, for example, before declaring
bankruptcy. Any transfer of a debtor's assets made
within 90 days of filing bankruptcy, or one year if
a relative or business associate is involved, is carefully
scrutinized by the bankruptcy court. If the court determines
that a debtor attempted to defraud creditors by selling
property at a below-market price, the court can order
that property or other assets be given over to the
trustee. Anything sold at a reasonable market value
before a bankruptcy filing cannot be recovered by the
court under the rules of the Uniform Fraudulent Transfer
Act.
Preferences
A preference occurs when a debtor treats one creditor
more favorably than another. For instance, if a debtor
with only $100 owes $100 each to creditors A and B
and pays A completely, leaving nothing for B, then
A has received a preference. If the following conditions
exist, the recipient of a preference may be forced
to return it to the debtor's estate:
*Transfer is for the benefit of a creditor
*Transfer is made for debt owed prior to the initiation
of bankruptcy
*Debtor is insolvent at the time of transfer
*Transfer is made 90 days before filing of the bankruptcy,
or one year if made to an insider such as a relative
or a director of a corporate debtor
Collection Agencies and the Law
Although not a part of the Bankruptcy Code, laws regulating
collection agencies are usually of concern to anyone
experiencing financial difficulties. Both state and
federal laws limit the kinds of activities that a collection
agency can engage in as it tries to collect a debt.
These laws only apply to third-party collection agencies
and not to in-house collections. That is, if a creditor
tries on its own to induce its delinquent accounts
to pay their overdue bills, it is not required to follow
the laws governing collection agencies. But if a creditor
turns collection matters over to a collection agency,
the collection agency's employees must follow the rules.
Alternatives to Bankruptcy
Anyone in financial trouble has undoubtedly received
many letters from creditors demanding payment on debts
owed. Even a very demanding creditor may have a change
of heart once a debtor mentions the possibility of
filing bankruptcy because creditors know that bankruptcy
means that they may only get a fraction of what is
owed them.
Anyone confident that his or her financial problems are only temporary may want to consider asking major creditors to accept reduced payments for a short period or asking for a short delay in making payments. Provided that the debtor has not already given creditors reason to doubt his or her sincerity by, for example, completely ignoring creditors' letters or by consistently breaking promises, chances are good that creditors will agree on one of these plans. Creditors know that if they sue to collect their money, they undergo the hassle of going to a judge to get a court order to garnish the debtor's wages. This is time-consuming and costly. All of these factors make it more likely that a creditor will agree to a repayment plan.
Many creditors can be understanding if approached with a reduced or delayed payment plan accurately spelling out the debtor's financial situation and showing that the debtor is trying to spread out his or her resources in a way that tries to please everyone. A consumer credit counselor can help set up such a plan. Credit counselors can help to analyze and organize one's finances to set up a deferred or reduced payment plan.
In a typical case, a credit counselor devises a repayment plan that is then described in a form letter to be mailed to the debtor's major creditors. There are both advantages and disadvantages to using credit counselors. On the plus side, creditors who see that a debtor has taken the effort to consult with a credit advisor may be more likely to accept a repayment plan because seeing a credit counselor shows that the debtor is serious about getting out of debt. But credit counseling services also charge fees for their work, which may be more than an already stressed budget can handle. However, there are some nonprofit agencies that offer credit counseling for a sliding-scale fee.
Resources
Bankruptcy, The Florida Bar. This free pamphlet is available
by calling The Florida Bar at (904) 561-5834.
Money Troubles: Legal Strategies to Cope with Your Debts, Robin Leonard, Nolo Press, Berkeley, CA, 1991.