How Does Bankruptcy Work in Florida
Bankruptcy is a legal proceeding designed to help individuals and businesses eliminate their debts or to restructure and repay them under the protection of the Bankruptcy Court. Generally speaking, there are two types of bankruptcy—liquidation (Chapter 7) and reorganization (Chapters 11, 12 and 13). Both types of bankruptcy, liquidation and reorganization, have numerous rules and exceptions. Which Chapter is right for you is dependent upon your particular circumstances and objectives. As part of the services that we provide the attorneys of our firm listen closely to our clients and are sensitive to our clients’ needs and objectives while giving realistic advice as to the available options.
Types of Bankruptcy
In a Chapter 7 liquidation proceeding, most of your debts are discharged. In exchange for the discharge of your debts, a trustee is assigned to liquidate your non-exempt assets. In Florida, the exemption laws are very broad and provide substantial protections to those in debt. At the time of your initial consultation, the attorneys of our firm will discuss the implications of applicable exemption laws.
Certain debts are not dischargeable in a Chapter 7 bankruptcy. If you want to keep property on which there is a lien, such as a house or car, you must continue to make these payments. Also, please note that only consumers who pass the means test can file a Chapter 7 bankruptcy (this test will be explained to you in detail by one of our attorneys at your initial meeting and a summary is discussed below).
A Chapter 13 bankruptcy is a three to five year repayment plan available only to individual consumers. Sometimes you must file a Chapter 13 bankruptcy in lieu of a Chapter 7 bankruptcy if you have enough income to repay your debts in a Chapter 13 plan, as determined by an objective evaluation called the “means test, as discussed below.
One fundamental advantage of a Chapter 13 bankruptcy is that, under certain circumstances, it can be used as a vehicle to remove an unsecured second mortgage from your home. The attorneys of our firm will discuss the viability of this feature of Chapter 13 bankruptcy to your individual circumstances at the time of your initial consultation.
You may not qualify for Chapter 13 bankruptcy if your debts are too high or your income is too low. If you are behind on a secured payment, such as a mortgage, you may file a Chapter 13 bankruptcy to repay past due payments over time without late charges. You may also file a Chapter 13 bankruptcy if you have assets that you would lose in a Chapter 7 liquidation proceeding and wish to keep those assets.
A Chapter 11 is a reorganization proceeding typically used by businesses, but also may be used by individuals who do not qualify for Chapter 13 because of their substantial debts. The purpose of a chapter 11 proceeding is to provide temporary relief from pre-bankruptcy debts while formulating a plan to restructure those debts by payments over time or surrender of unnecessary assets to reduce the overall debts structure. This procedure also allow the ability to reduce secured debts down to the value of the collateral (real estate, car, etc.), as well as the rejection and surrender of leases and contracts that are no longer necessary.
Chapter 7 Bankruptcy Basics
Florida Chapter 7 bankruptcy is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships.
Chapter 7 bankruptcy is a liquidation bankruptcy. In other words, the filer’s non-exempt assets, if any exist, are sold by the Chapter 7 trustee. On many occasions, these unprotected assets are sold back to the person filing bankruptcy at a negotiated price. The proceeds from the sale of the non-exempt assets are then distributed to creditors.
To qualify for Chapter 7 bankruptcy in Florida, the filer (known as the “debtor”) who has primarily “consumer debts” must pass the “means test”, which was instituted with the 2005 changes to the Bankruptcy Code.
In most consumer cases, the filer’s assets are exempt from liquidation by the trustee, which means that these assets are not available to the trustee to liquidate to distribute to creditors.
Filing Chapter 7 Bankruptcy
The case is begun by filing the official petition, schedules and statement of financial affairs. In these forms, the filer lists all assets debts, along with some recent financial history. This is the most important and most time consuming part of a bankruptcy filing. In fact, most of the work is completed in a bankruptcy case before it is ever filed.
The schedules are where the filer lists his/her assets and debts. The filer signs these documents under penalty of perjury. It is important that every creditor is listed in the schedules with an accurate mailing address. The filer must list all debts, even if the debt is non dischargeable or if he/she intends to reaffirm or keep the debt.
