When you have debts that you can no longer afford to pay, sometimes the best option for improving your financial situation is bankruptcy. Although many people are hesitant about filing for bankruptcy, the truth is that there is no reason to be ashamed or embarrassed about doing so.
The purpose of bankruptcy, a right afforded by the U.S. Constitution, is to allow businesses and individuals who are struggling financially to receive a “clean slate” and live debt-free. Bankruptcy law is incredibly complex. As a result, filing for bankruptcy can be a daunting process. For decades, the Fort Lauderdale bankruptcy attorneys at Loan Lawyers have been helping individuals and businesses pursue bankruptcy, in order to obtain a fresh start and save the assets and property that are most important to them.
Contact us today for a free review of your situation and advice about your best legal options.
Understanding the Bankruptcy Code
The Bankruptcy Code is organized into several chapters, each of which provide different kinds of bankruptcy for various types of debtors. The most commonly used chapters of the Code are:
- Chapter 7, which is a liquidation bankruptcy, used by any debtor who wishes to liquidate – or sell off – their assets, generating cash to pay off debts. A business that undergoes Chapter 7 liquidation typically ceases operations upon entering bankruptcy.
- Chapter 11, which allows a business to undergo a reorganization of its operations and finances while still continuing its day-to-day operations.
- Chapter 13, which is the reorganization process available to individuals.
Other chapters of the Code provide avenues of bankruptcy to specific types of debtors, such as farm owners or municipalities.
Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws. Chapter 7 is the most common form of bankruptcy. In the liquidation process, most or all of a debtor’s assets are sold off to generate cash that is then used to pay the debtor’s creditors. The debtor’s debts are thereby eliminated, giving the debtor a fresh start. The liquidation process under Chapter 7 can differ slightly, depending on whether the debtor is a business or an individual.
When a business files for Chapter 7 bankruptcy, the bankruptcy court will appoint a trustee. The business must cease operations, unless the trustee chooses to continue operations. The trustee will make an accounting of the business’ financial affairs, and will then begin selling the business’ assets, distributing the proceeds to the business’ creditors. However, a business’ debts are not technically discharged at the close of a Chapter 7 case, and continue to exist until the applicable statute of limitations expires.
When an individual files for Chapter 7 bankruptcy, unless their debt is primarily not consumer debt, they must meet the means test to demonstrate their eligibility for Chapter 7. A debtor automatically meets the means test if their household income (the income being earned by all individuals in the debtor’s household, not just the debtor’s income) is less than the median household income in the state where the debtor files for bankruptcy. Otherwise, a debtor’s disposable income must not exceed a specified floor amount or portion of their debts. If it does, a debtor can only seek a Chapter 7 bankruptcy if they establish “special circumstances,” such as additional expenses, loss of income, or medical emergency.
An individual is allowed to exempt certain property from liquidation in Chapter 7 bankruptcy. Upon emerging from bankruptcy, most of the individual’s unsecured debts are discharged (with certain exceptions, such as student loans or domestic support obligations).
Chapter 13 bankruptcy is the process by which an individual is allowed to undertake a “reorganization” of their finances. An individual can seek Chapter 13 bankruptcy when they have sufficient income to make payments to their creditors under a repayment plan.
In a Chapter 13 proceeding, the debtor begins making payments to a trustee appointed by the bankruptcy court. The debtor must also present the court with a proposed repayment plan lasting either three or five years. The plan must be approved by the debtor’s creditors. It can also be approved by the bankruptcy court, over the objections of creditors, so long as the plan meets the requirements under Chapter 13.
Under a Chapter 13 repayment plan, a debtor can:
- Consolidate debts
- Cure arrearages on mortgages or other long-term debts
- Avoid “underwater” loans
- Pay back taxes over time
- Partially repay unsecured debt
If the debtor makes all payments required under the repayment plan and meets other requirements, the bankruptcy court can discharge outstanding debts, including some debts that cannot be discharged in a Chapter 7 bankruptcy. Chapter 13 bankruptcy also has the benefit of allowing a debtor to keep most or all of their property and assets – which would sold off in a Chapter 7 liquidation – even though the debtor’s creditors are likely to receive less than the outstanding balances owed by the debtor.
Chapter 11 bankruptcy allows businesses, whether organized as corporations, partnerships, or sole proprietorships, as well as individuals in certain situations, to undertake reorganization of operations and finances. Businesses typically file for Chapter 11 bankruptcy when they are no longer able to service debts or pay creditors, but when the business can still be reorganized and made profitable again. Unlike Chapter 7 bankruptcy, the debtor remains in control of the business and its operations as a debtor-in-possession, unless the court appoints a trustee.
As in a Chapter 13 bankruptcy, a Chapter 11 debtor is required to file a plan of reorganization with the court. A plan of reorganization is effectively a compromise between the debtor and their creditors. The plan sets forth how the debtor intends to reorganize operations to become profitable again and how the debtor proposes to repay creditors. The plan will also propose to reject and cancel certain contracts known as executory contracts, or those in which both parties still have duties to perform. Examples of executory contracts include collective bargaining agreements, vendor contracts, and real estate leases.
If all creditors approve the plan of reorganization, it is usually approved by the bankruptcy court. In a process known as cramdown, the bankruptcy court can approve the plan over the objection of certain creditors, provided the plan still meets the requirements of Chapter 11. Although a debtor has the exclusive right to propose a plan at the outset of the proceedings, if a plan is not adopted by a certain time, any party with an interest in the proceedings may propose an alternative plan.