DIVORCE AND BANKRUKPTCY

Divorce and Bankruptcy

Often, family law and bankruptcy seem to go together. Either upon splitting up, the spouses can't pay the family debts and jointly need bankruptcy relief, or one spouse seeks to use bankruptcy as a weapon against the other spouse, or the other spouse's lawyer.

Bankruptcy's effect on family law issues

For those divorcing or divorced, the bankruptcy issues generally fall into three categories:

1. Support:   discharge, payment and the automatic stay
2. Property settlement:   what happens to debts between spouses
3. Liability to others:   who is liable for the debts at divorce

Filing together

Sometimes, one or both spouses can benefit from a bankruptcy filing:

	dischargeable debts are eliminated, leaving more money for the payment of on going expenses, including support.
	taxes can be paid, without interest, or even discharged where sufficiently old.
	the divorce is simplified by the elimination of much of the family debt

One spouse files

When only one files, the legal worlds of state family law and federal bankruptcy law may collide. The bankruptcy courts are left to sift through the wreckage.

Where there are non exempt assets, a bankruptcy filing by one spouse pulls all the community property into the bankruptcy estate and assures that the available assets are used to pay debts now. 

A spouse who has the benefit of an indemnity agreement in a divorce decree (a provision that requires the other spouse to pay certain debts or repay the benefited spouse if the creditor makes that spouse pay the debt) may be able to prevent the discharge of the indemnity agreement under 11 U.S.C. 523(a)(15).  There are no other bars to one spouse discharging  all liability for non tax/ non support debt.

Family Law & Bankruptcy FAQS

	Can my ex escape paying support by filing bankruptcy?
	What happens to my motion for modification of support when my ex  files bankruptcy?
	My support is deducted from my ex's wages by the employer:  does that change if he files bankruptcy?
	We were in the middle of a divorce, and my spouse filed bankruptcy
	Does listing me on his bankruptcy schedules discharge what he owes me?

Bankruptcy and support claims

The Bankruptcy Code attempts to protect the rights of children and former spouses to collect support:  whether it is called family support, alimony, or child support, the bankruptcy code makes it non dischargeable in bankruptcy.   The recipient spouse does not have to do anything for the debt to be excluded from the discharge.

The automatic stay, which stops other court proceedings when a bankruptcy is filed, does not apply to actions to establish or modify a support order or to collect support from post petition wages.

Wage orders that deduct current support from the debtor's wages are not generally affected by the bankruptcy filing.  Wage orders that collect past due support arguably are stayed in Chapter 7 and certainly stayed in Chapter 13.

Also, support is a priority claim for purposes of payment from the estate.   Thus in a Chapter 13, payment of past due support is paid before unsecured creditors, and even before taxes. The recipient spouse must file a proof of claim to receive payment.  Chapter 13 frequently works well for both the paying spouse (who is protected from other creditors while paying back support) and for the recipient spouse ( who gets regular payments from the trustee made by the debtor voluntarily).

Bankruptcy and the division of property and debts in a pending divorce

The issues raised when one spouse in a divorce action files bankruptcy are complex and vary somewhat depending on the property and family laws of the state.  

In general, the filing of a bankruptcy stops all court proceedings against the debtor;  brings into the bankruptcy estate all property of the debtor and all community property of the debtor and his spouse;  and upon entry of a discharge, relieves the debtor of personal liability for all dischargeable debts.   

The family court cannot assign marital debts to the debtor after he has received a discharge and cannot make orders dividing the property of  the debtor while the property is property of the estate.  The family court can divide the property that the debtor exempts;  after the exemption is allowed, that exempt property is no longer property of the estate.  

The family court can continue to hear and decide issues relating to fixing support. Some courts will require an order from the bankruptcy court, specifically finding that motions to establish or modify support are outside the bankruptcy stay. 

If you become involved in such a proceeding, get advice from an experienced bankruptcy lawyer. 

Bankruptcy and enforcement of marital settlement agreements

The Bankruptcy Code recently made non support obligations created in connection with a divorce or separation nondischargeable in Chapter 7 if discharge of the obligation would harm the non debtor spouse more than it would benefit the debtor.  11 U.S.C. 523 (a)15. 

Unlike support obligations, which are non dischargeable without the necessity of action on the part of the recipient spouse, these marital separation obligations survive the bankruptcy only if the non debtor spouse files a timely action to except the debt from discharge.  

