Happy 7thirteen Day!

To assist you in celebrating this extremely minor (and possibly fictional) holiday:

Seven Facts About Chapter 7

ONE: Chapter 7 is the “liquidation” option under the U.S. Bankruptcy Code.  Virtually any human being can file a Chapter 7 bankruptcy petition.  You will need to have some basis for venue, of course, but there are no age or citizenship limitations.  After amendments in 2005, some individuals may have their Chapter 7 petitions challenged as abusive, if they are deemed to make too much money.  Railroads and most types of banks and insurance companies are barred from filing Chapter 7

TWO: When a Chapter 7 case is filed, a Trustee is appointed.  The Chapter 7 Trustee receives a commission on any funds paid to creditors.  What if, as in the vast majority of cases, there are no funds to distribute?  The Trustee receives $60 from the bankruptcy filing fee (unless the filing fee is waived by the Court).  When the Bankruptcy Act of 1898 was enacted, the Trustee’s base compensation was $5.  Depending on your point of view that’s either a twelve-fold increase or a $55 raise in just 121 years. 

THREE:  For that $60 a Chapter 7 Trustee has four categories of duties.   Think of them as “the 4 -ates”: To "investigate" the affairs of the debtor; to "liquidate" (reduce to dollar amount) any assets; to "litigate" as needed to maximize value for creditors; and finally "administrate" the case and distribute any payments to creditors. 

FOUR: Chapter 7 does not have a provision that allows a debtor to pay his or her attorney fees from the Chapter 7 case, or over time.   This is problematic for individuals below the poverty line who often have the most dire need for Chapter 7 relief.  Legal representation is not required under the Bankruptcy Code, but the laws, procedures and forms are complex, and can be confusing.  As a result, some individuals are forced to seek relief under Chapter 13 when they would be better served by Chapter 7, an issue that has attracted scrutiny, including this compelling article, and really needs a solution from Congress.   

FIVE: Only human beings (“individuals” in bankruptcy parlance) can receive a Chapter 7 discharge.  A Chapter 7 bankruptcy discharge is allowed once every eight years.  The notion of canceling debts once every seven years goes back to Biblical times.  You can find references in the Book of Deuteronomy, Chapter 15.  (I wonder whether they referred to the procedure as a “Chapter 15”?)

SIX: Speaking of Biblical things, a Chapter 7 debtor can also seek “redemption.”  In this context, redemption allows individuals to pay off a lien in a lump sum at the current value of collateral.  

SEVEN:  At the risk of turning this into a religious holiday, a Chapter 7 debtor can also seek “conversion.”  A debtor can change from Chapter 7 to Chapter 11 or 13 at any time.  The Supreme Court has held that there is a good-faith requirement, meaning that debtors cannot convert to Chapter 13 to avoid a Chapter 7 Trustee after behaving fraudulently or dishonestly. 

Thirteen Facts About Chapter 13

ONE: Chapter 13 is a “reorganization” under the Bankruptcy Code.  Its more glamorous cousin, Chapter 11, grabs the news headlines due to large corporate filings including Sears, Toys ‘R’ Us, Chrysler, GM and Lehman Brothers.  Yet both chapters accomplish the same thing.  The difference is that Chapter 13 is available only to human beings (“individuals”). 

TWO: Besides being a human being, you need to have “regular income” in order to file a Chapter 13 case.  There are also limits on the amount of debt you can have.  When the Bankruptcy Code was first enacted in 1978 the limits were $250,000 in unsecured debt (debt without collateral attached to it, such as a credit card) and $750,000 in secured debt (debt secured by collateral like a house or car).  As of 2019 those numbers have increased to $419,275 and $1,257,850, respectively.  Those numbers may sound high, but in some cases they are not adequate to address student loan debt. 

THREE: Chapter 13 was previously known as “Chapter XI” in the predecessor to the Bankruptcy Code, the Bankruptcy Act of 1898.  As far back as the 1930s, Chapter 13 (still called Chapter XI) suffered from an intellectual bias in favor of business reorganizations under “Chapter X,” which would later become Chapter 11.  As this Yale Law School article put it:  

Chapter XI, on the other hand, has about it the grubbiness of bankruptcy. It provides a cheap and practical method of settlement, based on the history of composition in bankruptcy, for poor debtors whose estates cannot afford the expense of an elaborate public ceremonial, No one will look to Chapter XI as a theatre for the glamor and high language expected of spectacular proceedings under Chapter X. 

