Types of Bankruptcy
With our economy in a downturn, more and more people are finding it difficult to make ends meet. In fact, in 2008 and 2009, 2.5 million individuals filed for bankruptcy, up from 1.4 million in 2006 and 2007. Bankruptcy is a legal process that helps struggling debtors protect assets, get rid of debt and alleviate the mental anguish that comes with overwhelming financial difficulties. Medical expenses, credit card debt, job loss, disability, divorce, children, business losses and/or unexpected expenses are some of the most common reasons people file for bankruptcy.
The type of relief bankruptcy can provide depends on the nature of the debtor and the debt. Individuals receive a discharge of debts relatively quickly under the most popular type of bankruptcy: Chapter 7 liquidation. However, individuals with regular income may have to complete a Chapter 13 repayment plan (usually three to five years) before they are eligible for a discharge. Businesses can liquidate and cease operations under Chapter 7 or reorganize their debt and continue operations under Chapter 11. If you or your business is struggling financially, contact a bankruptcy attorney to learn more about how bankruptcy can help.
Chapter 7: Liquidations
Chapter 7 (commonly referred to as liquidation or straight bankruptcy) is generally the fastest and least expensive bankruptcy process cases typically last three to six months. Under Chapter 7, the debtor's non-exempt assets are sold to repay creditors in exchange for a discharge of debts. Priority claims are paid first (e.g., administrative and legal fees), collateral is returned to secured creditors and then remaining proceeds, if any, are used to pay credit cards and other unsecured debts. Debts that are not able to be repaid are discharged, though some types of debt, including child support and student loans, are not dischargeable in bankruptcy.
Chapter 7 is available to qualified individuals, corporations and partnerships. Individual debtors who are able to repay a portion of their debt may have their case dismissed or converted to Chapter 13. To learn more about Chapter 7, consult a bankruptcy attorney.
Chapter 11: Reorganizations
Chapter 11 gives financially stressed individuals and businesses the chance to reorganize their finances and/or operations. The debtor, called the debtor in possession (DIP), remains in control of assets and everyday operations during the bankruptcy process (though a trustee may be appointed if there is mismanagement or fraud). If the DIP's plan of reorganization is approved, it is carried out under the protection and supervision of the court.
Chapter 11 offers the greatest flexibility for the debtor, but the process is much more complicated and expensive than other bankruptcy proceedings. It is the only bankruptcy option for companies that want to stay in business. Chapter 11 is not as common for individuals, though it may be a good choice, if not the only choice, for individuals with substantial assets, income or debt levels. A bankruptcy attorney can help determine if Chapter 11 is right for you.
Chapter 13: Restructuring for Individuals with Regular Income
Chapter 13 is excellent for debtors who have a regular source of income but are having trouble keeping up with payments. In fact, Chapter 13 is often used to save a car or home and car. Under Chapter 13, a debtor is allowed to stretch payments over a longer period of time (usually three to five years, but no longer) as long as they use all "disposable income" (generally income less reasonably necessary living expenses) to fund the repayment plan. If the debtor successfully completes the repayment plan, they get to keep their assets and receive a discharge.
A Chapter 13 discharge is called a "super discharge" because additional debts (e.g., certain tax obligations) are eligible for discharge. Chapter 13 also features the "co-debtor" stay which protects co-signers of consumer debts. However, individuals must satisfy income and debt requirements in order to file under Chapter 13. A bankruptcy attorney is best qualified to assess whether Chapter 13 is right for you.
Other Types of Bankruptcy
Chapter 9 (Municipality), Chapter 12 (Family Farmer or Family Fisherman) and Chapter 15 (Ancillary and Cross-Border Cases) are other types of bankruptcy, but these types of bankruptcy rarely affect consumers.
The Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA)
In 2005, Congress enacted the Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA) to help prevent fraudulent and abusive bankruptcy filings. Generally, the BAPCPA imposes stricter requirements on debtors and reduces the scope of relief. The most significant provision is the new Chapter 7 "means test" which says that individuals with enough disposable income (generally income less essential living expenses) to make payments under a Chapter 13 plan will not be allowed to file Chapter 7. Other changes include:
- Mandatory credit counseling and money management classes
- Longer waiting periods to file multiple bankruptcies
- More stringent homestead exemptions
- Restrictions on the availability of the automatic stay (see sidebar) for repeat filers
- Reduction of debts dischargeable in bankruptcy (e.g., student loans, domestic support)
- Increased legal responsibility on attorneys concerning their clients' information
Since the new laws make it more difficult for debtors to file bankruptcy, it is even more important to consult with a qualified bankruptcy attorney.
How Can a Bankruptcy Attorney Help?
Bankruptcy has many advantages, such as protection from creditors and discharge of debts, and disadvantages, such as the possibility of losing property and the effect on credit. The laws are quite complicated, and you want to be sure your rights and interests are protected every step of the way. A bankruptcy attorney will evaluate whether you should file for bankruptcy (or pursue bankruptcy alternatives) and what form of bankruptcy is best suited to your needs. Bankruptcy consultations are generally provided free of charge. Contact an attorney today to start your journey towards financial recovery.
While bankruptcy can have a negative impact on your credit for a time, many people start receiving credit card solicitations in as little as 18 to 24 months after emerging from bankruptcy.