Sacramento Bankruptcy Attorney Blog

Individuals often approach a bankruptcy attorney when they feel a sudden urgency to respond to pressure from a creditor. In Sacramento that urgency comes in many forms: loss of job, a lawsuit, increasing mortgage payment, and a number of other events that can take anyone off track. When one of these events comes unexpectedly there may be little time to respond and most people don't have the cash reserves or assets to buy enough time to get back on their feet. Most creditors are unwilling to settle with desperate borrowers. Ultimately, when the options to pay a credit card or change the interest on a mortgage are insufficient to help remedy a borrowers issues, the borrower finds themselves in an tough situation. They realize that based on their current finances they are unlikely to ever get back on there feet. With that feeling, debtors lose the motivation to earn a living, accumulate assets, and strive toward retirement and a successful financial outcome.

In turn, those individuals who wish to utilize the resources under the bankruptcy code, will file bankruptcy. Chapter 7 is more common than other types of filings like chapter 11 or chapter 13 because it tends to be the least expensive means to obtain relief from creditor action. That's because a bankruptcy attorney can prepare a chapter 7 in most cases rather quickly. In the Eastern District of California, there is usually only one court appearance, and that is at a creditors meeting, also known as a 341 meeting. In addition, a discharge in a chapter 7 case frequently can be obtained within four months of filing.

Chapter 7 is known as a liquidation chapter, meaning that most debts and most assets are eliminated. However, some debts, like students loans, are not normally discharged unless there is a hardship demonstrated. Some other types of debts are not discharged under any circumstances. Most of the time though, credit card debt is discharged if the debtor qualifies for this type of filing. This result can offer great relief for someone who is on a limited income and would be strained by trying to maintain a high interest revolving account.

Many Sacramento residents ask me whether they can keep their house or car if they file chapter 7. It usually depends on whether there is debt secured by the asset, whether the individual can afford to continue to pay that monthly payment, or whether the individual has any equity in the property. For example, if one of my clients had a mortgage of $200,000 on their home and they decided that they did not want their home foreclosed and to have to surrender it, they would need to have sufficient income to make the monthly payment. What if my client's car was worth $10,000 without any debt secured by this item? If there was a sufficient exemption value remaining, my client could probably keep the car, even one of this value.

Sometimes however, an individuals monthly income is too high for chapter 7 and therefore chapter 13 or chapter 11 might be more fitting. Other times a debtor wishes to reduce the secured debt associated with certain types of eligible property and therefore chapter 7 may not be the best fit even if they qualify.

These are just a few considerations on the subject. This is not legal advice.

From and attorney's perspective, why do individual debtors file chapter 11 instead of chapter 13?

Where an individual or household's income exceeds the limits provided for in Chapter 7, I like to evaluate other options under the bankruptcy code. The first determination that I make is whether the individual debtor(s) are within the debt limits established to meet the eligibility requirements in a chapter 13 case. I look at two categories relevant to this inquiry, secured debt and unsecured debt. Secured debts are normally linked to some kind of property, such as house or a car. In the Folsom and Sacramento California areas it is quite common for home owners to have mortgages that exceed these limits especially where they own more than one home. While the most common unsecured debts are credit cards. If the debt in either one of these categories exceeds the statutory limits, Chapter 13 is probably not a viable option.

Secondly, even if the debtor's debt is below the relevant limits, in a chapter 11 small business sole proprietor's case or an individual case, calculating a debtor's disposable income by incorporating the debtor's actual income deductions, taxes, and expenses is currently possible. This lessons the possibility that a debtor's financial commitment is based on an artificial disposable income figure that might translate into an unrealistic obligation.

Another important consideration is the commitment period commensurate with the debtor's reorganization plan. In chapter 13, a plan usually must be between three and five years. In a chapter 11 there is greater flexibility. This can translate into payment terms that are more reasonable and appropriate for a debtor's particular situation. For example, if a debtor owes $50,000 on the debtor's car, a Lexis Hybrid SUV, and the value of the car is $30,000, and purchased several years ago, and otherwise eligible for a reduction in the secured debt associated with the car, the debtor might want to take the opportunity to do so. If so, the debtor would probably need to pay the debt during the life of the plan. In a chapter 13, this might result in monthly payments that the debtor cannot afford. However, with longer plan terms available in a chapter 11, the debtor could reduce the amount of those payments in such a plan. A longer repayment period can also be effective in preventing foreclosure or modifying a mortgage.

While these are just a few considerations, as a bankruptcy attorney I find them to be frequently relevant. This article is not attorney legal advice.