What, exactly, is to be sneered at about “a cheap and practical method” for settling debts for poor people?  While Chapter 11 may still be “a theatre” for glamor and high language, I am convinced that much more actual, meaningful theater plays out in Chapter 13 cases on a daily basis. 

FOUR: When you file Chapter 13, a Trustee is appointed.  You make payments to the Trustee under a plan that you propose.  The Trustee disburses those payments to creditors after taking a commission from monies received.  So in comparison to Chapter 7 Trustees, a Chapter 13 Trustee can investigate, litigate and administrate, but cannot liquidate or force you to sell your property.

FIVE: Chapter 13 is completely voluntary.  This means you cannot be forced to be in a Chapter 13 case, and you can exit Chapter 13 at any time.  This is because you use your wages to pay creditors to avoid liquidation.  Forcing someone to continue to work would be comparable to “involuntary servitude,” a violation of the 13th Amendment to the Constitution!

SIX: Filing a Chapter 13 case will protect anyone who cosigned with you on a consumer debt, without the cosigner needing to file bankruptcy.  This means that no collection efforts can be taken against the cosigner as long as you remain in the Chapter 13 case. 

SEVEN: In many US jurisdictions, it’s possible to pay a Chapter 13 attorney over time, often included in the Chapter 13 plan payments.  This makes it possible to file a “no money down” bankruptcy case.  That sounds great, and sometimes it is, except that there is no comparable provision in Chapter 7.  That means that some Chapter 13 debtors are really people who need Chapter 7 relief but are forced into a longer and more expensive process because they need to pay an attorney. 

EIGHT: Chapter 13 debtors can continue to operate businesses while in bankruptcy.  They may need to do so with some supervision from the Trustee and Court, but in most cases they can continue to operate as before. 

NINE: A Chapter 13 plan can be used to catch up on missed payments to a mortgage company, taxing authority, former spouse or other creditors.   You can reduce the interest owed on many secured claims and reduce the principal paid on older loans, avoid certain liens altogether, and discharge many other types of debt. 

TEN: Chapter 13 debtors can sell property, buy property and incur new debt.  This usually needs to be done with permission from the Trustee or Court, but the bankruptcy case does not bar the possibility. 

ELEVEN:  Debts that you incur during a Chapter 13 case may not be discharged.  There is a mechanism for including these debts in the case, but it’s not straightforward or automatic.  It’s possible to “convert” your case to a Chapter 7 case, at which point you can include those debts in your Chapter 7 case and often discharge them. 

TWELVE: You can modify your plan at any point in your case, as long as you haven’t already completed the plan.  This is an important tool because it allows you to react to changes in circumstances that can occur during the life of the plan.    

THIRTEEN: Completing your Chapter 13 plan will result in a discharge, similar to Chapter 7.  Once known as the “super discharge,” but somewhat reduced after the 2005 amendments, Chapter 13 will still discharge certain types of debt that would not be covered in a Chapter 7 discharge.  

“How do I celebrate 7thirteen day?”

There is no right or wrong way to celebrate 7thirteen day.  If you were too busy on Thursday to celebrate 7-Eleven day, why not treat yourself to a Slurpee?  7-Eleven does not give out free Slurpees in honor of 7thirteen day (yet), but think of the price as an administrative fee, paid to the Clerk of 7-Eleven.  If you still have fireworks left over from the Fourth of July, today would be an appropriate day to “grant them a discharge,” don’t you think?  I also think getting a bit “grubby” would be appropriate, just to keep up appearances with the folks at Yale.  

While you are enjoying a Slurpee and setting off fireworks, you might consider playing music that is appropriate for the adjustment of debts.  A list of the best bankruptcy-related music is far too broad of a topic for this post, but consider “Touch of Grey” by the Grateful Dead and “House Rent Boogie” by John Lee Hooker if you are just starting a playlist.  Above all, enjoy yourself, be safe, and spend wisely! 

The7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit the website at narmorelawoffice.com. 

Narmore Law Office LLC is a debt relief agency that helps people file for relief under the Bankruptcy Code.