WHAT IS BANKRUPTCY? WHAT ARE MY OPTIONS?
August 17, 2016 | BANKRUPTCY
Every day we are faced with decisions. Many times, there are several options and choices involved. From purchasing a new home or car, to purchasing lunch for the day, you often have limitless options to consider. However, for individuals considering bankruptcy filing, there are likely only a few bankruptcy Chapters to choose from. Why is this, and what is are your options? What are the differences and similarities and ultimately, what is best for you?
First, let’s be sure to understand a few terms.
Bankruptcy: Bankruptcy is federally codified law (Title 11 of the United States Code) that allows a debtor to shield himself from the reach of creditors while seeking relief from federal bankruptcy court to ultimately either eliminate debt or to repay debt under new terms feasible to the debtor.
Debtor: A debtor is a person, company or municipality who owes money to another party.
Creditor: A creditor is the person or entity who is owed the money.
Secured debt: A debt that is secured by a piece of property, usually real property or personal property. For example, a home mortgage is secured by the home, a vehicle loan is secured by the vehicle that was purchased with the loan;
Unsecured debt: A debt that is not secured by any particular property. For example credit card debt.
Exemptions: Exemptions are benefits taken by the debtor under the bankruptcy code to reduce equity in real or personal property. For example, if a vehicle is worth $5,000.00 and the debtor applies a $3,000.00 exemption, the value of that property relevant to the bankruptcy estate is only $2,000.00.
As a debtor, you have rights and duties under the federal bankruptcy code; so do your creditors. These rights and duties differ depending on which Chapter of bankruptcy a debtor files. Therefore, it is essential that you and your attorney understand your rights and duties, that your goals are clearly communicated, and that you receive the proper guidance in your bankruptcy case to ensure the best available relief is afforded to you.
For many individuals and married couples, there are only two bankruptcy chapters under which to consider filing: Chapter 7 or Chapter 13. In total there are only five bankruptcy chapters currently codified:
- Chapter 7: This is the most typical type of bankruptcy case. Chapter 7 is also called the liquidating bankruptcy or the “fresh start” bankruptcy. This is the bankruptcy Chapter that allows a debtor to eliminate debt without any further repayment on all dischargeable debts.
- Chapter 13: In this bankruptcy chapter, a debtor enters into a repayment plan that allows for the modification of certain debts. Many times creditors will be paid pennies on the dollar and the remainder of the unpaid debt will be discharged, affording the debtor a fresh start at the conclusion of the repayment plan. These repayment plans generally last 3-5 years.
- Chapter 11: This type of filing usually involves a business such as a large corporation or partnership, but is similar to a Chapter 13 in that the debtor enters into a plan to restructure debt and repay certain creditors while continuing to operate the business. Individuals do not typically file a Chapter 11 because the requirements for filing under this section impose a much greater expense on the debtor. Debtors who file Chapter 11 typically do so because they do not qualify for a Chapter 13 filing due to debt limit constraints. Notable debtors who have filed Ch 11 include US Airways, Eddie Bauer, General Motors, Samsonite, Kmart, Owens Corning, and Six Flags.
- Chapter 12: This bankruptcy chapter is limited a debtor who is defined as family farmer or family fisherman pursuant to the bankruptcy code definition. This chapter is somewhat of a mix between Chapter 13 and Chapter 11, designed to allow a successful family farmer or fisherman to reorganize debts while continuing to operate his farm or fishing business.
- Chapter 9: These filings are rare, but are up in recent years. Only a municipality may file for Chapter 9 bankruptcy. Recently Detroit, MI became the largest US city to file Chapter 9 bankruptcy; the case is currently pending.
In light of the above, as you can see, Debtors who are not large corporations, municipalities or family farming or fishing operations, may choose from either Chapter 7 or chapter 13 bankruptcy relief. Sometimes, this choice is further limited by the individual debtor’s particular circumstances.
Some Chapter 7 qualifying factors: You must meet the following qualifications in order to file for Chapter 7 bankruptcy:
- You have not received a bankruptcy discharge under a prior Chapter 7 case filed within the past 8 years; nor a bankruptcy discharge under Chapter 13 filed within the past 6 years. Therefore, for example, a debtor who filed for Chapter 7 bankruptcy on January 1, 2005 and was discharged June 1, 2005, would not be eligible to file another Chapter 7 bankruptcy case until January 2, 2013 (8 years; 1 one day from the previous filing date of the prior discharged case)
- You must be under the median household income for your family size in your region. You should seek to determine whether you are under or above the median income only from a qualified attorney, after examination of necessary and complete wage information has been made.
- You must be able to prove that you do not have current disposable monthly income
A Chapter 13 bankruptcy filing also has certain qualifying factors, which include but are not limited to:
- You must have regular, ongoing monthly income. This term is loosely defined and can even include unemployment income, depending on certain circumstances, however, a debtor receiving no monthly income at all will not qualify for this type of bankruptcy filing.
- Your debt cannot exceed certain limits. Currently, Chapter 13 debt limits are set at $383,175.00 for all unsecured debts and $1,149,525.00 for all secured debt.
Similarities in Chapter 7 and Chapter 13 include:
- Essentially, there is no minimum amount of debt one must have to file a case
- All debtors must comply with requirements of full disclosure and good faith
- In the Southern district of Ohio, each bankruptcy case will be assigned a trustee to oversee the process. The trustee’s duties are to essentially ensure that the bankruptcy relief provided is fair to all affected parties
- Discharge of debt in Chapter 7 and Chapter 13 bankruptcy does not create a taxable event
Differences in Chapter 7 and Chapter 13 include:
- A properly drafted and feasible Chapter 13 plan will allow a Debtor the ability to keep any pay for assets even if they are behind on payments. For example, a vehicle, house, lease, or other asset secured by a loan can be retained by a debtor, with payments made through the Chapter 13 plan until paid off or caught up.
- A Chapter 13 may allow a debtor who is underwater on a home to strip off junior liens such as second mortgages or home equity lines of credit so that at the conclusion of the plan, that junior lien is released from the property.
- Some debts that are dischargeable in Chapter 13 are not dischargeable in Chapter 7. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.
So, where does all of this information leave you when it comes to making a decision on whether to file bankruptcy and if so, which bankruptcy Chapter to choose? The answer is that it depends on your own individual circumstances. Bankruptcy is a specialized area of law and debtors considering a potential bankruptcy filing or other financial reorganization or restructuring option should contact an experienced bankruptcy attorney. Laura Nesbitt and the Nesbitt Law Firm, LLC focus only on bankruptcy and financial debt resolution assistance for clients. While we network with other attorneys experienced in other areas of legal assistance in order to assist our clients in finding additional legal assistance as the need may arise, we only handle financial debt solutions for clients. This concentration allows The Nesbitt Law Firm to devote its time, expertise, and resources to exactly what a bankruptcy client needs without dilution into other practice areas.