A little over a hundred years ago, Supreme Court Justice John Clark McReynolds laid out the intent and purpose of the then-new Bankruptcy Code in Williams v. U.S. Fidelity Guarantee Company (1915):
“It is the purpose of the Bankrupt Act to convert the assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.”
History has not remembered Justice McReynolds very fondly, but his assessment about consumer bankruptcy was spot-on and is still quoted to this day. As he noted, the primary purpose of the Bankruptcy Code is to protect creditors and not debtors. That being said, if the debtor is honest, the debtor should receive a much sought-after financial fresh start. Here are the different types of bankruptcy.
Chapter 11 reorganization is a very complex proceeding that few consumers file. In addition to the complexity, it is very expensive (the filing fee alone often exceeds $1,500), so while Chapter 11 is ideal for large or medium-sized companies that need to make major changes in order to return to profitability and also need the protection of the bankruptcy court, Chapter 11 is not really for consumers.
Chapter 15 is not really a consumer bankruptcy either, especially after the Second Circuit Court of Appeals in New York basically changed the eligibility requirements in 2014. Moreover, in most cases, only municipal governments can file Chapter 9. A fourth type (Chapter 12) only applies to a handful of family fisheries and family farms.
Somewhere along the line, someone labeled this type of bankruptcy as “liquidation,” and the tag stuck. Most consumer assets are exempt from liquidation. So, most all debtors in Georgia can keep their:
- House: Single filers can exempt up to $21,500 in home equity; joint filers may be able to double that figure. Moreover, up to $5,000 of the unused homestead exemption ($10,000 for some joint filers) can be applied to the wild-card exemption.
- Cars: Up to $5,000 in vehicle equity is also exempt. As a general rule, newer cars have almost no equity (and therefore they are of no interest to creditors) and older cars have almost no monetary value, so this exemption seems small but is actually quite generous.
- Retirement Accounts: Earned IRAs, 401(k)s, pension plans, and other nest eggs are all exempt regardless of their cash value.
- Income: 75 percent of current wages, and even more in some cases, are exempt, as are most public benefit and spousal/child support payments.
- Personal Property: Clothes, furniture, jewelry, and personal effects are all exempt up to certain limits.
- Any Other Property: Under Georgia law, debtors can exempt up to $1,200 of any otherwise non-exempt property; some joint debtors can exempt up to $11,200.
Because of these exemptions, “liquidation” is a misnomer, since most people have few, if any, non-exempt assets. Examples of unprotected assets include extremely valuable homes and vehicles, vacation homes, and inherited IRAs.
Even if an asset does not fall under a recognized or wild-card exemption, it is not automatically liquidated. The trustee (whose role is explained more fully below) has a duty to act in the best interests of the creditors and not a duty to seize as much property as possible. Assume Donny Debtor has a bass boat that he cannot exempt. Once the trustee factors in the bother and expense of seizing the boat, storing it, making necessary repairs, and listing it for sale, the trustee may well allow Donny to keep the boat.
About six weeks after the voluntary petition is filed, the 341 Creditors’ Meeting takes place. This too is a misnomer, because the creditors hardly ever appear. In a Chapter 7, the trustee basically looks for red flags in the bankruptcy paperwork and ensures that the debtor is eligible for Chapter 7. In most cases, the discharge order follows about six on nine months later, and the case is over.
That eligibility comes from the Means Test, a relatively new addition to the Bankruptcy Code. Only people whose income falls below the average income for that geographic area can file Chapter 7. In Georgia, that figure is typically $70,325 for a family of four.
There is no eligibility requirement for the “wage-earner” or “repayment” plan, and the same exemptions apply. The main difference between Chapter 7 and Chapter 13 is the debtor’s financial goal. Liquidation is a great way to quickly get rid of excess debt and start over; the repayment plan gives debtors a chance to catch up on delinquent debt, like past-due mortgage payments, so they can still keep the property.
Chapter 13 normally lasts either three or five years. In addition to the voluntary petition, the debtor files a proposed repayment plan. Later, instead of simply reviewing the paperwork, the trustee essentially places the debtor on an allowance for the repayment period. After paying for monthly essentials, the debtor gives any excess money to the bankruptcy trustee for distribution among the creditors. Secured creditors (house, car, and so on) must be paid in full; unsecured creditors (credit card, medical bill, and so on) divide whatever is left. Any remaining unpaid unsecured debt is discharged.
Both Chapter 13 and Chapter 7 involve an automatic stay, at least in most cases. While the case is pending, most creditors may not garnish wages, foreclose on property, pursue civil lawsuits, or otherwise attempt to collect on a debt without special permission from the bankruptcy judge. Therefore, Chapter 7 debtors get their fresh start quickly, and Chapter 13 debtors repay their obligations based on what they can afford and not what the moneylenders demand.
Whatever type of bankruptcy is best for you and your family, an experienced bankruptcy attorney in Rome makes the process much easier. Call the Law Office of Jeff Kelly today for a free consultation.