Declaring bankruptcy is the last straw many debtors and business owners use to seek debt relief. Debtors can utilize bankruptcy as a tool to default on their debt and seek alternative ways to settle them with their creditors.
Claiming bankruptcy is a double-edged sword. Although you may find relief from your debt, you may also suffer long-term consequences because of your bad credit record.
Managing your personal finance is still the best way to avoid the risk of bankruptcy. This article will discuss bankruptcy basics, such as the different types of bankruptcies and their relevant Bankruptcy Code chapters.
What Is Bankruptcy?
When people say they ‘went bankrupt,’ most people often picture someone who lost all their money. However, this is not technically correct.
A person who went bankrupt means that their debt surpassed their assets which severely affects their ability to pay an existing loan.
An individual suffering from bankruptcy needs to declare their financial situation in the bankruptcy court. They need to do this before defaulting on any debt under their name.
Significant life changes usually cause bankruptcy. Events such as a catastrophic accident, a death of a loved one, or job loss can lead to this unfortunate situation. Because of these circumstances, the debtor is left holistically vulnerable.
The law recognizes these challenges, and they enacted several regulations to alleviate the debtor’s situation. The Bankruptcy Code outlines the different classifications of bankruptcies and how a debtor can settle their debt.
Different Types of Personal Bankruptcies
A debtor can file for bankruptcy in two ways. You either file for bankruptcy as a private individual or as a business. When filing as a private individual, you can fit into two different bankruptcy categories — Chapter 7 or Chapter 13.
Bankruptcy laws differ between these two classifications. Most debtors often go for a Chapter 7 Bankruptcy over a Chapter 13 Bankruptcy.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 of the Bankruptcy Code is often referred to as the ‘Liquidation Chapter.’ When you file for a Chapter 7 Bankruptcy, you agree to pay your balance with the creditor by selling your nonexempt assets.
However, you will need to undergo a ‘means test’ before the court approves your Chapter 7 Bankruptcy claim. The means test is an analysis tool the court uses to determine if your regular income is insufficient to pay your existing debt.
How Does Chapter 7 Work?
Your Chapter 7 case will initiate once you file a Chapter 7 Bankruptcy claim. In addition, you will also need to declare the following to the bankruptcy court:
- financial affairs
- unexpired leases
- executory contracts
After filing a Chapter 7 Bankruptcy, a court-appointed trustee will take over your case. The trustee will assess your personal finances and sell your nonexempt assets to pay the creditor.
Your exempt and nonexempt assets vary depending on which state you live in. You must clarify and check this with your Chapter 7 bankruptcy lawyer.
In most cases, a Chapter 7 Bankruptcy claim lasts for about four to six months. The court has already identified which of your assets will be sold to pay your creditor within this timeline.
Chapter 13 Bankruptcy: Reorganization
Chapter 13 Bankruptcy is another choice available for private individuals. Unlike Chapter 7, individuals who file for a Chapter 13 bankruptcy are given a flexible repayment plan. This allows them to keep their properties.
People often opt for a Chapter 13 Bankruptcy over a Liquidation Bankruptcy because they earn enough money to pay their debt without selling properties.
The court allows individuals with less than $394,725 in unsecured debt and less than $1,184,200 in secured debt. 11 U.S.C. § 109(e) outlines the specifications of Chapter 13 eligible individuals.
How Does Chapter 13 Work?
The bankruptcy process for Chapter 13 allows you to offer a repayment plan based on your monthly income and expenses. Once the trustee approves your offer, you will need to pay your disposable income.
The trustee will categorize your existing debts into three categories:
- Priority debts. This includes child support, tax debts, commissions, or salary owed to an employer.
- Unsecured debts. Unsecured debt is a debt without collateral. This category’s debt includes credit card debt, personal loans, and medical bills.
- Secured debts. Secured debts include missed mortgage payments and car loans. The court allows you to offer an alternative payment schedule for these debts so you can keep your properties.
Although you can file a Chapter 13 by yourself, it’s highly advisable to hire a Chapter 13 Bankruptcy attorney to assist you with the process.
Chapter 7 vs. Chapter 13
The bankruptcy law provides assistance to help debtors deal with financial hurdles. You must know which of the two Bankruptcy Code chapters is best for your case.
Here’s a brief comparison between the two Chapters:
- Who’s it for? Both Chapters are applicable for individuals, but Chapter 13 also has provisions for sole proprietors.
- Eligibility. Chapter 7 uses a ‘means test’ to identify an individual’s eligibility. In contrast, Chapter 13 only allows individuals with less than $394,725 in unsecured debt and less than $1,184,200 in secured debt.
- Timeline. Chapter 7 cases usually conclude within four to six months. On the other hand, Chapter 13 usually takes up to five years to clear a debt.
- Credit report. A Chapter 7 Bankruptcy appears in your credit record for ten years, while a Chapter 13 Bankruptcy only remains in your history for seven years.
