You’re trying to run a business and you want the bottom line, how long will this take? What are the steps in bankruptcy and what should we do along the way? I’ll give you the answer all lawyers give: it depends. The first factor is what chapter you’re dealing with. Chapter 7 cases are usually much faster than Chapter 13. But Chapter 13 cases are more likely to fall apart before they even get started.
Chapter 7
A Chapter 7 bankruptcy is when the debtor is liquidating his assets to pay off debts. Whatever debts cannot be paid off are discharged and no longer have to be paid. On the short end, a Chapter 7 bankruptcy could take as little as four months. If there are assets that have to be administered, a case could take a year and a half or longer.
• Step One—The Case Begins
The case begins with the debtor filing a bankruptcy petition. You, as the creditor, will receive a Notice of Bankruptcy form from the bankruptcy court advising you of the date and time of the case filing, the case number, and some of your rights as a creditor. You should also receive a copy of the bankruptcy Petition and Schedules. Schedules are lists of assets and debts of the debtor. The debtor also gets a chance to list his “exempt” assets and the legal basis for the exemption. Later, we’ll go through the Petition and Schedules in detail.
• Step Two—The 341 Meeting of Creditors
In a typical case, within 30 to 60 days of the filing of the petition the 341 Meeting of Creditors is scheduled. Why is it called the 341 Meeting of Creditors, or 341 Hearing? Because the meeting is required by the statute 11 U.S.C. § 341.
At the meeting, the trustee will go through the Petition and Schedules with the debtor and ask questions to confirm what’s already in the papers. The debtor gets a chance to tell the trustee if anything is incorrect or needs to be added. This is not uncommon. People with dozens of credit card debts or medical debts will sometimes forget one or two during the filing process.
Creditors are allowed to be present and are entitled to ask questions. A creditor may want to know the location or disposition of certain property, or whether certain property is insured. If the creditor spots an inconsistency between their records and the bankruptcy papers, the creditor may explore that as well.
In most cases, the 341 Hearing is concluded on the spot after a few minutes of questioning. Sometimes it’s kept open and another meeting is scheduled for in a month to allow the debtor to present tax returns, amend his Schedules, or present additional documentation.
• Step Three—Disposing of Assets
Here is where the timing of the case turns. If there are no nonexempt assets to sell or dispose of, the trustee will recommend the case be discharged. The case will likely end there within the four-month timeline. But if there are assets, what happens next depends on liens.
In most cases, real property (houses, land, buildings) is encumbered by a mortgage. Typically, the debtor is in arrears on their mortgage. The mortgage lender will usually want the property back. But, there is an “automatic stay” in effect (see Chapter I herein). Outside of bankruptcy, the mortgage lender would be able to retake the property through a state procedure of foreclosure. Permission to retake the property during bankruptcy must be obtained from the bankruptcy court (11 § U.S.C. 362(d)). The mortgage lender will file a “motion for relief from stay” to proceed with foreclosure. In most cases, the motion for relief is unopposed by the debtor. This hearing is held within a month of the motion being filed with a consent agreement memorializing the debtor’s lack of opposition to the property being foreclosed.
Occasionally, the debtor fights a motion for relief. There are numerous arguments a debtor can raise. The debtor may claim that the creditor’s security interest is not perfected, meaning there is a defect in the lien documents. There can be a question of the creditor’s valuation of the property. In rare cases, the debtor argues that the creditor is guilty of fraud. In these instances, the court will schedule a full hearing another month after the initial hearing.
Sometimes the debtor will have other property that is nonexempt (meaning, the debtor cannot keep it after the bankruptcy). This can include cars, boats, planes, art, jewelry, anything movable, and even real estate that is not encumbered by a lien or mortgage (meaning, all of the debts owed on it have been paid off). The nonexempt property will have to be liquidated and distributed to pay off creditors. This is when a four-month case becomes a two-year marathon.