If no adversary proceeding is timely filed in the bankruptcy, these obligations are discharged.  Snooze, you lose. 

The case law on just what obligations fall into this category of potentially non dischargeable debts; who can bring the action; and which party has the burden of proof is still developing.  See a bankruptcy attorney immediately if you are the beneficiary of a property settlement agreement or an indemnity agreement with your former spouse. 

Effect of listing a marital debt on the schedules

Just because a creditor is listed by the debtor on the bankruptcy schedules does not make the creditor's claim dischargeable.  The debtor is required to list all debts on the schedules, even debts that are acknowledged to be non dischargeable.  

The dischargeability of the debt depends on the nature of the debt (support, property division, lien for equalizing payment, etc.).  Support is non dischargeable without action on the part of the receiving spouse.  

Other debts arising from a divorce, like property division and liability for the debts incurred to others during the marriage, require action on the part of the creditor/spouse if they are to survive the bankruptcy.  

If you have notice of the bankruptcy, whether from the court or through the grapevine, you are charged with finding out what is going on and taking steps to protect your interests, if necessary.  

Exemptions

Texas Personal Property Exemptions: The Property They Can't Take

Texas is one of the most liberal exemption states. Discussed below are the personal property bankruptcy exemptions available under Texas state law and the most commonly claimed federal law exemptions.

	The state personal property exemption cap: The Texas debtor is allowed a certain portion of personal property exempt from garnishment, attachment, etc. The aggregate amount which is allowed the debtor is determined based upon the debtor's status. Single adult: A single adult, who is not a member of a family is entitled to property he or she owns that has a fair market value (exclusive of liens) of up to $30,000. Tex.Prop. Code ¿ 42.001(a)(2). Family: A family is entitled to property with a fair market value (exclusive of liens) of up to $60,000. Tex.Prop. Code ¿ 42.001(a)(1).
	Property subject to state exemption cap: With the exception of jewelry and unpaid commissions for personal services which are each limited to 25% of the cap, the debtor may allocate his exemption cap among any one or more of the 13 categories listed below.
	Home furnishings: Home furnishings, including family heirlooms can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(1). The term "home furnishings" is not defined in the Texas Property Code. The words "household" and "furnishings" are given their ordinary meaning. They do not include items such as portable telephones and hand-held recorders.
	Food: Provisions for consumption can be claimed as exempt property.
	Farm/ranch vehicles and implements: Farming and ranching vehicles and implements can be claimed as exempt property.
	Tools of trade: Tools, equipment, books and apparatus, including boats and motor vehicles used in a trade or profession can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(4). What constitutes "tools of trade": Items are tools of the trade in Texas if they are "fairly belonging to or usable in the trade." Only items that are "peculiarly adapted to" the debtor's trade or profession are exempt as tools of the trade under the Texas exemption statutes.

