Attorney Elizabeth Atkins is Charleston's Bankruptcy Specialist

Bankruptcy law is a highly specialized area of the law.  The South Carolina Supreme Court has created a specialty designation for attorneys who have shown special expertise in matters relating to Bankruptcy law.  Attorneys must pass a certification examination;  before being allowed to take the examination, the attorney must show substantial involvement and special competence in the area of bankruptcy during the five years immediately prior to seeking certification.

 

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Bankruptcy Overview

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Bankruptcy law is governed by the Congress of the United States.   The following types of relief are available:  Chapter 7 (liquidation);  Chapter 13 (reorganization for individuals); Chapter 9 (reorganization of a municipality); Chapter 11 (reorganization for businesses or individuals with higher outstanding obligations);  and Chapter 12 (reorganization for family farmers).  A new type of Chapter 11 relief has recently been added.  The following concepts and terminology are common to all types of bankruptcy cases:

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Common concepts and terminology of bankruptcy cases:

 

Commencement

A bankruptcy case is commenced by the filing a petition, along with a list of creditors.  A filing fee in the amount of $313 is required for a Chapter 13 petition.  A petition can be filed by an individual or by a husband and wife jointly under Chapter 13.  A filing fee in the amount of $338 is required for a Chapter 7 petition.  A partnership, a corporation, or an individual/husband/wife can file under Chapter 7.  A filing fee in the amount of $1,738 is required for a Chapter 11 petition.   In the District of South Carolina, all petitions are filed electronically.

Trustee

A trustee will be appointed upon filing in a Chapter 7, 12, or 13 case.  In a Chapter 11 case, a Trustee can be appointed upon request by a party in interest if it can be shown that the Debtor should not be allowed to continue to manage its affairs.  In South Carolina, the Trustee is selected from a panel of trustees who have been been previously qualified.  The Trustee has different responsibilities, depending on the type of case. 

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Exemptions

South Carolina law allows all individuals to claim certain property as exempt from their creditors. By claiming an exemption, the debtor is telling the creditors and the trustee that no-one can take that property to satisfy any debt that may be owed by the debtor. The exemption applies to the value of the property after taking into consideration the liens of any creditors (a lien is an agreement made with a creditor that allows the creditor to repossess specific property if payments are not made as agreed). Most car loans are secured by liens. Each individual debtor can claim the following property as exempt, subject to certain dollar limits:

• Principal residence

• Burial plots

• Vehicles

• Household furnishings

• Jewelry

• Tools of trade

• Cash or liquid assets

• Benefits such as social security, disability, personal injury recoveries, or pension/retirement plan payments

• Life insurance proceeds

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Exemptions are based on the state of `domicile’ during the 730 days immediately preceding the filing of the case.   If you have not lived in South Carolina for at least 180 days immediately preceding the filing of the case, then a determination will need to be made as to whether the exemptions provided the laws of South Carolina, the bankruptcy code (federal) or another state will apply.

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Discharge
The completion of a bankruptcy case is designed to result in the entry of an order that will permanently relieve an individual from the obligation to repay certain creditors. A discharge will not be entered until a debtor has completed an instructional course concerning personal financial management. In addition, no discharge will be granted to a debtor with a child support obligation until he/she certifies that all support that has come due and payable since the filing of the case has been paid.

Automatic Stay

Individuals seeking relief under the bankruptcy laws are provided immediate protection from ongoing collection by their creditors. Once the Bankruptcy Court receives a petition, a case number is assigned which triggers an automatic stay of all collection efforts by creditors. The protection applies whether creditors actually know of the filing of the case; any acts taken after the date of filing can be undone. Creditors are normally very cautious about attempting to continue collection if they believe a bankruptcy case has been filed because the Bankruptcy Judge can punish a willful violation of the automatic stay. The creditor must have actual knowledge of the filing of the case to be punished for willful violation of the stay. Therefore, creditors should be provided a case number and date of filing as quickly as possible.

