There’s no doubt that people spend a lot of money during the holiday season. Regardless of if you’re hosting parties (and spending money on food, decor, etc…) or picking up presents for every aunt, uncle, and nephew, you’re bound to be a little bit strapped for cash. For those already feeling the strain of debt, holiday spending can often be the straw that breaks the camel’s back and forces them into filing for bankruptcy. If you’re facing bankruptcy, you’ll want to know exactly what your options are.
You have most likely heard the term “Chapter 11 bankruptcy” or Chapter 7 or Chapter 13 bankruptcy. But what is are they? And what are your options?
Chapter 13 and Chapter 7 Bankruptcy
Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.
When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.
During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors. Just because your assets are being sold, that does not mean that all of your property needs to be sold.
Differences in Chapter 7 and 13 Bankruptcy
In Chapter 13 bankruptcy, a trustee will not sell your nonexempt assets and distribute the proceeds to your creditors. That’s how it works in Chapter 7 bankruptcy. Rather, you will need to put together a repayment plan that shows your creditors how you plan to pay back some or all of your creditors. You get to keep your property in exchange for paying back a certain amount of the debt you owe. But remember that the more nonexempt assets you have, the more you will need to pay to unsecured creditors.
When you file for Chapter 7 bankruptcy, a trustee takes the nonexempt property, sells it, and uses the proceeds to pay your general unsecured creditors. But because you keep all of your property with Chapter 13, it’s unfair to your unsecured creditors if they do not get paid as much as they would have had you filed for Chapter 7.
Because of this, if you file Chapter 13 and create a repayment plan, you will still need to pay the general unsecured creditors a dividend at least equal to the value of your nonexempt assets. So if you have a large amount of nonexempt property, you hay have to repay the unsecured debts in full.
Chapter 11 Bankruptcy
Under Chapter 11 bankruptcy, the business or individual undergoes a reorganization in order to pay down its debt and reorganize its income and expenses while regaining its profits. If your business is a corporation, limited liability company (LLC) or partnership, it can continue business operations during the bankruptcy process. While the business is making payments through the debt repayment plan, the business continues operating.
The Chapter 11 bankruptcy process can be a complex, and lengthy one. If you are facing a Chapter 11, you’ll want to work with a bankruptcy attorney to understand the process and what you will need to do to move through it. They will be able to explain the terminology in addition to what is legal, and what you will be required to do.
Here is a general outline of what is required during a typical Chapter 11 case.
Credit Counseling Course for Individual Bankruptcy
If you are filing for Chapter 11 as an individual and not for your business, you will need to complete a credit counseling course. This course must be done with an approved agency prior to filing your bankruptcy. This course is not required if you are filing to reorganize the debts of a business.
Chapter 11 Petition
To prepare your petition you will need to complete a list of your (or your company’s) assets, debts, income, and expenses. Additionally, you will need to create a summary of your financial affairs. Review everything to check for accuracy. Then you will be able to file your petition with bankruptcy clerk’s office. This filing triggers an “automatic stay” which prohibits most creditors from being able to continue their collection efforts against you or your assets until a bankruptcy judge gives them permission to do so.
You will need to file a disclosure statement containing information about your financial affairs. This will allow your creditors to make informed decisions when they decide if they will accept or reject your plan.
What should be included on the disclosure statement is dependent on the nature, history, and size of the Chapter 11 debtor. For small business cases, a bankruptcy court may decide a separate disclosure statement is not needed because the plan of reorganization provides thorough information.
Here are some of the typical items included in a disclosure statement:
- financial history of debtor
- circumstances that led to the bankruptcy filing, including significant events like job loss or injury
- summary of reorganization plan
- description and value of debtor’s assets
- description of claims, liabilities and how they are addressed in the plan
- tax consequences of reorganization plan
- plan confirmation procedures and requirements
- feasibility of plan
- comparison with Chapter 7 liquidation, and
- all other information that a creditor would need to make an informed judgment about the plan.
The disclosure statement and proposed plan of reorganization is then mailed to every party in interest, including your creditors. The disclosure statement also includes information for your creditors that explains how they may participate in the bankruptcy. It also includes information regarding how the creditor’s rights may be adversely affected.
After the disclosure statement is filed, a court holds a hearing to approve or reject it. Typically, a plan will not be accepted or rejected until the disclosure statement is approved.
There will be a hearing for the disclosure statement during which parties involved can object to the language included in the statement. Usually disclosure statements are approved and the hearing is just a formality.
Proposed Plan for Reorganization
You will outline how creditors will be treated in your plan of reorganization. Creditors are assigned as either priority debt creditors, secured debt creditors, or unsecured debt creditors. If a creditor does not approve how they are treated in your proposed plan of reorganization, you are able to file a motion (called a cramdown) asking the judge to force the creditor to accept the plan.
You will ask a judge to approve your plan of reorganization at your confirmation hearing. All of your creditor classes will need to have accepted your plan for a judge to be able to approve the plan. This is where you would file a cramdown motion if you have not received approval. A court will then need to reschedule the confirmation hearing. If the creditor does not respond to this motion for cram down, it is ruled as accepting the plan. But if the creditor does respond to the motion, you will need to negotiate with the creditor to try to get it to accept plan treatment. If an agreement cannot be made between you and the creditor, then a judge will decide at a hearing.
After your reorganization plan is approved, you have to start making payments to creditors in accordance with that confirmed plan. You will need to abide with the new contract you have with each of your creditors. If you default on payments, a creditor may sue you on that basis. Because of the agreed to plan, you will have little recourse.
Payments can continue for many years depending on your proposed plan. And debts such as mortgages or car notes typically get re-amortized over an extended period. This means a lender recalculates the monthly payments during the repayment term.
Discharging of Debts
A discharge of debts is the main reason you enter Chapter 11 bankruptcy, and it happens after you have made all required payments to your unsecured creditor class. After paying everything off you will ask the court for a discharge of the remainder of your unsecured debts. This motion prevents any of these creditors from collecting on any of the debts in the plan. This is the end of your Chapter 11 bankruptcy.
Working with an Attorney
Facing bankruptcy, regardless of if it’s a personal or business bankruptcy, is a scary thing. There might be ways to avoid it and still keep your credit intact. Working with a bankruptcy lawyer will ensure you are made aware of all the options available to you. Because bankruptcy law can be confusing, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have should you decide to file. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.