There is a solution to your difficult financial position. Filing for bankruptcy may be the answer to absolving your financial woes. However, whether you are filing as an individual, partner, or company, the process will almost always be complicated and confusing. From choosing what type of bankruptcy you will declare to determining what debts will be deemed as nonexempt, there are a million and one facets to bankruptcy that must be considered. To guide you through this difficult legal process and financial journey, it is important to hire a bankruptcy attorney that is qualified and trustworthy.
Continue through to learn general bankruptcy aspects and common types of bankruptcy cases. Reach out to us with any of your bankruptcy questions and concerns. During our initial consultation, we will discuss your current financial situation, learn about your needs and wants, and find a potential solution. While filing for bankruptcy may sound daunting, the sooner we begin the process, the sooner you can regain control of your financial future.
Chapter 7 Bankruptcy
Chapter 7 is the most common form of bankruptcy. Often referred to as “liquidation” bankruptcy, a debtor does not file a repayment plan in a Chapter 7 case. Instead, the bankruptcy trustee collects the debtor’s non-exempt assets. These assets are then sold with the profits being given to creditors. This process of gathering assets, selling non-exempt belongings, and redistributing funds is referred to as asset liquidation.
How Does Chapter 7 Work?
When filing Chapter 7, the first step is for a debtor to file a petition with the bankruptcy court. From there, determine the order in which your debts should be paid, with unsecured priority debts needing to be paid first. Tax debts and child support payments are examples of unsecured loans. Unsecured loans are not backed by collateral. Following the payment of unsecured debts, secured debts have second priority. Car loans and mortgages are examples of secured loans. Unlike unsecured loans, secured loans are secured by collateral. The payment of unsecured nonpriority debt comes in as the lowest priority. In short, debts should be fulfilled in the order of:
- unsecured priority debts
- secured debts
- unsecured nonpriority debts
The Process of a Chapter 7 Case
- Within six months prior to filing for Chapter 7 bankruptcy, the filer must undergo credit counseling. However, the debtor may forgo this step, in the event that there is a paucity of approved counseling agencies or in other extenuating circumstances.
- The next step for the applicant is to complete several forms. These forms may include:
- A petition to the court
- Official Chapter 7 proceedings
- Detailed information on the filer’s finances
Once your petition is submitted, an “automatic stay” prohibits creditors from collecting on their debt and income garnishments.
- The bankruptcy court designates an impartial trustee to manage the bankruptcy process. The trustee:
- reviews the assets and finances of the debtor
- determines exempt property needed to support a basic standard of living
- decides the nonexempt assets that can be liquidated to repay creditors
- schedules meetings with the creditors and debtor to ask and answer questions and confirm the petition and finances
Chapter 7 Discharge of Debts
When filing for bankruptcy, one of the main goals is to be discharged from one’s debts. A debtor does not have responsibility for discharged debts and can have a new start. However, it is important to note that discharge, while commonly takes place, is not a guarantee under Chapter 7. Furthermore, only individual debtors may be discharged under Chapter 7, not partnerships or corporations.
Chapter 11 Bankruptcy
Frequently called “reorganization” bankruptcy, Chapter 11 concerns the reorganization of the debtor’s business affairs, debts, and assets. Chapter 11 bankruptcy is arguably the most complex kind of bankruptcy case and is often the most expensive bankruptcy proceeding. As a result, Chapter 11 cases typically involve large companies attempting to keep their business afloat while repaying creditors. After filing for Chapter 11, corporations are given a clean slate, provided that they fulfill their commitments under the plan of reorganization.
How Does Chapter 11 Work?
The court helps a business restructure its debts and duties during a Chapter 11 proceeding. In the majority of scenarios, firms continue to operate throughout the bankruptcy process. Corporations, partnerships, and limited liability companies comprise the bulk of Chapter 11 filers, but individuals who are ineligible for Chapter 7 or 13 bankruptcy may be able to petition for Chapter 11.
The Process of a Chapter 11 Case
When submitting a petition with the bankruptcy court, the options are:
- Voluntary. A voluntary petition is filed by the debtor. The petition will include general information on the debtor, such as:
- Location of personal assets
- Debtor’s plan
- A request for relief
- Involuntary. Filed by creditors that have met the requirements.