The recent amendments to the Bankruptcy Code have eliminated the protection of the automatic stay in
certain situations. No protection will be afforded in the following situations:

1. Ongoing paternity, child custody/visitation, divorce or domestic violence actions;
2. Collection of child support;
3. Suspension of drivers license;
4. Residential eviction action;
5. Setoff of tax refunds against tax debt;
6. Two prior bankruptcy cases have been pending within the past year.

Additional restrictions have been imposed if a previous bankruptcy case was pending within one year of the filing a bankruptcy case. In that situation, the automatic stay will only be effective for a period of thirty days, after which time creditors will be entitled to proceed without regard to the automatic stay UNLESS the debtor has demonstrated to the bankruptcy court that the filing of the second case is in good faith.

Credit Counseling
In order to be eligible to file a bankruptcy case, each individual debtor is required to participate in credit counseling that outlines the opportunities available for credit counseling and provides a budget analysis.  The counseling must take place no more than 180 days prior to the filing of the case and must be provided by a counseling agency that has been approved by the United States Trustee.  The debtor will be provided with a certificate of completion to be filed with the bankruptcy court.  If a repayment plan is created, the debtor must file the repayment plan with the bankruptcy court.  In limited circumstances, an individual can file a case prior to participating in credit counseling, but only if the counseling services were not available within a 5-day period prior to the filing of the case.  If the counseling is not completed prior to the filing of the case, and the court grants a waiver, the counseling must be completed within 30 days after the filing of the case.

Meeting of Creditors

The bankruptcy rules require each debtor to appear at a Meeting of Creditors (this meeting is often referred to as the First Meeting of Creditors or §341 meeting), at which time the Trustee who has been assigned to the case will ask questions of each debtor.  In addition, creditors are allowed to appear at the meeting and ask questions about the schedules and the circumstances surrounding the filing of the case.   These hearings are held on a monthly basis in the Charleston division of the bankruptcy court.  The attendance of the debtor is required;  a case can be dismissed if the debtor does not appear.

 

Upon filing a case, a Chapter 13 debtor must be able to verify that all tax returns for the four years prior to the filing of the case have been filed with the appropriate taxing authorities.  If the debtor cannot provide proof that the returns have been filed, then the Trustee can delay the Meeting of Creditors until such time as the returns are filed, but in no event for longer than 120 days.  In addition, the Chapter 13 Trustee will require copies of pay stubs for the month preceding the filing of the cases as well as copies of W-2’s for the preceding year and copy of all bank statements for the period immediately prior to the filing of the case.

 

At least seven (7) days prior to the meeting, Chapter 7 and Chapter 13 debtors must provide a copy of their most recent tax return to the Trustee.

 

Proof of identity (picture) and social security number are required to be provided to the Trustee at the Meeting of Creditors.

Means Test

Under the  Bankruptcy Code, a consumer debtor will be required to pass a means `test’ in order to qualify for relief in the type of case that has been filed.  In a Chapter 7 case, the means test will not apply if the median household income is lower than the following amounts (effective November 1, 2020):

 

                                             1 person household                         $ 49,390

                                             2-person family                                $ 64,083

                                             3-person family                                $ 70,883

                                             4-person family                                $ 85,227

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                                             5-person family and over - add $9,000 per additional person in household                      

 

The means test is based on an average of all income for the six (6) months prior to the filing of the case.  A means test is also applied in a Chapter 13 case to determine the length of the commitment period for the Chapter 13 Plan.  The commitment period is then used to determine the minimum amount that must be paid to the unsecured creditors.

Notices
Special care must be given to gathering the addresses for creditors that must be attached to the petition.  Each creditor is entitled to notice of the filing of the case at its correspondence address as provided in at least two written statements sent to the debtor within the ninety days prior to the filing of the bankruptcy case.  The payment address will not be considered proper notice for the creditor.    If the incorrect address is used for the creditor, then any notice that is sent to the incorrect address will be considered to be ineffective to bind the creditor.

Property

Debtors are required to provide a complete list of all property in which they have an interest which can include the following:

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1. Property jointly owned with a person who is not filing a bankruptcy case;

2. Heirs property that may not be titled in the debtor’s name;

3. Property in the possession of a former spouse for which the title has not been changed;

4. Money that is due but has not yet been received;

5. Property that has been inherited by way of a will even if title has not yet changed;

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Further, you must provide a value for your property.  The value should be based on the replacement value of the property as of the date of the filing of the bankruptcy petition.    Reference should be made to the price that a retail merchant would charge for property of that kind given the age and condition of the property at the time of the filing of the case.