	Wearing apparel: Wearing apparel (other than jewelry which is dealt with separately) can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(5).
	Jewelry: Jewelry is exempt to the extent its value does not exceed 25% of the exemption limit. Tex.Prop. Code ¿ 42.002(a)(6).
	Weapons: Two firearms can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(7).
	Athletic/sporting equipment: Athletic and sporting equipment, including bicycles can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(8). Athletic and sporting equipment consists only of small items for individual use and does not include jet skis, sailboats, or power boats. In re Crockett, 158 F.3d 332 (5th Cir.1998)(jet skis); In re Gibson, 69 B.R. 534, 535 (Bankr.N.D.Tex.1987) (power boats); In re Griffin, 139 B.R. 415, 417 (Bankr.W.D.Tex.1992) (sailboats).
	Motor vehicles: A two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver's license or who does not hold a driver's license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(9).
	Farm animals: The following animals and forage on hand for their consumption can be claimed as exempt property: two horses, mules, or donkeys and a saddle, blanket, and bridle for each; 12 head of cattle; 60 head of other types of livestock; and 120 fowl. Tex.Prop. Code ¿ 42.002(a)(10).
	Pets: Household pets can be claimed as exempt property. Tex.Prop. Code ¿ 42.002(a)(11).
	Life insurance: The present value of life insurance policies are exempt if a family member or dependent of the insured judgment debtor is the beneficiary. Tex.Prop. Code ¿ 42.002(a)(12); but see Tex.Ins. Code art. 21.22, which indicates that exemption is unlimited (¿ 11:45).: As a practical matter, the cash surrender or loan value of a whole-life insurance policy is its present value and there will be no present value to a term policy. (See ¿ 11:45 et seq.)
	Unpaid commissions for personal services: Unpaid commissions for personal services not to exceed 25% of the aggregate limitation may be claimed as exempt from seizure. Tex.Prop. Code ¿ 42.001(d).
	State exemptions not subject to cap: Certain exemptions are not subject to any valuation limitation.
	Current wages: Current wages for personal services are wholly exempt, except for the enforcement of court-ordered child support payments. Tex.Prop. Code ¿ 42.001(b); See In re Cooley, 87 B.R. 432, 438 (Bankr.S.D.Tex.1988)--Bankruptcy Code also excludes wages from Chapter 11 plan.
	Limited protection: This exemption prohibits the issuance of a writ of garnishment against the debtor's employer. Additionally, a court cannot order turnover of paychecks, retirement checks and other similar types of assets. However, once the wages are turned over to the debtor and converted into cash they are subject to execution and a turnover order. Tex.Civ.Prac. & Rem. Code ¿ 31.002(f)--a turnover order cannot be obtained before the wages are turned over to the debtor; Brink v. Ayre, 855 S.W.2d 44, 45 (Tex.App.--Houston [14th Dist.] 1993, no writ); Burns v. Miller, Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317 (Tex.App.-- Dallas 1997, writ denied).: If the wages are deposited into a bank account they are subject to garnishment. American Exp. Travel Related Services v. Harris, 831 S.W.2d 531, 533 (Tex.App.--Houston [14th Dist.] 1992).
	Self-employed debtors: The current wages exemption does not apply to the earnings of self-employed debtors who are viewed as independent contractors. Tex.Prop. Code ¿ 42.001(d); In re Martin, 117 B.R. 243, 246 (Bankr.N.D.Tex.1990). The self-employed debtor must rely upon the exemption for unpaid commissions for personal services which is included in the property subject to the exemption cap and cannot exceed 25% of the cap. EXAMPLES: Texas courts have found independent contractors to include: . attorneys in private practice; Hennigan v. Hennigan, 666 S.W.2d 322, 324-25 (Tex.App.--Houston [14th Dist.] 1984, writ refused n.r.e.), 677 S.W.2d 495 (Tex.1984); . a district agent for an insurance company; In re Perciavalle, 92 B.R. 688, 691 (Bankr.W.D.Tex.1988), and a trucker who furnished his own transportation, equipment, etc. Brasher v. Carnation Co. of Texas, 92 S.W.2d 573, 575 (Tex.Civ.App.-- Austin 1936, writ dismissed).
	Health aids: Health aids that are professionally prescribed for the judgment debtor (or the debtor's spouse or dependent) are exempt regardless of value. Tex.Prop. Code ¿ 42.001(b)(2).: This exemption arguably includes, e.g. a wheelchair for a person unable to walk, an air conditioner for an asthmatic or an elevator for a person unable to climb stairs. However, it probably does not exempt swimming pools, saunas, bicycles, golf clubs, or gymnastic equipment merely because their use is necessary to sustain good health.
	Insurance benefits: There is an unlimited exemption of insurance benefits to the debtor who is the designated beneficiary of an insurance policy. Tex.Ins. Code art. 21.22; In re Young, 166 B.R. 854, 857 (Bankr.E.D.Tex.1994) (life insurance proceeds remain exempt cash).: "Insurance benefits" includes "all money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance issued by a life, health or accident insurance company, including mutual and fraternal insurance companies, or under any plan or program of annuities and benefits in use by any employer." Tex.Ins. Code art. 21.22 ¿ 1.: The exemption protects the insurance benefits from seizure to pay the debts of the beneficiary and the insured even if (i) the insured has the right to change the beneficiary or (ii) the insured or the insured's estate is a contingent beneficiary. Tex.Ins. Code art. 21.22.: This exemption does not apply to a creditor seeking to:(1) recover premium payments made in fraud of creditors; or (2) to foreclose on its security interest in a policy or its proceeds pledged to secure the debt of the insured or beneficiary. Tex.Ins. Code art. 21.22. If the bankruptcy debtor chooses the Texas exemptions, insurance benefits are fully exempt in a bankruptcy proceeding of either the insured or the beneficiary. Tex.Ins. Code art. 21.22, ¿ 1(4).
