Bankruptcy can be a valuable tool for individuals and businesses looking to get out from under insurmountable debt to get a fresh start.
The Bankruptcy Code consists of five distinct types of bankruptcy for individuals and businesses for debts owed in the United States (the sixth, Chapter 9, is only available to municipalities to reorganize debt; the seventh, Chapter 15, deals with debt involving more than one country). The types of available bankruptcies apply to certain types of debtors. The most common bankruptcies filed are Chapter 7 and Chapter 13, primarily because each applies to individuals.
Here is what you need to know about each bankruptcy option:
Chapter 7, also known as liquidation, allows individuals or businesses to turnover non-exempt assets and discharge most of their debts. For businesses, Chapter 7 means the business is closed and will be liquidated. Chapter 7 business debtors do not receive a formal discharge, but with all assets being liquidated by a trustee, there is nothing left for creditors to collect.
For individuals whose debts are primarily consumer or household related, they must pass the means test to qualify for Chapter 7. The means test compares an individual debtor’s household to preset median income numbers and determines whether the individual may file Chapter 7.
Some debts cannot be discharged in a Chapter 7 bankruptcy. Debt that is discharged in a Chapter 7 case can no longer be collected from the debtor.
The main advantages to Chapter 7 are that the process is normally quick, and most debts are eliminated.
The main disadvantages are that assets may be liquidated by a trustee and some debts may survive discharge.
A reorganization bankruptcy, Chapter 11 is available to both individuals and businesses. Chapter 11 bankruptcy is more commonly used by businesses to restructure their debts. Chapter 11 permits the debtor to propose a plan of reorganization to repay some of their debts, keep assets and remain in business.
Chapter 11 is a complex process and can be very expensive, making it inaccessible for some individuals and business. Additionally, creditors vote whether to accept or reject the plan, which can make it exceedingly difficult to get a reorganization plan approved. There are also strict financial reporting requirements and governmental fees that must be paid on a quarterly basis.
The main advantages to Chapter 11 are that a business can remain in operation, keep its assets, and receive protection from their creditors.
The main disadvantages are that Chapter 11 is complicated, costly, and can be time intensive.
Another reorganization bankruptcy, Subchapter V Chapter 11 (“Sub V”) is also available to both individuals and businesses. Sub V is a newer type of Chapter 11 bankruptcy available to small business debtors to restructure their debts. Sub V has debt limits, which if exceeded preclude a debtor from using this chapter of the Bankruptcy Code.
Sub V is designed to be more streamlined, less costly, and easier to navigate than traditional Chapter 11. Sub V provided a debtor the exclusive right to propose a plan of reorganization to repay some of their debts, keep assets and remain in business. Like traditional Chapter 11, creditors vote whether to accept or reject the plan, but the Court can overrule the objections and approve a plan of reorganization if the court finds the plan to be fair and equitable. There are also strict financial reporting requirements, but no governmental fees.
The main advantages to Sub V are that a business can remain in operation, keeps its assets, and receive protection from their creditors, and more importantly are easier and less costly to navigate.
The main disadvantages are like those found with a traditional Chapter 11 bankruptcy.
Chapter 12 bankruptcy allows family farmers and fishermen with regular income to reorganize debt. Chapter 12 is like Chapter 13. Chapter 12 is better for farmers and fishermen with large debts who do not meet the Chapter 13 wage-earner requirement. Chapter 12 has more advantages for debtors than Chapter 11.
Once a Chapter 12 debtor completes the plan payments, their debts are discharged. Some debts may not be discharged.
Chapter 13 is a reorganization bankruptcy available only to individuals with regular income. Chapter 13 debtors may restructure their debts through a plan of reorganization lasting from as little as 3 years to as long as 5 years. Chapter 13 has debt limits which were increased to $2.5 million in 2022. These debt limits revert to the prior limits, which are significantly lower, in 2024. Chapter 13 bankruptcy allows debtors to avoid foreclosures and repossessions, and to catch up on arrearages over time.
The main advantages to Chapter 13 are that individuals can catch up secured debt (i.e., mortgage and auto) arrearages over time, catch up on delinquent domestic support and income tax payments, and have the protection of the automatic stay for the duration of the case.
Chapter 13 also has a broader discharge than Chapter 7, meaning that more types of debt can be discharged in a Chapter 13 than in a Chapter 7.
The main disadvantage is that a Chapter 13 plan can last up to 5 years.
Bankruptcy is a complex process with many nuances. If you have decided bankruptcy is your best option, you should consult with an experienced bankruptcy attorney to find out about your rights under the Bankruptcy Code, and to decide what the best course of action is for you.
Contact the experienced and knowledgeable attorneys at Gold, Lange, Majoros & Smalarz, P.C. today!
Bankruptcy can be a valuable tool for individuals and businesses looking to get out from under insurmountable debt to get a fresh start. The Bankruptcy Code consists of five distinct types of bankruptcy for individuals and businesses for debts owed in the United States (the sixth, Chapter 9, is only available to municipalities to reorganize […]
Many people in need of legal advice concerning financial problems and the possibility of filing bankruptcy understandably want to get it done as cheaply and efficiently as possible. In today’s world of easy internet access, many of us take it upon ourselves to research answers online to become educated on the benefits and pitfalls of […]