The trustee will first gather and valuate all of the nonexempt assets of the debtor. Next, the trustee will look for buyers to obtain the highest price. This can be done through an auction, direct advertisement and sale, or through a professional broker. In whatever manner the assets are sold, the seller and the trustee take a commission. Selling assets can be quick and easy for sought-after items, or difficult for specialized property. Inevitably, there will be disputes among the trustee, debtor, and creditors over the value of the assets. Those disputes get settled by the judge.
Once the assets are sold, the proceeds get distributed to creditors in order of their priority. Priority is determined by law. Secured creditors get first crack at the proceeds. Naturally, creditors will fight over who has priority. In large cases, significant sums of money are at stake. Good attorneys will usually be able to negotiate an agreement with the trustee and other creditors setting out a fair distribution of the sale proceeds. But if an agreement cannot be reached, hearings have to be held in front of the judge.
To get a sense of how numerous hearings slow down the progress of a case, estimate a month for each hearing. This is the lead time required for a hearing to be set.
• Step 4—Discharge
Once all of the assets have been disposed of, the case will be submitted to the judge to sign an order of discharge closing the case and wiping out the unpaid debts of the debtor. After disposal of assets, this can take anywhere from a few weeks to two months, depending on your district. It is an understatement to say that the courts are backlogged.
Chapter 13
Cases filed under Chapter 13 of the Bankruptcy Code follow a different timeline. In a Chapter 13 case the debtor is restructuring his debt to pay it off over time. The debtor files a “Chapter 13 Plan” along with their Schedules and Petition. The Plan shows how the debtor will repay existing past-due debt (arrearage) within a period of three to five years. The Plan also has to show that the debtor has the ability to pay recurring debts (mortgages, leases, other payment plans) and still be able to meet regular living expenses. The debtor can abandon property as part of the Plan and not have to pay debt owed toward that property. After the Plan has been completed, the debtor’s unsecured debts are discharged, and the debtor is considered current on all secured debts that have been paid under the Plan.
• Steps 1 and 2—Filing and 341 Hearing
Similar to Chapter 7, the trustee holds a 341 Meeting of Creditors approximately 30 days after filing of the Petition and Schedules. Unlike Chapter 7, the trustee will scrutinize the debtor’s Chapter 13 Plan to make sure it’s feasible. If it’s not, the trustee will direct the debtor to revise his Plan, if possible, and resubmit it before going to the next step—confirmation.
• Step 3—Confirmation
The Chapter 13 Plan has to be confirmed (approved) by the bankruptcy court. In most cases, the trustee and creditors have objections to the Plan in its initial form. These objections can be related to feasibility of the Plan, unfair treatment of creditors, or questionable disclosures about assets, debt, and property values. The Plan may have to go through several amendments and versions before it’s confirmed.
The process of getting from filing to confirmation can average six to eight months in a typical case. If the debtor falls behind on payments during the confirmation stage, it’s possible that the case could be dismissed then and there. Statistically, between 66 percent and 90 percent of Chapter 13 bankruptcy cases fail, depending on the year, and most debtors never make it to the end of their Plan (http://govinfo.library.unt.edu/nbrc/report/08consum.html).
• Step 4—Term of the Plan and Discharge
The bankruptcy code allows for a Plan to last from three to five years (or 36 to 60 months, as they say in the Plan). During this time, abandoned assets will be repossessed by creditors, and the debtor will make two ongoing payments to each creditor: (1) regular installment payments on mortgages and other loans, and (2) payments on arrearages owed to creditors. The arrearage payment is calculated as the amount of arrearage divided by the number of months of the Plan, plus a reduced interest rate. The arrearage amount is the amount of the back payments owed from the date of filing the bankruptcy.
If the debtor successfully makes all of these payments during the term of the Plan, then the debtor is discharged at the end, and is no longer liable for any other unpaid debts not covered by the Plan. If the debtor misses a payment, the creditors and trustee can ask for the case to be dismissed. Often, the debtor is given a few chances to catch up. If the debtor is unable to catch up or to get the creditors to agree to an amendment of the Plan, the case will be dismissed and all of the debts owed by the debtor will be restored (less payments made during the bankruptcy).