Other

In addition to listing all property and all debts, debtors are also required to file with the Court any pay stubs received from an employer during the six (6) months prior to the filing of the case.

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If requested by the Court, the United States Trustee or a creditor (also known as a `party in interest’), the debtor may be required to file his/her tax returns with the Court while a case is pending.

 

Failure to file tax returns while a case is pending is grounds for the dismissal of the case.

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Consultations for personal bankruptcy are free.

Attorney Atkins can advise you of your options. Fees are tailored to each case.

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Which type is best for me?

At your initial consultation, Attorney Atkins will review your personal case.  No hard and fast rules apply in determining which type of relief is best suited for a particular problem.  Most people want to repay as much of their debt as possible.  However, if relief is needed, then you want to ensure that the problem is solved to the maximum extent available.  The most common scenarios are as follows:

Chapter 7

When an individual has limited income available to meet his necessary living expenses and has primarily unsecured debts, a Chapter 7 liquidation will be beneficial because the unsecured debt will be discharged, or eliminated.  The income will then be `freed up' for the necessary living expenses. 

 

If the same individual also has secured debts, they would need to decide whether they could handle the ongoing payments to the secured creditors.  The most common type of secured loans are car, home, furniture or jewelry.  In order to keep property that is subject to a lien (also known as a security interest), the payments would need to be kept up-to-date according to the original agreement with the creditor.  An agreement, called a reaffirmation agreement, must be signed within forty five (45) days after the meeting of creditors.  If no agreement is signed, then the creditor will be entitled to proceed with its state court remedies to the property.    In some situations, a lump sum payment that equals the value of the property can be made to the creditor to satisfy the lien.

Chapter 13

When an individual has a regular source of income available or does not qualify for a Chapter 7 case, a Chapter 13 reorganization will be beneficial because the repayment to the creditors can be restructured and tailored more closely to the disposable income that is available.  All debts can be restructured in a Chapter 13 plan EXCEPT FOR home mortgage loans and other long term debts.  When an arrearage on a home mortgage or long term debt is to be caught up or cured in a Chapter 13 plan,  the ongoing mortgage payments will also be included in the Plan payment.   This type of case is referred to as a `conduit mortgage case’.   Unsecured debts, such as credit cards, medical bills, finance companies, or check cashing debts, do not need to be paid in full unless disposable income is available. 

 

Secured debts must be paid up to the amount owed but no more than the value of the property.  An exception exists for a personal car loan taken out within two and one-half years (910 days) of the filing of the case or a loan incurred to purchase personal property within one (1) year of the filing of the case.  The full amount owed must be paid, even if the value of the property is less than the amount owed. 

 

Many times, an individual will file a Chapter 13 case instead of a Chapter 7 case because car payments are not up-to-date, and they need to change the payment terms.  Other debts that can be paid through a Chapter 13 reorganization plan are taxes (including property and income), student loans, and cosigned debts.    In some instances, student loans can be treated differently from other unsecured debts. 

 

Chapter 7 Bankruptcy

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In a Chapter 7 case, the appointed Chapter 7 trustee will look at these three main areas:

 

Assets

The trustee will want to know if you have any property that is not protected by the exemptions (discussed on page 2) or subject to a security interest.  If you have 'excess' property then the trustee will want to sell or liquidate the property and then distribute the proceeds amongst your creditors.   After analyzing your situation, it may be more advisable to file a Chapter 13 Reorganization to pay the creditors, so that your non-exempt property will not be sold.

Secured Creditors
The trustee and the secured creditors will want to know how you plan to treat these debts.  You will have the following choices:

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     a.  Surrender the property to the creditor;

     b.  Maintain the contractual payments originally agreed upon with the creditor and sign a reaffirmation agreement;   

     c.  Agree to repay the debt by making one lump-sum payment to the creditor to pay the full value of the property, called a               redemption.