Assets include real estate, personal property, or possessions, such as vehicles, bank accounts, retirements accounts and even household goods and furnishings, clothing and jewelry. However, many of these assets have exemptions available to protect them from being lost.
The schedules are filed with the bankruptcy clerk in the district in which you live, or have lived for the greater part of the last 180 days.
The automatic stay goes into effect upon filing the petition, creating a legal barrier to collection actions by creditors. The automatic stay means creditors must stop taking any collection activity against you, such as telephone calls, written communication and lawsuits.
The court appoints a trustee and gives notice to all creditors listed in your schedules that you have filed bankruptcy. You will get a copy of that notice at the same time it is sent to creditors.
First meeting of creditors – aka Section 341 Meeting
The debtor must appear at the ”first meeting of creditors” (also called the Section 341 meeting from the section of the Code that describes the meeting.) At the meeting, the trustee will ask the debtor questions under oath about assets and liabilities. Creditors can also question the debtor on those subjects, but seldom do. These 341 meetings usually last five to ten minutes in most cases.
After the Section 341 Meeting – Getting to discharge
Creditors and the trustee have approximately 60 days from the date of the 341 meeting in which they may challenge the debtor’s right to a discharge (Bankruptcy Code § 727) or the dischargeability of a particular debt (Bankruptcy Code § 523 (a) (2), (4), (6),and (15)) by filing an adversary proceeding. Typically, adversary proceedings are filed where there has been some type of fraud by the filer within a period of time before the case is filed. These types of proceedings are rare.
Failure to take the post-filing financial management class and file the certificate of completion of that class can result in the case being closed without entry of a discharge. The court may charge a new filing fee to reopen the case, file the certificate and then enter the discharge.
Individual debtors get their discharge within approximately four (4) months from the filing of the case. The discharge wipes out dischargeable debts that existed at the commencement of the bankruptcy case.
After the Discharge
Certain debts survive a Chapter 7 bankruptcy because they are excepted from the discharge by law: for examples, most taxes, child support and alimony, student loans, liens and reaffirmed secured debts are among the kinds of debts not discharged in Chapter 7.
Chapter 13 Bankruptcy Basics
Chapter 13 is a repayment plan or individual reorganization bankruptcy. Only individual consumer debtors can file a Chapter 13 bankruptcy. There are debt limitations. In other words, a debtor filing a Chapter 13 bankruptcy cannot have any more than certain amounts of unsecured debt and secured debt, as defined in the bankruptcy laws.
A Chapter 13 is like a court-enforced repayment plan, which creditors must accept. Unlike credit management plans outside of bankruptcy, creditors don’t get to choose whether to be bound by the plan. It protects the debtor from collection action during the case and discharges any unpaid balance of dischargeable debts at the end of the plan. A Chapter 13 stops the running of interest and late charges on unsecured debt (like credit card debt) and stops late charges on secured debt (like cars and mortgages)
There are four reasons a debtor will repay his or her debts in a Chapter 13 repayment plan instead of discharging them in a Chapter 7
- The debtor makes too much money and doesn’t qualify for a Chapter 7;
- The debtor has assets that are non-exempt that he or she would lose in a Chapter 7;
- The debtor is behind on a secured debt (a house or car payment) that he or she wants to catch up on by spreading out the missed payments over time; and
- The debtor is able to strip a lien such as a second mortgage or car loan.
Chapter 13 permits the debtor time to pay debts that can’t be discharged in bankruptcy, like recent taxes or back child support, to cure defaults on home mortgages and to eliminate that part of a lien that is greater than the value of the asset at the beginning of the case.
A Chapter 13 is a powerful tool for the right debtor. If you fit into any of the above categories, it may be more advantageous for you to file a Chapter 13 than to file a Chapter 7, under the right circumstances.
The “Means Test”
The bankruptcy “means test” determines whether your income is low enough for you to file Chapter 7 bankruptcy. It’s a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy when they have sufficient income to at least pay back part of their debts and then discharge the unpaid balances after the Chapter 13 plan payments are completed.
