Bankruptcy is a federal court process designed to allow debtors to either discharge or reorganize and repay their debts. At the same time that the bankruptcy code affords debtors an opportunity to eliminate or reorganize their debts, or a "fresh start", the bankruptcy code also attempts to promote equality among similarly situated creditors.

There are several types of relief under the bankruptcy code. Chapter 7, Chapter 11 and Chapter 13 cases are the most common types of bankruptcy cases. The various types of bankruptcy relief include:

  • Chapter 7 (Liquidation- Individuals and Businesses)
  • Chapter 9 (Municipalities)
  • Chapter 11 (Reorganization-Individuals and Businesses)
  • Chapter 12 (Family Farmer or Fisherman)
  • Chapter 13 (Individual Debt Adjustment) and
  • Chapter 15 (Ancillary and Foreign Insolvency Proceedings).

There are four important concepts to understand about any bankruptcy case:

  • Discharge
  • Bankruptcy estate
  • Exemptions
  • Automatic stay

 1. The Discharge.

The effect of the bankruptcy discharge is to eliminate the debtor’s personal liability for a debt. Bankruptcy generally deals with assets and liabilities that exist when the bankruptcy case is filed. When the debtor’s bankruptcy case is completed, all the debtor’s scheduled liabilities will be discharged unless there is an exception that applies to preclude either the discharge of a particular debt or the universe of claims against the debtor.

Not all debts are dischargeable. For example, certain taxes, alimony and child support, and student loans will survive a debtor’s bankruptcy. In addition, if the debtor engages in certain acts of misconduct within one year prior to or in connection with his or her bankruptcy case, all of the debtor’s debts will be nondischargeable. If a particular debt or all debts are determined to be nondischargeable, creditors can enforce their respective rights against the debtor as if there was never a bankruptcy case.

Even though a debt is dischargeable, a creditor with a valid lien on property will retain rights against the property. If the creditor has a valid lien on property in which the debtor has an interest (such as a mortgage on the debtor’s residence or a lien on an automobile), the lien is generally unaffected by and survives the debtor’s bankruptcy.  This provides the debtor with the flexibility to maintain certain property or surrender the property.  The debtor can also reaffirm particular debts that would ordinarily be discharged. 

2. Bankruptcy Estate

In all bankruptcy cases, the debtor files schedules and statements with the court that list all the debtor’s assets and liabilities and current and historical information concerning the debtor’s financial affairs. The debtor’s "bankruptcy estate" is comprised of all the debtor’s assets and liabilities as of the date the bankruptcy case is filed. The concept of the "bankruptcy estate" is expanded in chapter 11 and chapter 13 cases to include assets acquired and claims that arise subsequent to the filing of the case.

Assets include real and personal property such as homes, automobiles, boats, furniture, jewelry, business interests and assets, cash and money market accounts. Future or contingent interests such as deferred compensation, interests in trusts and claims for refunds, injuries and other law suits are also considered to be part of the bankruptcy estate.

Liabilities include debts of all kinds. These include debts arising from the debtor’s direct liability or where, for example, the debtor is a co-signor or is jointly or severally liable in a contractual, legal or statutory capacity for the debt.

There are basically four classes of creditors under the bankruptcy code:

  • Administrative Expense Claims (Postpetition expenses, professional fees, accrued expenses associated with administration of the estate);
  • Secured Creditors (Creditors with valid voluntary or involuntary liens on the debtor’s property);
  • Priority Creditors (Domestic support obligations, certain taxes, accrued wage claims); and
  • Unsecured Creditors (Open credit, credit cards, business loans, medical bills, student loans, lease payments).

Creditors are given notice of a claims bar date by which they must file a Proof of Claim. When distributions are made to creditors in a bankruptcy case, the distributions are made in this order, like a watershed. In the event there are insufficient funds to pay all or a class of creditors in full, the creditors in that class share pro rata based upon the amount of their respective claims and the funds available for distribution to that class. Junior creditors are not entitled to distributions where senior creditors’ claims are not satisfied in full.

3. Exemptions

Where the debtor is an individual, or a husband and wife, the debtor(s) may exempt certain assets. Exemptions are available to a debtor whether or not they file for bankruptcy protection. If property is exempt, it generally means the property is beyond the reach of certain creditors’ claims.

For example, under Florida’s homestead exemption, the debtor’s homestead is protected from all claims except a creditor holding a mortgage, or creditors having claims against the debtor for taxes or contracts for improvements. No other creditors can enforce their claims against the debtor’s homestead.

In a bankruptcy case, creditors and interested parties are given a limited time to object to the debtor’s claim of exemptions. In the absence of objections, the property becomes exempt. Exempt property is generally excluded from the bankruptcy estate. With certain limited exceptions, even a creditor with a nondischargeable claim cannot enforce its claim against exempt property.

Examples of exemptions in Florida include:

  • Homestead exemption;
  • Personal property;
  • Automobile;
  • Wages for the head of household;
  • Certain insurance policies:
  • Retirement, disability and pension benefits; and
  • Tenancy by the entireties (husband and wife)

4. Automatic Stay

One of the most important aspects of the bankruptcy code is the "automatic stay." The automatic stay protects debtors and creditors. The automatic stay has been frequently described as a breathing spell for the debtor. With certain exceptions, such as criminal and domestic relations proceedings, the automatic stay is effective upon the filing of any type of bankruptcy case, whether it be chapter 7, 11 or 13.

The automatic stay is designed to stop all collection and enforcement measures by creditors against the debtor or the debtor’s property. For example, the automatic stay prevents the commencement or continuation of law suits, garnishments, foreclosures, repossessions, seizures and any means of contact with the debtor to collect a debt. Creditors can be sanctioned severally for violating the automatic stay.

In chapter 7 and 11 bankruptcy cases, the automatic stay does not apply to codebtors. However, in a chapter 13 bankruptcy case, the automatic stay generally protects a codebtor who is liable on a consumer debt that is provided for in the debtor’s chapter 13 plan.

The automatic stay protects debtors by precluding most creditors from taking any action to collect the debts that are owed prior to the petition. This is designed to relieve the debtor from the pressures that led to bankruptcy. The automatic stay protects creditors by preventing other creditors from obtaining or exercising control over the debtor’s assets so that each creditor is treated in accordance with the bankruptcy code’s distribution scheme.

Under certain circumstances, a creditor can obtain relief from the automatic stay. For example, a creditor may obtain relief from the automatic stay where the debtor intends to surrender property or fails to insure or provide adequate protection for property in which a creditor has an interest, or where the property is not necessary for the debtor’s reorganization and there is insufficient equity in the property.

The Law Offices Of Nicholas B Bangos assists clients with Bankruptcy / Insolvency in Florida area including Coral Gables, Miami Dade and Broward County.

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