- Property. In Chapter 7, your nonexempt properties will be sold by the trustee to pay your creditors. However, with Chapter 13, you can keep your properties. But it will take you a long time to settle your debt.
Consulting with a Chapter 13 or a Chapter 7 bankruptcy attorney is the best way to deal with the situation. They can help you identify which one is best for you.
Types of Business Bankruptcies
The laws for business bankruptcies differ slightly from personal bankruptcy. Chapters 7, 11, and 13 are applicable for business bankruptcy.
The provisions for Chapter 7 remain the same in a business bankruptcy case. Chapter 13 has a slight modification in its conditions, and Chapter 11 is solely applicable for business bankruptcy.
Chapter 13 Bankruptcy: Small Business Repayment Plan
The law cannot distinguish between sole proprietors and individual debtors. Because of this, small businesses can offer a reorganization plan for their debts rather than liquidate their nonexempt assets.
Similar to an individual debtor, a sole proprietor will have to declare their monthly sales and business operations expenses. They will have to provide an alternative repayment schedule based on this information to settle their debts.
Chapter 7 Bankruptcy: Liquidation
A Chapter 7 business bankruptcy is relatively similar to a Chapter 7 personal bankruptcy. The problem with this one is that most business assets are nonexempt assets. Unlike in personal bankruptcy, a business owner might end up with nothing after the liquidation.
Although you can settle your remaining debt this way, your bankruptcy record can show up for ten years. This can pose a challenge if you want to request an S.B.A. or Small Business Administration loan following a chapter 7 bankruptcy.
Chapter 11 Bankruptcy: Business Reorganization
Chapter 11 of the Bankruptcy Code is also known as the Business Reorganization Bankruptcy. This chapter allows debtors to maintain their business while proposing a plan to reorganize their operations.
Chapter 11 buys a debtor time and additional rights to maintain their property. If the reorganization is successful, the debtor can settle their debts with a creditor without losing their business.
However, if the debtor’s business continues to plunge after the reorganization, the court will liquidate everything.
Seeking the advice of a bankruptcy attorney can help you devise a reorganization plan. Furthermore, they can help you convince the court to allow your reorganization plan.
Other Types of Bankruptcies
The three Bankruptcy Code chapters outlined above are the most commonly filed bankruptcy cases in the county. Roughly more than 90% of debtors suffering bankruptcy file for either one of these three.
However, the Bankruptcy Code contains more chapters than the ones specified above.
Chapter 9 Bankruptcy
Chapter 9 Bankruptcy allows the following to file bankruptcy protection:
- municipal utilities
- school districts
- taxing districts
This Bankruptcy law chapter allows government entities to reorganize their debt or even set up an alternative payment plan. The provisions of this chapter are comparable to that of Chapter 13 and Chapter 11 bankruptcy.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is applicable to family farmers or fishermen with consistent yearly income. Similar to Chapter 13, the provision allows family farmers or fishers to propose an alternative payment plan.
The debtor family needs to complete their debt payment within three to five years. Because Chapter 12 is created explicitly for farming and fishing families, the law excludes several provisions to accommodate the family’s situation.
Chapter 12 is less expensive and more straightforward than Chapter 11. In essence, Chapter 12 combines the provisions of Chapters 11 and 13 to suit the finances of a family relying on farms and fisheries.
Chapter 15 Bankruptcy
A recent addition to the Bankruptcy Code, Chapter 15 addresses bankruptcy cases involving foreign debtors or creditors. Before Chapter 15 was enacted, the law concerning debtors or creditors of more than one country was vague.
Although bankruptcy filings for Chapter 15 are extremely rare, the provision remains beneficial for cross-border cases. This specific Bankruptcy laws chapter is derived from the United Nations’ Model Law.
Listed below are the objectives of the newly added chapter:
- To establish cooperation with the U.S. courts and other bankruptcy courts involved in cross-border insolvency cases;
- To establish legalities for foreign trade and investment;
- To create a fair administration of cross-border insolvency cases;
- To provide bankruptcy protection for debtors involved in cross-border cases;
- To protect businesses engaged in cross-border issues facing bankruptcy.
Bankruptcy Attorney Near Me | Contact The Law Offices of Emil Fleysher for Legal Assistance
The law protects individuals, businesses, and families to preserve their rights during bankruptcy by creating different legal statutes. Your capacity to settle a debt determines which chapter of the Bankruptcy Code is suitable for you.
Seeking counsel from an experienced bankruptcy attorney can help you file and process your bankruptcy claim. In addition, they can also help you with the bankruptcy proceeding if the court requires you to appear before a judge.
The Law Offices of Emil Fleysher, P. A. assisted countless debtors with their Bankruptcy cases. Our principal attorney has extensive experience dealing with various Chapters of the Bankruptcy Law.
Call our experienced attorney now at 888.886.0020 for a free case consultation. You can also use our online contact form to submit your case details.