Abuse

The trustee wants to know if you have sufficient income to enable you to commit to a repayment plan.  If so, then a presumption of abuse arises.  Each debtor is required to complete  a `Means Test’.  The test will raise a presumption of abuse, if you have income to allow the repayment of a portion of your unsecured debts.   If a presumption of abuse exists, then you would be required to explain any circumstances that you believe would justify a finding of no abuse (in other words, no extra income to pay the unsecured creditors).   You would be required to provide documentation of the additional expense or adjustment to your income and a detailed explanation as to why the expense is necessary and reasonable.  The explanation must be made under oath.

              

If the trustee believes that you have not passed the `Means Test’, then he will file a motion to dismiss or convert and may ask the Court to award attorney fees and costs that were required to bring the issue to the attention of the Court.

Common Questions About Chapter 7 Cases:

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Are there any types of debt of that will not be discharged in a Chapter 7 case?
Yes, certain debts will be excepted from discharge in a Chapter 7 case.  For example, if you have a student loan debt, you will have to make arrangements to repay that debt.  In addition, certain tax debts will survive the discharge that is granted in a Chapter 7 case.  Further, alimony, child support or marital debts will also be excepted from discharge.  Finally, any debts that arose as a result of fraudulent conduct or willful misrepresentation will be excepted from discharge.  A creditor must prove that you acted improperly to prevent a discharge of a debt on the basis of fraudulent conduct or willful misrepresentation.

If property is surrendered to a secured creditor, will I be held responsible for any remaining balance owed to that creditor after the property is sold?
No, any balance owed after the property is sold by the creditor will be discharged along with your other unsecured debt.   Keep in mind that if you elect to keep property that is security for a debt (and reaffirm the obligation) and the property is surrendered to the creditor at a later date after the bankruptcy case is ended, then any remaining balance can be collected by the creditor after the discharge is granted.

What happens to debts that are cosigned?
The creditor can seek to collect the debt from the co-debtor; your obligation will be discharged.  The co-debtor should be listed as a creditor to ensure that the co-debtor does not pay the creditor and then seek contribution from you.  This type situation commonly arises in a situation where a debtor is divorced or separated and has joint debts with the former spouse.  The former spouse is a creditor because of the joint status of the debt.   If the Family Court has ordered you to pay the cosigned debt, then you will not be relieved of the terms of the Family Court order.  Even though the creditor will not be entitled to collect directly from you, your former spouse will be able to hold you in contempt of the Family Court order for failure to pay.

What if I have more financial problems in the future - can I file another Chapter 7 bankruptcy case?
The Bankruptcy Code only allows a discharge of debts in a Chapter 7 case every eight (8) years.  If additional financial problems arise during that eight (8) year time period, you would be entitled to file a Chapter 13 case provided at least four (4) years have passed since the filing of the Chapter 7 case.

What if I have the income to repay my creditors under a Chapter 13 Reorganization Plan now, but won't in the near future?
Normally, the Chapter 7 trustee will look at your income situation as of the time of the filing of the case.  An anticipated reduction in income would need to be proven to the Trustee as a circumstance that might affect the means test finding of abuse.

What if my income situation unexpectedly improves after filing of the Chapter 7 case?

The means test is based on an average of your monthly income during the six months prior to the filing the case.  Of course, if the Trustee believes that you deliberately waited to take a higher paying job until after the filing of the case, he may question the circumstances surrounding the new job/income.  Even if the monthly income as of the filing of the case `passes’ the means test, the Court can still determine that a discharge is an abuse if a review of the totality of the circumstances indicates an abuse.  In any event, no-one can force you to file a Chapter 13 reorganization.  However, if you wish to convert to a Chapter 13 case because you are confident that the change in your income situation will continue, then you can do so. 

