Bankruptcy is a legal process designed to give individuals, small business owners and large corporate entities relief from crushing debt. Debtors are allowed to retain most of their assets so long as they are statutorily exempt from seizure by the bankruptcy trustee to distribute to creditors in order of priority, while discharging other obligations. For businesses, they can choose to liquidate and dissolve their operations or come up with a repayment plan or a debt reorganization plan and restructure their businesses in an attempt to achieve profitability.
There are three types of bankruptcies that may be used by consumers and private businesses—chapter 7, 13 and 11. Which chapter to file under is a matter to be discussed with a bankruptcy attorney from the DCDM Law Group and to examine if bankruptcy is an option for you.
The following is a short guide to these three types of bankruptcies.
Chapter 7 Bankruptcy
A Chapter 7 is debt liquidation that can be utilized by individuals, married couples, small businesses, LLCs and corporations. Before you can file, you have to meet certain eligibility requirements, or a means test based on your state’s median income. In California, if you are a single person with an income of $48,498 or below, you may qualify. For a family of four, the median income standard is $76,211. The income ceiling typically rises in April of each year.
Not meeting the median income standard does not automatically render you ineligible. If your median income is above the current level, you can still qualify if your disposable income is below a certain level.
Before filing for bankruptcy relief, all debtors must complete a brief credit counseling class. Debtors have to take another debtor education course before their discharge will be granted.
One important aspect of filing any bankruptcy is that once your bankruptcy petition is filed, all legal proceedings and all collection activities are automatically stayed under 11 U.S.C. 362. This prohibits creditors from making further contact with you as well as continuing with collection efforts. In some circumstances, the creditor can ask that the automatic stay be lifted such as if you have real estate in foreclosure.
When you do file, your petition will contain a list of all your debts, secured and unsecured, assets and their value, and your monthly expenses. You are prohibited from trying to hide or sell non-exempt assets to relatives or business insiders over a period of time before you file if the trustee believes you did so to defraud or hinder your creditors. You also may not favor a creditor over others by paying them over a period of time before filing in most situations.
Most assets are exempt from being seized by the bankruptcy but you must choose between either of two state exemption systems used in California. If you have a large amount of home equity, you would use the first system that exempts $75,000 in equity for a single filer and $100,000 for a couple.
Unsecured debts are generally discharged in a Chapter 7 and you may reaffirm a secured debt. You can expect a discharge in most cases in about 4 months after filing.
Chapter 13 Bankruptcy
Should you not qualify to file a Chapter 7 petition, you can still use Chapter 13, which is also called a “wage earner” plan. This filing is also for homeowners who are facing a foreclosure. You must have a steady source of income and enough disposable assets or cash to make monthly payments to the trustee.
When filing under this chapter, you must submit a repayment plan that provides for payment of your debts over a 3 or 5 year period. For homeowners dealing with mortgage arrearages and foreclosure looming, they must be able to meet their current monthly mortgage while paying the arrearages over the 3 or 5 year period. For homeowners with second or even third mortgages, these are typically discharged at the completion of the plan as unsecured debts.
You may also continue to pay past due taxes without continuing penalties though interest will continue to accrue until paid off.
A Chapter 13 filing also allows debtors with nonexempt assets to retain them, such as second homes, multiple motor vehicles or large boats. Individuals who are sole proprietors can include personal and business debt, under this plan so they can continue with their operations.
Chapter 11 Bankruptcy
A more complicated process is Chapter 11, which is debt reorganization. Chapter 11 is generally used by corporations, partnerships and even individuals who do not qualify under Chapter 7 but have complex issues in their financial affairs. In some cases, creditors can even force an involuntary petition.
Debtor companies submit schedules of its debts, assets and financial affairs. The business, referred to as the debtor-in-possession, will typically serve a written disclosure to all creditors before submitting a reorganization plan to be confirmed by creditors’ committees and then later by the court. If a plan is not approved, creditors can submit their own. Businesses can still operate and perform such functions as renegotiating leases and contracts on more favorable terms and paying back creditors at discounted rates. Material decisions such as selling off assets need court approval. If a business as debtor-in-possession is not performing or is allegedly engaged in conduct detrimental to the creditors, the creditors can petition to replace the business directors or owners.
Small businesses and individuals who file under Chapter 11 follow different and more streamlined procedures. Most Chapter 11 filings require an attorney or law firm with business insights and judgment, negotiating skills and experience in the complexities of Chapter 11.
Consult the DCDM Law Group
Contact the highly skilled and knowledgeable bankruptcy lawyers from the DCDM Law Group if you are experiencing personal or business financial distress. With an analysis of your personal or business situation, you can be assured in knowing whether bankruptcy is your best option and, if so, that it will be handled competently and proficiently.