Q: Is bankruptcy the answer?

A: Bankruptcy is only one alternative to the resolution of a debtor's financial difficulties. Nonbankruptcy alternatives will probably be less expensive and better received by creditors. Nonbankruptcy alternatives do not carry the stigma of a bankruptcy filing. Not all debtors should go through bankruptcy.

Q: What are nonbankruptcy alternatives?

A: Nonbankruptcy alternatives available to debtors include:

• Negotiation with creditors

• Consolidation loans

• Credit counseling

• Assignments for the benefit of creditors

• Defending an action brought on a debt

Negotiation may involve discussion and agreement between the debtor and a creditor whereby the creditor agrees to terms different from those originally agreed to with the debtor. As a result of negotiation, the debtor may receive an extension of time in which to pay the debt, a reduction in the amount of the debt, or a combination of the two.

A Consolidation Loan allows a debtor to obtain one loan large enough to pay off all debts. The monthly payment on the consolidated loan would be less than the total of the monthly payments on the many small debts. The consolidation loan may allow the debtor to pay the debt over a longer period of time although the interest rate may be higher than previously paid.

Credit Counseling addresses the debtor's spending habits so the causes of the debtor's financial problems can be addressed. Credit Counseling Centers are licensed and bonded. They analyze the debtor's obligations and negotiate with creditors for the repayment of the debtor's bills on a schedule the agency feels the debtor can manage. These agencies do not lend money. They only distribute the debtor's money to the debtor's creditors.

Assignments For The Benefit Of Creditors involve the transfer of the debtor's assets to a third party to insure the payment of the debtor's obligations. Assignments for the benefit of creditors are used almost exclusively by business debtors.

Defending A State Court Action requires the debtor to appear and defend if sued on a debt in a state court. The debtor must choose whether to continue to defend the state court action or to file a petition in the federal bankruptcy court which will stay (bar) the state court action from proceeding.

Q: What are the bankruptcy alternatives?

A: If the debtor decides to file for bankruptcy, the debtor must decide:

• if the bankruptcy filing will be as an individual, a partnership, or a corporation.

• if the bankruptcy filing will be under Chapter 7 (liquidation or straight bankruptcy), Chapter 11 (reorganization), Chapter 12 (adjustment of debts of a family farmer with regular annual income) or Chapter 13 (adjustment of debts of an individual with regular income). Consumer debtors normally file under Chapters 7 or 13 of the Bankruptcy Code (title 11 of the United States Code (11 U.S.C.).

Q: Who can be a debtor under the Bankruptcy Code?

A: A person (which by definition includes an individual, partnership and corporation) that resides in the United States or has a domicile, a place of business or property in the United States may be a debtor under the Bankruptcy Code.

Q: Who can file under Chapter 7 of the Bankruptcy Code?

A: An individual, partnership or corporation can file under Chapter 7 (liquidation) unless it is a railroad, an insurance company or a certain type of banking institution.

Q: Who can file under Chapter 11 of the Bankruptcy Code?

A: Anyone who can file under Chapter 7 can file under Chapter 11 with the exception of a stockbroker or a commodity broker. Although a railroad cannot be a debtor under Chapter 7, it may be a debtor under Chapter 11.

Q: Who can file under Chapter 12 of the Bankruptcy Code?

A: Only a family farmer with regular annual income (as defined by the Bankruptcy Code) may be a debtor under Chapter 12.

Q: Who can file under Chapter 13 of the Bankruptcy Code?

A: Only an individual (or an individual and spouse) with regular income who owes on the date of the filing of the bankruptcy petition unsecured debts of less than $290,525 and secured debts of less than $871,550 may be a debtor under Chapter 13. Neither a partnership nor a corporation can file under Chapter 13.

Q: How does a Chapter 7 bankruptcy differ from a Chapter 11, 12 or 13 bankruptcy?

A: Under Chapter 7 (straight bankruptcy or liquidation) a trustee will be appointed. If the trustee determines that there are assets to be distributed to creditors all of the debtor's nonexempt property will be sold and distributed among the debtor's creditors. Chapter 7 does not involve a plan.

Under Chapter 11, the debtor has the exclusive right for 120 days to file a reorganization plan.

Under Chapters 12 and 13, the debtor has 15 days from the date of the filing of the bankruptcy petition to file a plan showing how part or all of the allowed claims will be repaid. Generally, payment will be from future earnings. Occasionally, there may be a surrender of collateral or transfer of a certain asset to satisfy a certain creditor. The payment period under a Chapter 12 or 13 plan may not exceed three years unless the court, for cause, approves a longer period (although this period may not exceed five years).

Q: What property may the debtor claim as exempt?

A: Oklahoma has "opted out" of the federal bankruptcy exemptions so debtors may not select between federal bankruptcy exemptions and the Oklahoma exemptions.

Oklahoma exemptions will apply if the debtor's domicile has been in Oklahoma for 180 days immediately preceding the petition filing date or for a longer portion of such 180-day period than in any other place. The exemptions per person include:

• a homestead not exceeding one acre, if in a city, town or village, or not to exceed 160 acres of land if not within a city, town or village. The homestead must be the debtor's principal residence.

