In this second part of our consumer bankruptcy series we will discuss the different chapters of bankruptcy. The common forms of bankruptcy are Chapters 7, 13 and 11 each of which provides protection for the consumer. The three other Bankruptcy Chapters are 9, 12, and 15 (rare) which deal with municipalities, farms, and international assets respectively. This blog will give a brief overview of Chapters 7, 13 and 11.
Bankruptcy Chapter 7
Chapter 7 by the numbers is the most commonly filed bankruptcy Chapter in the United States. Clients who qualify for Chapter 7 will generally have all of their unsecured debts (Credit Cards, Medical bills, etc.) eliminated via a discharge. If a debtor has Judgment liens they can also typically be dealt with in a Chapter 7.
Debtors who qualify for Chapter 7 generally must not have a large amount of equity in their possessions, otherwise those items can be sold by the bankruptcy trustee.* Qualifying for Chapter 7 currently depends on a person’s income after congress passed the 2005 BAPCPA amendment which requires filers to not make more than the median income for the local area. If a debtor’s income exceeds the local parameters set by the means test the debtor will be unable to qualify for Chapter 7 relief.** Debtors who qualify will further benefit from the fact that a Chapter 7 case can be generally be completed in less than a year.
Chapter 13
Clients file Chapter 13 generally for one of two reasons.
- To stop Foreclosure.
- They either make too much money or have too much equity to qualify for chapter 7.
Chapter 13 works by putting a client on either a 36 month or 60 month repayment plan that is based on the amount of debt a client has. The means test in Chapter 13 is used to determine whether a client only pays a percentage of their debt or whether they pay 100% of everything through the plan.
Chapter 13 typically lasts 60 months and getting new debt during this period generally requires permission of the Chapter 13 trustee who administers the case. Chapter 13 benefits those facing foreclosure due to the fact that a stay on proceedings is placed by the court which generally last for the duration of the bankruptcy unless the client becomes unable to maintain their monthly Chapter 13 payment.
Chapter 11
Chapter 11 is typically only for corporations and debtors with extremely large amounts of debt. Chapter 11 is a restructuring plan designed for corporations to be able to survive. It has traditionally been too expensive for small businesses to afford forcing them into chapter 7 liquidation.
However as of Feb 2020 the new Small Business Reorganization Act of 2019 (SBRA) is now law, allowing small business owners to better be able to afford Chapter 11. As of the time of writing, the CARES act has, temporarily, increased the debt limitations from $2.7 million to $7.5 million so more small business owners can qualify for the SBRA. This is due to the financial problems small businesses are facing due to COVID-19.
If you’d like more information about bankruptcy please contact us.
* For more on this see our previous blog Bankruptcy Myth #1: I will lose everything if I file Bankruptcy.
** The means test does not apply to businesses that are liquidating under Chapter 7
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