SAN DIEGO CHAPTER 7 BANKRUPTCY – THE LIQUIDATION
“Knowledge speaks, but wisdom listens.” – Jimi Hendrix
Chapter 7 Basics: US BANKRUPTCY COURT: ON BASICS OF CHAPTER 7
In a Chapter 7, also known as liquidation, a debtor receives a discharge typically in 90 days. The process is not overly complicated but does have some requirements such as completion of a U.S. Trustee approved Credit Counseling Course, the filing with the court a lengthy document known as a petition requesting relief, disclosure of assets, debts, income and documentation, attendance at a creditor’s meeting, and completion of a U.S. Trustee approved Financial Management Course.
Most Chapter 7 cases, do not involve any adversarial court action. The process is overseen by a Trustee assigned to the case who is employed by the U.S. Trustees Office, an agency of The United States Department of Justice. In most cases, while a Bankruptcy Judge signs a discharge order, the petitioners never actually never step into the courthouse. The Bankruptcy Petition and all supporting documents are submitted electronically and docketed by the court’s computer. Case information can be obtained with Public Access to Court’s Electronic Records via Pacer.
341 Meeting (Creditor/Trustee meeting)
In San Diego, the Creditor’s Meeting is held at:
Office of The United States Trustee
Edward J. Schwartz Office Building
880 Front Street Third Floor, Suite 3230
San Diego, CA 92101
across the street from Tokarska Law Center
Creditors have a right to appear, though rarely do, at the meeting. They may question the petitioners regarding income, debts, and assets. Typically if creditors have objections they raise them by either first contacting the debtor’s attorney or filing an adversary proceeding and with complaint with the Court.
The meeting is held in an open forum, meaning anyone can sit and observe the proceedings. A properly filed case with all required documents having been previously timely submitted to the Trustee can proceed smoothly and complete the inquiries within a few minutes.
The formality of the meeting requires among other things that the Debtor(s) be sworn in, submit proper of identification (government issued picture identification: Driver’s License or Passport) and Social Security Number (Social Security Card, third party prepared tax returns, W9 forms, Military Issued ID) for verification purposes, and state under penalty of perjury and while being recorded that the information in the petition is the truth and nothing but the truth under PENALTY OF PERJURY.
CALIFORNIA BANKRUPTCY EXEMPTIONS
The Federal Bankruptcy Code allows debtors to use their State’s Exemptions laws in determining what property a debtor can keep “aka as exempt property” from the claims of creditors.
Exempting equity in your home, car, retirement, pension, or insurance benefits, and certain household property is an important part of bankruptcy protection for the debtor. California utilizes two separate sets of exemption. Choosing the right one depends on the types and value of owned property. Your attorney should ensure that you make the best use of the available exemptions to your particular circumstances.
Individuals contemplating filing for bankruptcy are urged not to transfer/sell any assets until consulting with your attorney. Depending on the circumstances, these transactions could be seen as fraud or abuse. Please discuss with your attorney if you intend to: transfer ownership or sell any items prior to filing or if you have done so in the past TWO years.
First thing to understand is what does Discharge mean exactly. Discharge means that the Creditor(s) are legally prevented from ever attempting to collect from you the owed amounts. All collection proceedings: lawsuits, credit collection contacts, garnishments, bank levy must cease immediately upon filing of the case. Whether the creditor will be able to resume collection efforts after your case closes depends on whether the debt is discharge-able or not?
WHAT IS DISCHARGE-ABLE?
Generally, unsecured debts such as credit cards, medical, and legal debts may be discharged. Other debts such as student loans are generally not discharge-able unless special circumstances exist. Debts such as child support, alimony, court-imposed fines, and most, but not all, taxes are not discharge-able.
You should discuss with your attorney all of your debts to understand what debts are not discharge-able in your particular case so that you can deal with these accordingly.
Eliminating Tax Debts in Bankruptcy
Some Income Taxes can’t be eliminated in bankruptcy. You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. Some tax debts cannot be wiped out in bankruptcy, meaning that you would continue to owe them at the end of a Chapter 7 bankruptcy case, or you’ll want to consider repaying under a Chapter 13 bankruptcy payment plan. If you need to discharge tax debts, Chapter 7 bankruptcy will probably be the better option — but only if your debts qualify for discharge (see below) and you are eligible for Chapter 7 bankruptcy .
