First, a Chapter 7 Debtor has no minimum financial limits to file a case. The debt or debts can be minimal and there is no upward cap either. It is possible of course to incur millions of dollars of debt, both secured and unsecured. You can get rid of all of this debt with the filing of a Chapter 7 case.
Please remember, however, that a debtor can retain his home or even rental property if his secured debts are current. In other words, he has no back due payments owing on those loans. The Chapter 7 Court just doesn’t have the facility to address the concept of monthly payments for past due secured loans in a Chapter 7 case. That’s different, however, where you file a Chapter 11 case–that type of case will typically handle and allow monthly payments to catch up with back due loans and even payment of back due home loan arrearages.
Many of the large Chapter 7 cases will involve surrender of large commercial or home loans perhaps in the millions of dollars. Or, in the alternative, small Chapter 7 cases typically involve multiple credit cards or hospital bills. It doesn’t matter how high the debts are in a Chapter 7 case.
Let me distinguish between 2 cases which I have recently handled in my practice. I handled a lower end Chapter 7 which sought to eliminate about $75,000. of debt. In this case, the client suffered a heart attack. He maintained no health insurance and his job provided him with no health insurance. He had a couple of other minor credit cards and eliminated all of this debt when he filed for Chapter 7. This was clean and simple.
In sharp contrast, let me tell you now about a higher end Chapter 7 which I had handled a couple of years ago. The Debtor was an LLC with about $2.5 million in the bank. Unfortunately, this debtor met with another attorney first before meeting me. This client wanted to stop the foreclosure of an 100 unit apartment building which to which he had taken title after foreclosing on his own 5th trust deed on the property. This client’s first lawyer advised him to file a Chapter 7 case in order to stop the foreclosure of the large apartment building that he was trying to save…This was bad advise! Remember, when I told you earlier that Chapter 7 is not set up to make monthly payments to catch up on a mortgage? The only way that this case could work for this client was to convert it to Chapter 11 so he could arrange for a Chapter 11 Plan to reduce the mortgage balance and pay off what ever he needed to pay off in order to keep the building. Well, the Court didn’t like the circumstances of the case because the state court had already denied this client’s request to stop the foreclosure. As a result, the bankruptcy court denied my request to convert the case from Chapter 7 to Chapter 11 where he could work with the mortgage.
When the Court wouldn’t convert the case to Chapter 11, we were stuck in Chapter 7. Look at the negative that was involved with this Chapter 7 now. First, the Chapter 7 Trustee took responsibility for the client’s assets (including this building) and wouldn’t let him take the building back. The Trustee charged $650. per hour for everything related to that case–for a total of about $200,000. which my client had to pay this Trustee for a lot of unnecessary work. And, to top off this entire misadventure, the Trustee demanded that my client give him his
entire account balance of $2.5 million (less fees he already paid). My client collapsed when he received this news and was taken to the hospital on an emergency basis. ALL OF THIS HAPPENED BECAUSE THE FIRST LAWYER HAD FILED THE CASE AS A CHAPTER 7 CASE RATHER THAN CHAPTER 11 CASE! Fortunately, I was able to impress the Judge that my client was a very solid, financially capable client who never should have filed a Chapter 7 in the first place. As a result, the Judge ultimately allowed my client to refinance the building in order to pay off the foreclosing creditor and then dismissed the Chapter 7 case.
These two cases reveal the stark contrast between a Chapter 7 and a Chapter 11 case. When you file a Chapter 7 case for any amount, you are committed to liquidating everything immediately (subject to certain exemptions) and will have to give up your excess cash and properties with back due mortgages to the Chapter 7 Trustee in order to sell those properties. When you file a Chapter 11 case, you are deemed the trustee of your own property, can retain your cash, and are looked upon generally as the party who can best handle and manage your own property. Then you can work out a Plan to be approved by the Court to reduce the mortgage and lease balances on your properties under certain circumstances so you can keep those properties.
Please contact me with your questions. I offer a free 1/2 hour consultation to help explain how best to handle your financial situation. Call me directly at 714-319-3446 to set up the appointment. Thank You, John H. Bauer