	Retirement plans, IRAs, etc.: There is also an unlimited exemption for monies set aside in certain qualified accounts earmarked for the debtor's retirement.
	Retirement plans; profit sharing plans: A person's right to the assets held in or to receive payments, whether vested or not, under any stock bonus, pension, profit-sharing, or similar plan, and under any annuity or similar contract purchased with assets distributed from that type of plan, and under any retirement annuity or account described by Section 403(b) of the Internal Revenue Code of 1986, or any individual retirement annuity, including a simplified employee pension plan, is exempt from attachment, execution, and seizure for the satisfaction of debts. The plan, contract, or account must qualify under the applicable provisions of the Internal Revenue Code of 1986. (26 U.S.C.A. ¿ 1 et seq.) Tex.Prop. Code ¿ 42.0021(a); Rucker v. Rucker, 810 S.W.2d 793, 795- 96 (Tex.App.--Houston [14th Dist.] 1991, writ denied)--to be exempt plan must qualify under Internal Revenue Code.: This does not prohibit the participant/plan beneficiary from borrowing from his or her plan and granting a lien on his/her interest in the plan to secure the loan. Tex.Prop. Code ¿ 42.002(d).: Additionally, under Texas law, causes of action to recover for lost exempt status of an individual retirement account (IRA) lost allegedly due to negligence and breach of fiduciary duty by the company that administered the debtor's preconversion Keogh retirement plan are exempt property under Texas statute exempting qualified retirement accounts from bankruptcy estate. Matter of Swift, 129 F.3d 792, 801 (5th Cir.1997).
	Government or church plans: A person's right to the assets held in or to receive payments, whether vested or not, under a government or church plan or contract is also exempt. The plan or contract must qualify under the definition of a government or church plan under the applicable provisions of the federal Employee Retirement Income Security Act of 1974. Tex.Prop. Code ¿ 42.0021(a); 26 U.S.C.A. ¿ 1001 et seq.: The participant/plan beneficiary is not prohibited from borrowing from his or her plan and granting a voluntary lien on his/her interest in the plan to secure the loan. Tex.Prop. Code ¿ 42.002(d).
	IRA [and Keogh] ("self-employed") plans partially exempt: Contributions to IRAs and annuities are exempt to the extent those amounts do not represent contributions in excess of the maximum contribution amounts exempt from federal income tax. Accrued earnings on exempt contributions are also exempt. Excess contributions and accrued earnings thereon are not exempt. Tex.Prop. Code ¿ 42.0021(b).
	Nontaxable rollover contributions: If an IRA contains amounts which qualify as non-taxable rollover contributions under the Internal Revenue Code, the amounts are exempt. 26 U.S.C.A. ¿¿ 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3); Tex.Prop. Code ¿ 42.0021(b).
	Multiple accounts: Texas law does not limit the number of IRAs the debtor can claim as exempt property; provided, the aggregate amount does not exceed the maximum contribution amounts. Matter of Volpe, 943 F.2d 1451, 1453 (5th Cir.1991). Distributions: Once payments are received by the retiree or other beneficiary they are no longer exempt. Cain v. Cain, 746 S.W.2d 861, 865 (Tex.App.--El Paso 1988, writ denied). There is an exception to this rule for amounts distributed from a qualified plan. These amounts are exempt for 60 days if the amounts qualify as a nontaxable rollover contribution. Tex.Prop. Code ¿ 42.0021(e). EXAMPLE: Debtor is terminated by employer. Employee "cashes out" debtor from employer's qualified plan. Debtor has 60 days to deposit funds into another qualified plan. Texas Exemption of Retirement Benefits: Interaction with the Bankruptcy Code and Possible Preemption by Mackey v. Lanier Collections Agency & Services." 26 Houston L. Rev. 497 (1989) contains a good discussion of the bankruptcy issues in exempting retirement benefits.
	Federal non-bankruptcy exemptions: A debtor may also utilize any exemptions provided by federal nonbankruptcy law in addition to either the state exemptions or the Bankruptcy Code exemptions.
	Social security benefits: Under federal law Social Security benefits (whether paid or payable) are not subject to execution, levy, attachment, garnishment, legal process or to the operation of the bankruptcy laws. 42 U.S.C.A. ¿ 407.
	Veteran's benefits: Federal law generally exempts veteran's benefits from seizure, both before and after receipt by the beneficiary. 38 U.S.C.A. ¿ 3101(a).: But if the benefits are spent on a permanent investment, they are no longer exempt as "veteran's benefits." Carrier v. Bryant, 306 U.S. 545, 549-550, 59 S.Ct. 707, 708, 83 L.Ed. 976 (1939). And, once benefits are paid to the veteran, they may be reached by court order to satisfy the veteran's child support obligations. Rose v. Rose, 481 U.S. 619, 635, 107 S.Ct. 2029, 2039, 95 L.Ed.2d 599 (1987).
	Property of debtor in military service: Although not technically an exemption from seizure, federal law also provides that any court may stay enforcement against a debtor in military service if the ability of the defendant to pay the judgment or debt is "materially affected by reason of his military service." The court may stay execution of any judgment or vacate or stay any attachment or garnishment (before or after judgment). The stay may generally last for the period of the debtor's military service plus three months. The court also has discretion to require payment in installments or otherwise. See 50 U.S.C.A. App. ¿¿ 523, 524.: In addition, deposits made to a U.S. Serviceman's Savings Institution by members of the armed forces on permanent duty outside the United States (and the interest thereon) are exempt from liability for the depositor's debts. 10 U.S.C.A. ¿ 1035(d).
	Federal employee's statutory compensation for injury or death: Compensation (and claims for compensation) paid on the death or injury of a federal employee are exempt. Also, these claims cannot be assigned. 5 U.S.C.A. ¿ 8130.