 

Chapter 13  Bankruptcy

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A Chapter 13 Reorganization involves proposing a plan of repayment to your creditors that can last up to sixty (60) months.  Prior to determining the actual length of the Plan, a determination must be made as to the commitment period for the Debtor, based on the household income.  If the household income exceeds the median family for a South Carolina household of similar size, then the plan commitment period is sixty (60) months.   If the household income does not exceed the median family for a South Carolina household of similar size, then the plan commitment period is thirty-six (36) months.  The commitment period is used primarily to determine the minimum monthly payment as well as the amount of monies that must be paid to the unsecured creditors.  The actual term of the Plan can be longer or shorter; however, in no event can a Chapter 13 Plan last for a period shorter than thirty-six months, unless you can repay all of your creditors in a shorter period of time and no Chapter 13 Plan can extend beyond sixty (60) months. 

 

The Bankruptcy Code allows for the payment of child support obligations after the completion of the plan payments, provided that the plan payments reduce the past due obligation as the Chapter 13 Plan is ongoing.

In a Chapter 13 case, the Chapter 13 trustee will look at these four main areas:
 

Disposable Income
In a Chapter 13 case, the trustee will want to ensure that you are committing all of your income, over and above your necessary living expenses, to the reorganization plan.  The disposable income must be committed for a period of at least three years.   Typically, the problems that arise in this area are related to expenses for `luxury' items such as private schooling costs for children, expenses related to nonessential items such as boats or recreational vehicles, and excessive budgeted amounts for clothing, cable, or entertainment.  The means test will not allow luxury expenses to be deducted in determining projected disposable income.  The means test is designed to force the debtor to make a higher Plan payment that will likely make luxury expenses unaffordable.

Feasibility
The Chapter 13 trustee will want to ensure that you have a reasonable basis for believing that you can make the required payments under the plan of reorganization that you are proposing. The feasibility or affordability of a Chapter 13 plan is the most common problem facing most debtors. However, the trustee does not normally object to the confirmation or approval of a plan on this basis, unless you have no income and no reasonable belief that you will have income necessary to make
payments under the plan. You must have a regular source of income to file a Chapter 13; your income can include wages, unemployment compensation, disability, social security, child support or alimony, or self-employment income. Since the Chapter 13 payments begin within 30 days after filing the case, you can file a case if you know that you will begin generating income within that 30 day period.

Liquidation Test
The Chapter 13 trustee will want to ensure that your creditors will receive as much from your Chapter 13 plan as they would have received in a Chapter 7 liquidation.  Normally, you would avoid filing a Chapter 7 case if non-exempt property was available for a trustee to sell.  In that type scenario, you would want to file a Chapter 13 so that the property would not be taken and sold.  A Chapter 13 trustee will not sell non-exempt property.  His primary function is to disburse monies, paid by you, to your creditors pursuant to the terms of the plan approved by the Court. Accordingly, a liquidation analysis will identify what type of bankruptcy case you should file; if a Chapter 13 case is appropriate, then the liquidation analysis will identify how much money must be paid to your creditors through your plan.

Good Faith
The Chapter 13 trustee will want to ensure that you do not have improper motives in filing a bankruptcy case.  This area is difficult to summarize because of the nature of bankruptcy - no creditor believes that any debtor needs to reorganize.  The above discussion regarding disposable vis a vis luxury items/expenses also relates to good faith issues.  Filing a Chapter 13 to retain luxury items and not pay unsecured creditors is often viewed as lacking good faith.  Good faith issues will also arise in cases where a debtor is filing a second Chapter 13 case after a case that was dismissed for nonpayment.  And finally, good faith issues will invariably arise in a case that is filed `on the courthouse steps' - for example, the day before a foreclosure sale on a home.

Common Questions About Chapter 13 Cases

Three to five years is a long time to commit to monthly payments. What happens if I can't make the Trustee payment?

Several options are available in the event that problems arise with making your Trustee payments.  For example, the Court will allow a Moratorium in your monthly payments for a few months; the payments that are missed are added to the end of the term of the Chapter 13 Plan.  If the problem with making the payments is not temporary, then a moratorium will not be the best option.  A debtor has an absolute right to convert to a Chapter 7 case at any time; an additional filing fee will be required. 

 

Other options might be to modify the Chapter 13 Plan in order to reduce the Trustee payment or seek a hardship discharge prior to completion of all of the required payments.  The Chapter 13 Trustee will file a motion to dismiss a case if payments are not made; generally, arrangements can be made to catch up missed payments.  However, oftentimes, making the Trustee payments as well as an extra monthly payment is rather difficult.

