Which Type of Bankruptcy Should You File ?
The Federal Bankruptcy Act offers different types of bankruptcy filings. The type of bankruptcy is outlined and recognized in the title of the chapter of the Federal Bankruptcy Act. The most common type of bankruptcy filings that a consumer should be familiar are Chapter 7 and Chapter 13.
Chapter 7 is commonly referred to as a liquidation bankruptcy. An individual that enters Chapter 7 Bankruptcy liquidates most of their assets with limited exceptions to pay off creditors. Chapter 13 Bankruptcy is oftentimes referred to as a reorganization bankruptcy, in so far as it designed to allow individuals with regular income to keep most or all of their property so long as they pay off their debt obligations through a repayment plan.
Chapter 7 Bankruptcy allows an individual to quickly discharge their debt obligations to allow for a fresh start in planning their financial future. A Chapter 7 bankruptcy requires that non-exempt property must be sold to satisfy any debt obligations owed to creditors.
Chapter 13 Bankruptcy allows an individual or those filing jointly as a husband and wife to keep their property so long as regular payment obligations are made to their creditors. Chapter 13 bankruptcy requires that an individual continue to pay their debt obligations to avoid liquidation of their assets.
Chapter 11 Bankruptcy is a reorganization bankruptcy that is most often used by corporations, although individuals may file Chapter 11 bankruptcy too despite the extra requirements. A chapter 11 bankruptcy allows an individual or corporation to operate while in the process of reorganization.
Chapter 12 Bankruptcy is a reorganization bankruptcy for family farmers and fisherman.
How does the bankruptcy process work ?
The Bankruptcy Means Test
The 'Bankruptcy Means Test' determines who can file for debt forgiveness under Chapter 7 or Chapter 13 based on financial ability to repay debt obligations. An individual must take into account income, expenses and their family size to determine whether there is sufficient disposable income to repay debt obligations such as credit cards and past due medical expenses. The first step is to determine whether income over the past 6 months is below the state's median income. An individual that has income below the state's median income may automatically qualify for Chapter 7 bankruptcy protection. Alternatively, an individual may calculate their disposable income by offsetting income with expenses and based on ratios of debt to income be allowed to file Chapter 7 or Chapter Bankruptcy protection.
What Paperwork Is Included In a Bankruptcy Filing ?
An individual that files for Bankruptcy protection under Chapter 7 or Chapter 13 may file a bankruptcy petition with the court along with other forms that are state specific. Typically, the forms request for a list of income, expenses, debt and assets. The forms may request a detailed list of all your creditors and property transactions for a period of 10 years. There is typically a state filing fee that may be waived in certain circumstances. All states require an individual to complete and obtain a certificate denoting completion of some type of Credit and/or Debt Counseling course.
Chapter 7 Liquidation - The 341 Meeting of Creditors Hearing
An individual or business that files for Chapter 7 Bankruptcy protection must attend a meeting called a 341 meeting of creditors. At the hearing, the bankruptcy trustee will ask questions about the bankruptcy filing that must be answered while under oath. Creditors also have the opportunity to ask questions about the bankruptcy filings or specifics concerning the financial affairs of the person seeking Chapter 7 Bankruptcy protection. The bankruptcy trustee is allowed to seize and liquidate any assets that are not exempt in order to satisfy the debt obligations among the creditors. The bankruptcy trustee will file a final report with the court after all non exempt assets have been liquidated and claims paid. A court will issue a final decree discharging all remaining debts which has the effect of preventing creditors from attempting to collect on any unpaid debt obligations.
Chapter 13 Reorganization - The Wage Earner's Plan
A Chapter 13 Bankruptcy enables an individual or those filing jointly as a husband and wife to develop a plan to repay all or part of their debts. Typically, debtors propose a repayment plan that allows for repayment of the debt over a period of 3 to 5 years. The bankruptcy trustee will distribute payments according to the terms of a court approved plan. At the conclusion of the repayment plan a hearing will be held in which the individual obligations are discharged. A debtor is protected from all creditor actions while the reorganization plan is in effect inclusive of lawsuits, wage garnishments or other collection activity.