Should I File for Bankruptcy Protection?

Bankruptcy - Do Not Feel Guilty

Bankruptcy is about starting over fresh. It is about getting back in control of your financial future. Do not feel any shame for considering bankruptcy. In today's economy, many people, from all walks of life, are in your situation. We have clients who were making $200,000 plus last year and live in $600,000 dollar homes. Then again, we have an 18 year old who started out in life with $35,000.00 in debt (thanks MC/Visa/Amex) due to "free" credit cards. Who gives an 18 year old a $5,000.00 credit line? Credit card companies.

Bankruptcy Is Not Your Fault

Take control, feel no shame. Dotcom went bust. The telecommunications industry has gone South. Thousands have been laid off. This is not your fault. You cannot control the economy, you cannot control pie in the sky investors, and you cannot control voodoo accountants at multinational corporations (Enron), but you can take control back by contacting a bankruptcy lawyer. Since you were 4 years old, marketing companies have been trying to get you to buy into neighbor Jones' dream. If you didn't have the cash, "charge it."

The Credit Card/Debt Trap

Credit card companies have been begging you to charge up at 23% (some 24.99%) for years. How many "account balance" transfer offers have your received. How many new extensions of credit. Here's the trap, after you have established a decent payment history with a credit card company, they up the credit limit. "Congratulations," they say. Now that you have more credit, you spend it. They will keep upping that credit limit until you can barely make the minimum payment. Now they own you. Make the minimum payment on your Mastercard or Visa and you will be paying that debt for 35 years or more. Don't feel any shame about taking back control. The only thing the credit card companies have to fear is the United States Bankruptcy Code and a bankruptcy lawyer. That is why they lobbied Congress to the tune of $25,000,000.00 to get the bankruptcy laws changed to PROTECT THEM from you. Fortunately, their efforts in 2001 failed. If you are considering bankruptcy, the bankruptcy lawyers at E.N. Cashman & Conner, LLP, offer a free consultation to help you come to terms with your financial future. We understand.

Chapter 7 Bankruptcy

Chapter 7 Bankruptcy is about liquidating all nonsecured debts. Chapter 7 Consumer Liquidation Bankruptcy applies when the monthly payment on all personal overhead (rent/car payment/utilities/groceries) exceeds your take home income. You will keep your home and your car under the current state of the law. Click here to read more about Chapter 7 Liquidation Bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is about forcing creditors to negotiate with you subject to a bankruptcy trustee's approval. Chapter 13 Bankruptcy forces creditors to settle up for dimes on the dollar. Once again, you take control and you set forth a Chapter 13 Bankruptcy plan that you can work with. Chapter 13 Consumer Bankruptcy applies when your income exceeds your monthly personal overhead to some extent such that you are able repay some portion of the debt back. Once again, however, recognize Chapter 13 Consumer Bankruptcy is about putting you back in control. Click here to read more about Chapter 13 Wage Earner Bankruptcy.

To learn more above the differences between Chapter 7 Liquidation Bankruptcy and Chapter 13 Wage Earner Bankruptcy, click here.