When You Can Discharge a Tax Debt
You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
- The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
- The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
- You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
- You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)
You Can’t Discharge a Federal Tax Lien
Even if your taxes qualify for discharge in a Chapter 7 bankruptcy case but IRS has a recorded lien on your property before you filed your bankruptcy, the lien will remain on the property.
DO I QUALIFY FOR CHAPTER 7?
The 2005 Bankruptcy law changes, put into place specific calculations in helping to determine whether filing under Chapter 7 raises a presumption of fraud or abuse. Question 1: Is the “Current Monthly Income” in the household where debtor resides above the State’s median income? If Yes. Question 2: Does the Debtor pass the “Means Test”?
Before rushing to grab the calculator, we need to understand what Current Monthly Income “CMI” means. The Bankruptcy Code defines it as: the average of the total gross income received by the household over the six months period prior to the petition filing. In other words, the CMI is calculated by adding the gross income over the previous 6 months just before filing, then dividing that total by 6, to get the monthly average. You can imagine that unless the debtor is paid exactly the same every single month, this number might fluctuate. For self-employed individuals and people who receive pay for less than 12 months out of the year (like some teachers) this number can fluctuate quite a bit. This result is then multiplied by 12 to calculate the annual CMI number. It is this number exceeds the published state’s median income and the majority of the debt is not a business type debt, the next step is to perform a Means Test analysis.
In the Means Test, we deduct all “ALLOWABLE” deductions possible under the law from the CMI to calculate the “disposable income”. If the results shows that there is sufficient income left over to repay significant enough amount of the debt, a presumption of fraud/abuse is raised and in that circumstance it is very difficult to proceed under Chapter 7 barring special circumstances. In effect what the result says is that this Debtor can afford to repay some portion of their debt and if they choose to file for Bankruptcy they can still do so but under Chapter 13 where a certain payment will be required toward the debts for a period of 5 years. At the end of that period any existing balances left on the discharge-able debt is discharged.
While, on its face, Chapter 13 doesn’t seem as appealing there are several circumstances under which Chapter 13 can be preferable. Some examples include: when a Debtor is behind on secured debts (like mortgage, automobiles) and the debtor wishes to keep these items. To do so, the debtor must bring arrearages current and this can be accomplished through the Chapter 13 repayment plan.
Many debtors with income above the median can successfully proceed under Chapter 7 because they pass the Means Test however performing the test can be challenging for lay persons to do on their own. Often, individuals aren’t aware of all the intricate deductions. Please beware that making mistakes in calculating the Means Test and filing Chapter 7 based on incorrect numbers can result in your case being converted to a Chapter 13. If your income exceeds the Median you should seek professional assistance and not attempt to file case pro per.
The link below provides more details on the Means Test calculations. The basic idea in the calculation is to subtract allowable living expenses from your income and determine if there is sufficient disposable income for debtor to afford to repay some portion of the debt over a limited time period. Note however, that your actual expenses and income may differ from allowable expenses. Some expenses qualify dollar for dollar, others are limited to certain amounts or disallowed altogether. Some expenses would have had to have been incurred AND PAID out of your pocket, for others the legal obligation to repay is sufficient. Certain debts may also be deducted.
For example: many types of insurance: life, health, disability, are allowed to the extent that you have been paying these. Other expenses such as transportation, rent, utilities, food, personal care are limited with some exceptions that may allow a small bump up or if an extraordinary circumstance exists. In short you take the Means test and apply it to your individual circumstances.
OBJECTIONS TO DISCHARGE
A party in interest, a Creditors or the Trustee, may object to you receiving a discharge upon valid grounds. These can be raised based on incomplete or inaccurate information provided in the filing, fraud or presumption of abuse, or preferential treatment of creditors.
It is important to be thorough and completely honest in your filing. Innocent mistakes, such as forgetting to list creditors or assets can be costly. Should an objection arise, the attorney can advise and represent you in such matters.
Certain transactions before filing also are scrutinized. In Bankruptcy, creditors can be divided into categories by types. All creditors within each type category must be treated equally. Attorney will evaluate your situation looking for evidence of potential preferential treatment of creditors prior to filing.
If fraud or abuse is shown, dismissal of your case and criminal penalties can result. The attorney’s job is to ensure that your application is as accurate and complete as possible. Your signature and testimony at the creditor’s meeting subjects false statements to penalty of perjury.