The debtor automatically takes on the responsibility of “debtor in possession,” once the debtor files for a voluntary petition or, in an involuntary petition, the entry of an order for relief has been submitted.
As previously mentioned, a business can be normally run, while amid a Chapter 11 case, except in situations dealing with fraud, dishonesty, or gross incompetence. During those scenarios, like in a Chapter 7, a court appoints an unbiased trustee. The trustee intervenes and runs the company during the bankruptcy process. Separately, while a company is still able to operate as per usual, the business cannot make certain decisions without the court’s approval. Some examples of issues that must first be run through the courts include selling assets, annulling a rental contract, and ceasing business operations. Additionally, businesses are unable to arrange a loan that will end after the bankruptcy is complete during this time.
Chapter 11 Discharge of Debts
In a Chapter 11 bankruptcy, a plan is developed, which typically provides that a debtor is discharged from all debts that arose prior to the confirmation date. Once the plan is confirmed, the debtor must create a repayment schedule. Not only is the debtor now bound by the provisions of the plan of reorganization, but the plan establishes contractual rights. These new contractual rights take precedent over pre-bankruptcy agreements.
It is critical to note that while the confirmed plan discharges the debtor from the majority of prepetition obligations, it does not exempt debts had been made nondischargeable.
Chapter 13 Bankruptcy
Also referred to as wage earner’s plan, Chapter 13 bankruptcy permits individuals with conventional incomes to create a plan to pay back all or portions of their debts. Like a Chapter 11 case, the debtor takes on the task of reorganizing their finances subject to court supervision and approval. Individuals, married couples, and businesses may file Chapter 13, create a financial reorganization plan, and carry out the confirmed plan within a three to five year time frame. As the name “wage earner’s plan” indicates, those who file Chapter 13 pay an established monthly fee to a court-appointed unbiased trustee. Unlike other types of bankruptcy, the debtor does not have any direct contact with creditors in a Chapter 13 case.
How Does Chapter 13 Work?
While Chapter 7, the most common form of bankruptcy, gives individuals the opportunity to erase their existing debt, people oftentimes surrender their homes in the process of their Chapter 7 case. Chapter 13 is a solution for those who wish to keep their homes from being foreclosed on during a bankruptcy case. Once an individual or couple files Chapter 13, any home foreclosure proceedings are ceased. Chapter 13, unlike Chapter 11, is also less expensive and complicated.
The Process of a Chapter 13 Case
The first step that a debtor must take before pursuing a Chapter 13 case is determining whether or not they qualify. Any individual or married couple is eligible to use Chapter 13, so long as their unsecured debts are less than $394,725 and their secured debts are less than $1,184,200. However, these figures are often adjusted to reflect changes in the consumer price index. While a self-employed debtor who is operating an unincorporated business may be considered eligible for Chapter 13, corporations and partnerships are ineligible.
If you do qualify, the next step is filing a petition with the bankruptcy court. In addition to filing a petition, the filer must also submit additional documents, including:
- schedule of assets and liabilities
- schedule of current income and expenses
- schedule of executory contracts and unexpired leases
- statement of financial affairs
- certificate of credit counseling
The documents mentioned above should detail (1) every creditor and the amounts and nature of their claims, and (2) the debtor’s level, source, and frequency of income.
Except in scenarios where the court has granted an extension, the debtor must also file a repayment plan. The repayment plan may either be filed with the petition or within 14 days following the petition’s submission. This plan must include a fixed payment schedule on a cyclical basis (biweekly, monthly) and is subject to the court’s approval. Once the plan is confirmed, an impartial trustee disburses the capital to creditors per the plan’s terms.
Chapter 13 Discharge of Debts
The laws surrounding Chapter 13 discharge are complex. As a general rule, a Chapter 13 discharge absolves the debtor as provided by the confirmed plan. However, certain debts, such as guaranteed education loans and child support, are nondischargeable. Debtors should have competent legal counsel who will help define the scope of a Chapter 13 discharge.
The bankruptcy process is more often than not complicated. Choose an experienced bankruptcy attorney to stand by your side and help you navigate through bankruptcy’s twists and turns.