Credit Card Debt Management and Consolidation Services

Credit card counseling and debt management services - we don't buy it. Click here for Client's Story. Numerous clients have come to us after using a debt management company like C.C.C.S.  Recognize "nonprofit" organizations like C.C.C.S.  is funded by the credit card companies - are they on your side? No. Further, some counseling services require you to give them your paycheck. They take their fee, pay the credit card companies a payment, and then give you a monthly stipend. Don't do this. Take control. Don't lose control of your financial future. Know what else - if you breach your contract with a debt management company, you loose all the benefits you have gained - penalties and interest all gets put back. Did you contract with C.C.C.S. to protect your credit. They are right there on your credit report as Debt Consolidation Service or Credit Management. A negative entry that tells creditors that you are a bad credit risk. Consumer bankruptcy and consumer bankruptcy attorneys and lawyers are about empowering you.  Don't let someone else control you. Click here to learn more about consumer credit counseling services.

Getting Credit After Bankruptcy

You will get credit following your bankruptcy. Some clients have been very concerned about the state of their credit after filing bankruptcy. It is a fact, a bankruptcy entry will appear on your credit report for 10 years following the discharge. This does not mean that you will not get a credit card, buy a home, or car for 10 years. Far from it, creditors want you to borrow. Shortly after your bankruptcy discharge, we can almost promise that you will receive a credit card offer. Probably from Providian. The fact is, you no longer have the majority of your debt; you have an ability to repay (income is freed up), and you can't declare bankruptcy (Chapter 7) again for six years.  Further, the probability of a consumer declaring bankruptcy a second time in their lifetime is low (does happen but not often).

The Bankruptcy Attorneys at Cashman & Conner Understand

The Cashman & Conner, LLP  offers a free bankruptcy consultation. We are here to help you take back control of your financial future. Call our office at 214.369.7100 or fill out the form below. In order to make your appointment more meaningful download our internet bankruptcy questionnaire in Adobe PDF format.

Consumer Bankruptcy
Chapter 7 or Chapter 13?

The choice of chapter depends on many factors individual to your situation, and is one of the most important reasons to get good legal advice before filing.  Which chapter is best depends on the nature of your debt and the nature and value of your assets.

In general, the choice of chapter is not yours to make but is governed by the "means test." If your monthly overhead (mortgage or rent + insurance + taxes, etc.) exceeds your monthly net income, then you qualify for a Chapter 7 Bankruptcy. If your monthly net income exceeds your monthly overhead, then you qualify for a Chapter 13 Bankruptcy.

Chapter 7

Chapter 7 is the most frequently selected kind of bankruptcy for individuals.  The debtor receives a discharge of most unsecured debts within several months of filing the case. If the debtor's income appears high enough to permit some repayment of debt, the trustee or the court may move to dismiss the case for "substantial abuse".  The theory is that to permit someone with the ability to repay to file Chapter 7 and avoid repayment abuses the bankruptcy system.  This is termed "substantial abuse" - catch phrase with the U.S. Congress.

If your debt is mixed business and consumer it is important to know what the legal form of the business is.   Corporations and partnerships can file Chapter 7 and Chapter 11;  the choice depends on whether the business can be reorganized in Chapter 11 or will be liquidated in Chapter 7.  Sole proprietorships are treated for bankruptcy purposes as just one kind of asset of the individual who owns them;  thus the owner of a troubled business must file an individual bankruptcy, including all of his assets and liabilities, personal and business, to obtain bankruptcy court protection.  

Chapter 13

Chapter 13 is frequently a better choice if you have debts that are not dischargeable in Chapter 7;  if you are in default on mortgages or car payments; if you have more property than can be exempted from creditors in Chapter 7; or  if you owe taxes or other debts that are not dischargeable in Chapter 7.  

To be eligible for Chapter 13, you must have regular income and debts below a certain level.

Debtors choose to file a repayment plan under Chapter 13 when

	they owe debts not dischargeable in Chapter 7 ( such as taxes, child support, fraud judgments)
	they have liens that are larger than the value of the assets securing the debt
	they have years of unfiled taxes
	they are behind on car or house payments
	their assets are worth more than the available exemptions.

What debts can be discharged in bankruptcy?

The scope of the discharge is different in each chapter.  The Bankruptcy Code makes the Chapter 13 discharge more encompassing, to encourage individuals to use Chapter 13 to repay a portion of their debts.

Put most simply, most unsecured debt is dischargeable.  Most secured debt survives bankruptcy as a charge on the property to which it attaches unless a court order modifies the lien.

Cashman & Conner, LLP

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