Most credit managers at one time or another have heard a debtor threaten to file for bankruptcy if legal action is vigorously pursued. Knowing what a bankruptcy is and what your options are as a creditor can help clear up the mysteries surrounding this seemingly complicated process.
What is bankruptcy?
Bankruptcy is a form of relief available to individuals and corporations pursuant to Article I, Section 8 of the United States Constitution which grants to Congress the power to establish “uniform laws on the subject of bankruptcies throughout the United States.” The Bankruptcy Code and Rules are governed by the laws set forth in the United States Code, which Code includes the Bankruptcy Code.
Generally, bankruptcy provides an individual with a fresh start, allowing them to discharge all unsecured debts, or an opportunity for the individual or company to reorganize their debt in the hopes of paying their creditors a reduced amount over a prescribed period of time as set forth in their bankruptcy plan.
What are the typical types of bankruptcies?
Chapter 7 – Liquidation – A Chapter 7 is the simplest and one of the most common forms of bankruptcy in which the non-exempt assets are sold by a court appointed trustee who then pays all unsecured creditors a pro-rata dividend based upon the amount of funds recovered from the sale of the debtor’s assets. If the Chapter 7 debtor is an individual, the bankruptcy proceeding generally ends with the debtor being granted a discharge. If the Chapter 7 debtor is a corporation, the bankruptcy proceeding ends with a dissolution of the corporation or business.
Chapter 11 – Reorganization – Typically a Chapter 11 is used by corporations or extremely high net worth individuals who would like to retain their assets or continue to operate their business, but are unable to pay their debt as payment become due. Chapter 11 gives the debtor an opportunity to come up with a plan to reorganize and possibly pay creditors, although there is no guarantee that all creditors will be paid in full, if at all. The plan is provided to the creditors for their review and a ballot is sent as well to provide for a vote upon the plan by the creditors. It is ultimately up to the court to decide if the plan of reorganization is fair and reasonable under the circumstances of that particular debtor’s case.
Chapter 13 – Adjustment of Debts of an Individual with Regular Income
A Chapter 13 bankruptcy is utilized by an individual with a regular income who would like to retain his assets and would like to enter into a plan to repay his or her creditors on a monthly basis. Usually a Chapter 13 bankruptcy will provide for a three to five year plan with a pro rata payment to the unsecured creditors during that period of time. Unlike a Chapter 7, the Chapter 13 does not require a liquidation or sale of all of the debtor’s assets by the trustee. Additionally, unlike a Chapter 7, the Chapter 13 is only available to individuals and spouses.
Who can be a debtor?
Under Chapters 7 and 11, generally any individual, partnership or corporation may file for bankruptcy pursuant to these chapters. Only an individual debtor can file under Chapter 13. There are two additional types of bankruptcies that use special limited circumstances: The bankruptcy code provides for a Chapter 9 bankruptcy for municipalities and a Chapter 12 bankruptcy for family farmers.
Notice of filing
The first document a creditor typically receives is a Notice of Filing which includes quite a bit of helpful information. It is important that the Notice of Filing be read as soon as received because it contains vital information including the name and address of the debtor’s attorney, the court where the bankruptcy was filed, the chapter proceeding, the last date to file Proofs of Claim, the date of first meeting of creditors and the last date to object to discharge of debtor. Also, it may indicate whether or not the bankruptcy is a “no asset case”. In some no asset cases, the court will ask that a Proof of Claim not be filed until a determination is made that assets will be available for a distribution to creditors (see Filing of Proof of Claim below).
Pursuant to §362 of the United States Bankruptcy Code, a petition filed by a debtor operates as a stay against the commencement or continuation of any proceeding against the debtor. The stay generally continues in effect until the Court acts to lift or modify the stay or until the debtor is discharged, the case is closed, or the case is dismissed. No collection efforts should continue once you become aware of the automatic stay. If you are a secured creditor and have any questions about your rights, you should contact your attorney immediately rather than attempting to contact the debtor once you have received notice of an automatic stay.
