Bankruptcy

Filing for bankruptcy is a legal right that all consumers in the US can exercise

under the Bankruptcy Code. We at JC Law not only provide bankruptcy information, but also advises consumers about:

• the best time for filing
• which chapter of Bankruptcy Code they qualify for
• how to keep the assets safe on filing
• other requirements to be fulfilled for the smooth execution of bankruptcy

Three of the six chapters of the Bankruptcy Code are of special importance to individuals and businesses and are also the most used ones. These are:

Chapter 7 Bankruptcy: Liquidation

The most utilizedchapter of the Bankruptcy Code applies to:

Businesses: A business in debt that is unable to pay its creditors can file (or be forced to file by its creditors) for bankruptcy in a federal court. The appointment of a Chapter 7 Trustee is done immediately, who sells assets, the proceeds of which are distributed to the creditors. On filing, the business has to cease its operations unless the Chapter 7 Trustee allows resumption.

In the case of a Chapter 7 bankruptcy, a corporation or partnership doesn’t receive a discharge (only an individual business can receive a discharge under Chapter 7). Instead, the business entity is dissolved. The case is closed after all the assets of the entity have been administered. The debt of the entity continues to exist till the expiry of the applicable statutory period of limitations.

Individuals: Individuals residing in the US, having a business setup or any other property in the country can file for bankruptcy under Chapter 7. As is the case with other chapters of the Bankruptcy Code, this option is not available to those who’ve had a bankruptcy case dismissed in the last six months.

Individuals can keep certain property exempted. Most liens, such as mortgage and security interest for car loan, survive. Other assets are liquidated by the trustee to pay creditors. Some debts can also be discharged (common exceptions include student loans and fines). Bankruptcy discharge remains on the credit report of individuals for up to ten years. If the US Trustee assesses that the debtor can afford to repay his debt through disposable income in a timeframe of five years (under Chapter 13), he can prevent the debtor from receiving a Chapter 7 discharge.

To file for Chapter 7 bankruptcy, you need to file the following documents in the area of your residence/business setup:

• A petition for Chapter 7 bankruptcy
• Schedules of assets and liabilities
• A schedule of current income and expenditures
• A statement of financial affairs
• A schedule of executory contracts and unexpired leases
• Certificate of Credit Counseling
• A copy of any debt repayment plan developed through credit counseling
• Evidence of payment from employers
• Means Test

The filing fee for Chapter 7 is $299.

Chapter 11 Bankruptcy: Reorganization

Available to individuals, partnerships and corporations, this bankruptcy reorganization proceeding does not set any limits on the debt amount that needs to be reorganized. Debtors usually continue to possess their assets. Business operations run under the court’s supervision and to repay creditors.

The US Trustee appoints a creditors’ committee out of the 20 largest, unsecured creditors. This committee represents all the creditors. It:

• provides oversight for the operations of the debtor
• negotiates the reorganization plan with the debtor

The confirmation of a Chapter 11 plan depends on the votes given by creditors (categorized according to the nature of their claim). If a debtor is unable to get a plan confirmed by voting, he can try to "cram down" a plan on creditors and get it confirmed by meeting certain statutory tests.

The flexibility of the Chapter 11 plan makes it expensive to the debtor as shown by the success rate of reorganization (less than 10%). The filing fee for Chapter 11 is $1039.

Chapter 13 Bankruptcy: Adjustment of an Individual’s Debts with Regular Income

Chapter 13 requires an individual to use his or her income for the repayment of debt. The person needs to prove in court that she/he has a regular stream of income, making him or her capable of meeting the payment obligations.

To be eligible for filing for bankruptcy under this chapter, your total debt should not be very high. The caps are as follows:

• On secured debts (on which the creditor holds a right to take your property): $1,010,650
• On unsecured debt (creditors hold no right to cease your property): $336,900 

In order to file for Chapter 13 bankruptcy, the debtor has to provide the court in the county of residence the schedules of:

• current income and expenditure
• assets and liabilities
• executory contracts and unexpired leases

The other documents required include statements of financial affairs and of net monthly income.

Within 15 days of filing the petition, the debtor must submit a plan before the court for approval. Also, s/he must make the scheduled payments to the trustee regularly (typically monthly). The trustee distributes these funds to creditors as per the terms of the approved plan, which may pay creditors less than their claim.

Within 45 days of the creditors’ meeting, a confirmation hearing must be held by the bankruptcy judge. During this proceeding, the judge decides whether the repayment plan is feasible and conforms to the requirements of the Bankruptcy Code. Creditors get 25 days to raise objections against the confirmation.

If the court does not confirm the plan proposed by the debtor, s/he has the option of filing a modified plan or converting the case to liquidation under Chapter 7. If the court dismisses the case, the trustee can be authorized to retain some funds for costs, but return all the funds to the debtor, excluding those due to creditors or already disbursed. The filing fee for Chapter 13 is $274.

Before filing for bankruptcy under Chapter 7 or 13, receiving credit counseling from an agency approved by the US Trustee's office is necessary. These agencies usually charge a fee for this service, but must provide free or affordable counseling for the needy.

Legal issues around bankruptcy are complex. The bankruptcy information provided here is purely educational: It is neither legal advice nor any client-attorney relationship between the readers and the firm. Find a bankruptcy law firm that has attorneys who are licensed to practice in your state and discuss the specifics of your situation.