A Chapter 13 Bankruptcy is a viable alternative for individuals that do not qualify under the Means Tests offered under Chapter 7 Bankruptcy protection. Chapter 13 also allows an individual to retain property that is not required to be liquidated.
Should I File For Bankruptcy ?
The main reason to file for bankruptcy is to allow for a fresh start. An individual that is unable to repay past due debt obligations can have them discharged or reorganized. Chapter 7 Bankruptcy allows an individual to have debt obligations forgiven that cannot be paid back due to insufficient income or assets. An individual is allowed to keep the salary or wages that are earned and any property purchased after you filing for Chapter 7. An individual is only allowed to file under Chapter 7, once every 6 years, but an individual is allowed to file under Chapter 13 repeatedly if financial circumstances change requiring the individual to re-enter into bankruptcy protection.
Chapter 13 Bankruptcy allows an individual to protect valuable assets such as a house or other properties that are important and necessary to maintain a base standard of living.
The main downside for filing for bankruptcy is that it will not eliminate all debt obligations. Student loans, alimony, child support and back taxes are not allowed to be discharged in bankruptcy. In addition, non-exempt property when filing for Chapter 7 bankruptcy will need to be liquidated to satisfy creditors. Credit reporting agencies typically keep a record of a bankruptcy filing on an individuals credit report for 10 years. The costs for filing bankruptcy include filing fees, credit counseling fees, attorney fees and other court mandated bankruptcy trustee fees.
What happens to a business after a bankruptcy filing ?
A business bankruptcy or a personal bankruptcy will need to take into consideration of what can happen to unprotected assets. An individual is typically not personally responsible for business debts when an entity is properly incorporated.
Whether an individual can keep a business in a Chapter 7 bankruptcy will depend on the legal status of the business. The structure of the business is an important factors in ascertaining whether the bankruptcy trustee will force a sale of the business, any business assets, or corporate stock that an individual owns.
A business that is not a partnership or incorporated is operating as a sole proprietorship. In a Chapter 7 bankruptcy there is no distinction between personal and corporate assets and debts when operating a sole proprietorship.
A business that is incorporated is a separate legal entity. Corporations and Limited Liability companies own all assets inclusive of equipment, receivables and inventory. A bankruptcy trustee can force a sale of shares of stock that are owned personally by the individual in a Chapter 7 Bankruptcy.
A business that has entered into a partnership agreement can extend liability for the debts of the business to the partners. It is common for partnership agreements to dissolve the partnership when an individual partner files for Chapter 7 Bankruptcy.
A business owner that operates a sole proprietorship may be allowed to file Chapter 13 reorganization in order to reorganize debt obligations to continue operating the business. A sole proprietorship is not a separate legal entity and is responsible for both individual consumer debts and business debts.
A chapter 13 bankruptcy allows an individual that operates a business as a sole proprietorship to keep exempt and non-exempt property. The "tools of the trade" exemption protects business assets up to a certain state mandated dollar value in order to allow the business to operate. A Chapter 13 Bankruptcy also allows an individual to keep non-exempt business assets while engaged in reorganization to pay off any debts.
Chapter 7 Business Bankruptcy
A business entity that is not a sole proprietorship that is failing may need to file Chapter 7 Bankruptcy. A bankruptcy trustee will need to sell all business assets and distribute those assets to creditors. It is common for a bankruptcy trustee to operate the business for a limited period of time if the assets of the business can be preserved in order to repay creditors. The bankruptcy trustee will sell all the business assets and distribute the assets according to the priority rules of bankruptcy law. There are no exemptions that allow businesses to protect assets in bankruptcy. The priority rules of bankruptcy favor secured creditors over unsecured creditors to receive any distributions from the sale of business assets. A secured creditor is secured by a lien on the property whereas an unsecured creditor has no lien secured against the property.
The bankruptcy trustee will close down the business after all assets have been liquidated and distributed to creditors without a debt discharge because there is no value after all assets are liquidated. There may still be an opportunity for creditors to bring a claim against an individual owner under certain circumstances; such as when a fraud has been committed or when a agreement has been made by an agent or officer of the business via a "personal guarantee" to be personally responsible for any liabilities.
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