First meeting of creditors
Pursuant to §341 of the United States Bankruptcy Code, usually within a reasonable time after an Order for Relief is entered, the United States Trustee shall convene and preside at a meeting of creditors. The Court may not preside at and may not attend any meeting under this Section. This meeting may be beneficial in ascertaining answers to the location of collateral, especially for a secured creditor who does not receive payment and would like to file a Motion for Relief from Stay.
Filing a proof of claim
In a Chapter 7 proceeding, usually claims must be filed within 90 days after the first meeting of creditors; however, always refer to the Notice or Order from the Court to determine the actual deadline for filing of claims. In a Chapter 11 proceeding, a creditor whose debts are scheduled does not necessarily need to file a Proof of Claim if the claim is correctly scheduled; however, the preferred practice would be to file a claim to protect its interest in the estate, especially if the amount of their claim is incorrectly listed in the schedules or if their claim is listed as disputed, contingent or unliquidated. In a Chapter 13 proceeding, it is necessary to file a Claim even if payment is specifically provided for in the Plan. Unsecured creditors must file a claim typically within 90 days of the first meeting of creditors.
Distribution to creditors
Typically in a Chapter 7 case, the distribution is made first to cover administrative expenses, then tax claims, then unsecured claims. In a Chapter 11 case, distribution is made by the debtor according to the terms of the Plan of Reorganization. In a Chapter 13, distribution is made by the Trustee as he receives payment from the debtor according to the terms of the plan.
Creditors in Florida often ask why a debtor who has considerable assets is allowed to retain those assets even if he does not make payment to his creditors. The answer is the Florida exemption laws.
An exemption is a right given by law to a debtor to retain some portion of his property free from seizure and sale by his creditors under judicial process. Exemptions apply equally against trustees in bankruptcy since they represent the interest of creditors in the bankruptcy case. The value and the status of the property as exempt are determined as of the date of filing the bankruptcy petition. If the property wasn’t exempt when the debtor filed, it can’t be later made exempt by subsequent actions of the debtor. Likewise, the value must be determined as of the date of filing. It doesn’t matter if it subsequently changes in value.
The following are the most commonly utilized exemptions in Florida:
a. Florida Constitution Article X, Section 4
b. Available to any natural person.
c. 160 acres of contiguous land outside a city.
d. One-half acre of contiguous land within a city.
e. Must be used as debtor’s residence.
f. No limitation on value.
Personal Property Exemptions
a. Florida Constitution Article X, Section 4
b. Includes cash, furnishings, paintings, silverware, jewelry, china, linens, bank balances and any other form of personal property.
c. Value is generally considered to be fair market value.
d. Applies to any natural person. ($1000)
Other Specific Exemptions
a. Wages earned by the head of a family residing in the state of Florida, FS §222.11.
b. Proceeds and cash surrender value of life insurance policies, FS §222.13 and 222.14.
c. Disability income, FS §222.18
d. Benefits paid to deceased employee, FS §222.15 and 222.16 e. Retirement benefits, FS §222.21
f. Education expense trust funds, FS §222.22
g. Motor vehicle exemption, FS §222.25(1)
h. Health aids, FS §222.25(2)
Tenancy by the Entireties
While not an exemption in the true sense of the word, Florida law recognizes that property owned by husband and wife as tenants by the entireties cannot be subject to execution on a judgment against only one spouse. Accordingly, the same rule applies in bankruptcy and the trustee is not entitled to take possession of property owned by a debtor with his spouse as tenants by the entireties if only the debtor is filing for bankruptcy protection.
What is a tenancy by the entireties?
a. Unity of interest – same property interest
b. Unity of time – same time
c. Unity of title – hold title together
d. Unity of marriage – obviously, must have been and still be married
e. Real property – presumed tenancy by the entireties
f. Personal property – debtor and spouse must show intent.
Exceptions – fraudulent conveyances/transfers
While exemptions can provide a tremendous benefit to debtors in Florida, there are exceptions to these exemptions. Most courts will consider setting aside a fraudulent transfer or conveyance of assets if the transfer was made in an effort to hinder, delay or defraud creditors. Said transfers include the conversion of non-exempt assets into exempt status. Florida statutes dealing with fraudulent conveyances also include the penalties for such conveyances.
Contact us for any questions you may have regarding bankruptcy and what to do if your customer files a bankruptcy.