Is Chapter 7 Right for You?

Is Chapter 7 Right for You?

It is not uncommon for a new client to come into my office and tell me, “I need to file for a Chapter 7.” My first question to such a statement is always “Why?” The response varies, but has a common theme: “Because I can’t pay my bills.”

Not being able to pay your bills is, of course, a factor in making the difficult decision of filing for bankruptcy. Once making that decision, however, the next decision is whether to file for Chapter 7 or Chapter 13 (other chapters also exist, but they are not relevant to most consumers). While this decision may be made for you -- based on, for example, the amount of debt you have -- often you will qualify for both chapters. In that case, you must decide which will be more beneficial to you.

The major and most basic difference between these two varieties of bankruptcy protection available to most consumers is that, in a Chapter 7, you effectively “raise your hands and quit,” informing your creditors that you simply have nothing left. If you do not own a house or other property, and your income is just enough to make ends meet but not enough to save each month, then a Chapter 7 will probably be the right choice for you.

In a Chapter 13, on the other hand, you essentially tell your creditors that, while you do have some limited means to pay, you cannot pay all of them everything you owe. In filing a bankruptcy under Chapter 13, you propose a payment Plan, under which you promise to pay a certain amount each month to the Chapter 13 Trustee (assigned by the court and an employee of the Department of Justice), who then will distribute these funds to creditors. You will do so for 3 to 5 years and each of your creditors will get a portion of its debt paid off. At the conclusion of the Plan, any remaining
debts are wiped out.

So which chapter is right for you? While you should not decide the answer to this questions without speaking to a qualified bankruptcy attorney, the simple answer is that if you have no assets and
little income, you would probably end up in a Chapter 7. On the other hand, if you have assets, or your income is above the qualifying maximum income for a Chapter 7, a Chapter 13 may be right for
you.

- Shalem Shem-Tov, esq

Netzah & Shem-Tov

818-995-4200

www.netshemlaw.com

Chapter 11 and Relief from Stay: Special Rules for Single Asset Real Estate Debtor

As discussed in a previous post, the automatic stay prevents creditors from pursuing a debtor for payment or from foreclosing on a debtor's property.

However, the automatic stay is not full proof.  Creditors may file a motion with the bankruptcy court for relief from the automatic stay.  If the motion is granted, the stay will not longer apply to that particular creditor and as such the creditor may resume collection efforts against the debtor, including foreclosure.

In a Chapter 11 case, if the debtor's only asset is a single piece of real property, there are special rules which apply.  This type of Chapter 11 case is terms a Single Asset Real Estate case.

One of the special rules in these types of cases is that, within 90 days of the filing of the case, the debtor must either propose a Plan of reorganization (that is, propose how it will handle its debts) or begin paying its secured creditors at least the interest owed to them.  If the debtor fails to do so within the 90 days, the secured creditor (the mortgage company, for example) has a right to relief from stay.  These rules are provided in 11 USC §362(d)(3).

As you can see, Chapter 11 cases are complex.  It is therefore extremely important for a debtor to have experienced Chapter 11 counsel.  An attorney that only handles Chapter 7 and Chapter 13 cases will likely not know these, and other special rules which apply to Chapter 11 cases.  An oversight of §362(d)(3) by an inexperienced attorney can be very costly to a debtor trying to reorganize his debts.

Shalem Shem-Tov
Netzah & Shem-Tov,
www.netshemlaw.com
818-995-4200

Bankruptcy and the Automatic Stay

When a debtor files any type of bankruptcy, a “automatic stay” is created which prevents all creditors from pursuing the debtor.  That is, creditors cannot call or otherwise contact the debtor to ask for payment, they cannot sue the debtor (and any pending lawsuits are immediately halted), they cannot collect on a judgment and they cannot foreclose on any property of the debtor.  As the description implies, this “stay” of the creditors is automatic.  The filing of the bankruptcy case alone, and nothing else, creates the stay.  So, even if a creditor does not know of the bankruptcy filing, any action the creditor takes against a debtor can be cancelled.

For example, let us assume that there is a lawsuit pending against a debtor who has not yet filed for bankruptcy.  The debtor decides not to file an Answer in the lawsuit and therefore the creditor requests that a default be entered against the debtor.  Before the default is entered, however, the debtor files for bankruptcy.  The next day, before the debtor has a chance to inform either the creditor or the court in which the lawsuit is pending of the bankruptcy filing, the court enters the default against the debtor.  Sometime later, for whatever reason, the bankruptcy gets dismissed and the debtor now wants to file an Answer in the lawsuit.  Normally, once a default is entered, the debtor (or defendant) can no longer file an Answer.  However, in this case, since the bankruptcy was filed prior to the default being entered, the automatic stay prevented the default from being effective.  Although neither the court nor the creditor knew of the bankruptcy, the default must be set aside.

Some time ago, our office represented a client in this exact situation.  We filed a motion to set aside the default entered against our client after the client had filed for bankruptcy.  Although the creditor opposed our motion, the Judge recognized that due to the automatic stay being in effect on the date the default was entered, the default was ineffective.  We won the motion, and our client was able to file his Answer and defend the lawsuit.

Shalem Shem-Tov

Netzah & Shem-Tov,

www.netshemlaw.com

818-995-4200