Since almost everyone must take the means test, it does not require that the filer be completely broke and penniless in order to file a Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment. The test is a complicated formula that takes many factors into consideration.
The means test was primarily designed to limit the use of Chapter 7 bankruptcy to those who truly cannot pay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy. Then, your expenses and standard IRS averaged expenses are deducted from the current monthly income to see if there is any net income at the end of the test that can be used to repay creditors.
There is an exception to the means test: only bankruptcy filers with primarily consumer debts, not business debts, are required to take the means test.
The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. Period. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.
For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called “disposable income”), after paying your “allowed” monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.
Median income levels vary by state and household size. Each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation.
If the means test sounds complicated, that is because it truly is complicated. An experienced West Palm Beach bankruptcy attorney can help you determine whether you pass the means test and can then file a Chapter 7 bankruptcy.
Exemptions (under Florida law)
The bankruptcy code allows each individual who files bankruptcy to keep basic assets deemed necessary for the debtor’s “fresh start” after bankruptcy. That property is known as the debtor’s “exempt property.”
Exemptions are the one place where bankruptcy law varies from state to state. Congress created a set of exemptions in the bankruptcy code, but allowed each state to “opt-out of those exemptions in favor of the state exemptions. Florida has opted out and residents of Florida use the Florida state exemptions, which can be very generous in some regards.
The debtor claims property as exempt in the schedules that are filed to initiate the bankruptcy case. If no objections are filed to the exemptions, they become final 30 days after the meeting of creditors. Exempt property is then no longer property of the bankruptcy estate and not available to the trustee to sell and creditors cannot seek to take it away.
The point of bankruptcy is to get a fresh start and that is only possible if the debtor has something to start with when the procedure is completed. However, sometime certain necessary assets may not be exempt and the filer may have to buy that asset back from the trustee.
You must have lived for two (2) years in the state in which you are filing bankruptcy to use the exemptions of that state. If you have not lived in the state for two (2) years, then the exemptions of the state in which you lived in the six months beyond the two year look-back period apply. If no state’s exemptions are available, you are entitled to use the federal exemptions. This gets confusing, so if you have not lived in the state in which you are residing for the past two years, it is best to consult with an experienced attorney regarding which exemptions apply to you.
Most Chapter 7 cases are no-asset cases: that is, the debtors give up nothing to the trustee because the exemption laws allow debtors to retain certain assets free from the claims of their creditors. For example, household goods and furnishings, clothing, equity in a home and equity in a vehicle are examples of exempt assets. Some of these assets are exempt to the full value of the asset while others are exempt only up to a certain value. That value is determined by the laws of the state in which you are filing – or the federal exemption laws, if your state allows you to choose to use the federal exemption laws.
Pensions, 401K’s and Ira’s
Pension rights and 401(k) plans, which are frequently one of the filer’s largest asset are not property of the estate.
IRA’s and other retirement savings may be property of the estate but are frequently exempt. The 2005 amendments to the Bankruptcy Code increased the exemption for IRA’s for all debtors, regardless of state of residence, to $1million.
Valuation of Assets
The values in the exemption statutes refer to the present sale value of the item (not its purchase price or its replacement value).
If an asset is subject to a mortgage or a lien, it is the value of the item after deducting the amount of the lien or liens (the equity) that is used to figure the exemption. Also, the law looks only to the value of the debtor’s share of the equity in an item if it is co-owned with other people or entities.
Creditor Workouts and Loan Modifications
Before jumping into Bankruptcy, we always explore all available options and remedies to correct the financial problems of our clients. Such alternatives include negotiating with creditors to take reduced balances on the debts due in the form of Creditor Workouts that are done outside of Bankruptcy. Additionally, Kelley & Fulton, P.L. has substantial experience and success in efforts to cure mortgage defaults by working with the parties involved to try and avoid foreclosure and put the mortgage loan back to a performing status.
For more detailed information about exemptions or any other bankruptcy issue, please contact the law offices of Kelley & Fulton, P.L. at (561) 491-1200.