How are tax debts treated in a Chapter 13 Plan?

A Chapter 13 Plan cannot be approved by the Court unless the Plan provides for full payment of tax debts that are entitled to priority.  The provisions regarding tax claims are complex;  generally, income taxes that are owed for tax periods within three years preceding the filing of the case are not dischargeable.  Accordingly, these taxes must be paid in full through the Chapter 13 Plan.

 

After a case has been filed, any tax liabilities that arise are considered to be post petition taxes that cannot be included in the Chapter 13 Plan.  The IRS, Trustee, or any other party in interest can request the dismissal of a Chapter 13 case if post-petition tax returns are not filed and the appropriate taxes paid.

How are student loan debts treated in a Chapter 13 Plan?
Student loans cannot be discharged even in a Chapter 13 case.  A Chapter 13 Plan cannot provide better payment treatment to a student loan creditor.  A new procedure has recently been approved by the Court that allows for a student loan to be paid directly, outside of the Chapter 13 Plan, if the direct payment does not favor the student loan creditor over the other unsecured creditors.

What if my creditors don't agree with the Plan?
A copy of the Chapter 13 Plan is mailed to each creditor along with a notice that advises creditors of a deadline within which to object to the Plan.  If no objections are filed, then the creditors are bound by the terms of the Plan.  If a creditor timely objects, then the Judge may have to decide if the Plan meets confirmation standards; if so, then the Court will confirm the Plan over the creditor objection.

What if my creditors refuse to participate in the Plan?
As part of the notice of the commencement of the Chapter 13 case that is sent to creditors, a blank proof of claim is provided (you will receive a copy of the same information that is sent to your creditors).  The creditors must file the proof of claim in order to be paid.  The claim must be filed within ninety (90) days of the First Meeting of Creditors.  If a claim is not filed, then the Trustee has no authority to disburse money to the creditor.   Upon completion of the case, the obligation owed to the nonparticipating creditor is discharged, provided the creditor received notice of the filing of the case.  Providing a current correspondence address for all creditors is very important to ensure that proper notice is given.

Can I buy or sell any property while the Plan payments are being made?
The Bankruptcy Code includes provisions to allow debtors to obtain the approval of the Court to incur debt to acquire property or sell property during the period of the case.  The provisions are designed to ensure that creditors are given notice of post-petition transactions.

What if my income increases? Can the plan be paid off early?
If income increases, the Chapter 13 Plan can be modified to increase the Trustee payment. Such a modification is not required; however, the Trustee or other party can request a modification. If the Plan that has been approved by the Court proposes to pay all creditors in full, then a modification is not necessary; extra payments can be made so that the plan is completed early. If the Plan that has been approved by the Court does not propose to pay all creditors in full, then the Plan will likely need to be modified to ensure that the Trustee has the authority to disburse the extra monies to the creditors. Because of the requirement that the debtor commit disposable income for a period of thirty six (36) months, a debtor needs to be cautious about trying to complete a `base plan' (less than full payment to unsecured creditors) too soon.

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When will the Plan payments start?  Who are the Plan payments sent to?

The Plan payments must begin thirty (30) after the filing of the Chapter 13 case.  In addition, if a secured creditor files a claim within thirty (30) days of the filing of the case, a payment (referred to as an `adequate protection payment’) must be made to the secured creditor.  The Plan payment is made directly to the appointed Chapter 13 Trustee and will be treated as an adequate protection payment if a secured creditor files a proof of claim.

 

The Trustee can require that the payments be withheld directly from your pay and sent by your employer to his payment address.   A second method for making the Trustee payments is via TFS BillPay.  The Trustee’s preferred method of receiving payments is ‘TFS BillPay’ which is a recurring automatic draft from your checking account in lieu of a payroll deduction.   The Trustee generally conditions his recommendation to approve a Chapter 13 Plan on an agreement to either allow a payroll deduction or set up TFS BillPay.

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Consultations for personal bankruptcy are free.

Attorney Atkins can advise you of your options. Fees are tailored to each case.

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