• a mobile home if it is the debtor's principal residence

• interest in a claim for personal bodily injury, death or workers' compensation claim for a net amount not more than $50,000

• all household and kitchen furniture held primarily for personal, family or household use

• the debtor's interest, not to exceed $3,000 in value, in one motor vehicle

• tools of the trade or related materials up to $5,000

• personal wearing apparel up to $4,000

• some types of retirement or pension plans provided that they were created with pre-tax dollars.

The debtor may only claim an exemption in the equity that he or she has in property. For example, if the debtor has a car valued at $5,000 and the debtor still owes the bank $3,000 on the car and the bank holds a security interest on the car for $3,000, the debtor has only a $2,000 interest in the car and therefore, it is exempt.

Q: What must be filed in a Chapter 7?

A: The debtor must file with the bankruptcy court clerk's office:

• the filing fee

• the debtor's petition

• the Clerk's notice (if an individual consumer debtor)

• the disclosure of attorney's compensation statement

• the matrix (which serves as the list of creditors)

• the Schedules that list all real property, personal property, property claimed as exempt, creditors holding secured claims, creditors holding unsecured priority claims, creditors holding unsecured nonpriority claims, executory contracts and unexpired leases, co-debtors, current income of individual debtor(s), current expenditures of individual debtor(s), schedule of income and expenditures of a partnership or a corporation, declaration concerning the debtor's schedules (signed by the debtor(s) and

• the statement of financial affairs.

Q: What must be filed in a Chapter 13?

A: The filing in a Chapter 13 will include the same items as would be filed for a Chapter 7 (with the exception of the Clerk's notice). The debtor will also file a Chapter 13 plan.

Q: What occurs when a Bankruptcy Petition is filed?

A: Upon the filing of the petition:

• the estate is created

• the automatic stay goes into effect, protecting the estate property and the debtor from collection procedures

• if a Chapter 7 petition has been filed, a Chapter 7 trustee will take legal possession of the non-exempt property of the estate

• if a Chapter 13 petition has been filed, the co-debtor stay will also go into effect

• if a Chapter 13 petition has been filed, the debtor will remain in possession of the property of the estate.

Q: Will the debtor be discharged from the debts?

A: Only an individual debtor will receive a discharge under Chapter 7 and Chapter 13. A partnership or corporation will not be discharged from its debts under Chapter 7, but is eligible for a discharge under Chapter 11 through confirmation of its reorganization plan.

An individual debtor will be discharged from dischargeable debts only. Nondischargeable debts include:

• taxes incurred within three years before bankruptcy

• any debt arising out of false pretenses

• any debt which the debtor fails to schedule or one in which the creditor did not have actual knowledge of the pendency of the case in time to file a proof of claim

• any debt created while the debtor was acting in a fiduciary capacity resulting in fraud or embezzlement

• any debt owed to a spouse or former spouse for support, alimony or maintenance either for the spouse or any children (as distinguished from amounts owed by way of property settlement or division of property)

• any debt created through the willful and malicious conduct of the debtor

• any fine, penalty or forfeiture owed to a government unit

• student loans which first became due within seven years before the filing of the petition (unless the payments would impose an undue hardship on the debtor and the debtor's dependents)

• liabilities incurred by the debtor as a result of unlawfully operating a motor vehicle while intoxicated.

The discharge of an individual Chapter 7 debtor is independent of the distribution of the property of the estate.

Unless otherwise ordered by the court, a Chapter 13 debtor is required to start making payments to the Chapter 13 trustee within 30 days after the plan is filed. The Chapter 13 trustee will distribute payments upon confirmation of the Chapter 13 plan. After completion of payments under the plan, the debtor will be discharged from all debts except for long term debts and those specified as nondischargeable in a Chapter 13 bankruptcy.

Q: How often can a debtor receive a discharge?

A: A Chapter 7 debtor will not be granted a discharge from dischargeable debts if granted a Chapter 7 discharge in a case filed within six years before the date of the filing of this Chapter 7 petition.

A Chapter 7 debtor will not be granted a discharge from dischargeable debts if granted a Chapter 13 discharge in a case filed within six years before the date of the filing of this Chapter 7 petition unless the payments under the Chapter 13 plan totaled at least:

(a) 100 percent of the allowed unsecured claims; or

(b) 70 percent of the allowed unsecured claims and the Chapter 13 plan was proposed by the debtor in good faith and was the debtor's best effort.

A debtor may file a Chapter 13 at any time after receiving a discharge under a Chapter 7.

A debtor may file a second Chapter 13 petition at any time after receiving a Chapter 13 discharge.

Q: What factors should be considered when selecting between a Chapter 7 and Chapter 13 filing?

A: The factors include: Does the debtor have a choice between Chapter 7 and Chapter 13 (i.e., is the debtor eligible under each chapter)?

Could the debtor discharge the debt under Chapter 13 but not under Chapter 7?

Is liquidation inevitable?

Can the debtor formulate a viable Chapter 13 plan?

Does the debtor have the ability to pay out a Chapter 13 plan?

Will the bankruptcy court limit the debtor's selection of Chapter 7 if Chapter 13 is available (i.e., if an individual debtor's debts are primarily consumer debts, would the granting of relief under Chapter 7 be a substantial abuse of the provisions of Chapter 7)?

Revised July 2001