Even though for some this is the best solution, bankruptcy is never a pretty affair. Owners of sole proprietorships and certain partnerships have no means of protecting their personal assets as they are not separate from their legal entities. However, limited liability companies, S and C Corporations and some partnerships are separate, and they are safe from having their assets included in repayment of any debts unless they are used as a collateral for any of their business loans. Luckily, there are different types of bankruptcy, which can help one preserve the most and protect themselves from losing all.
Chapter 7
Chapter 7 bankruptcy is designed for those individuals who have no means of repaying their debts due to little income. In such instance, all of the unsecured debts are written off and covered by selling the debtor’s non-exempt assets. Secured debts are not subjected to bankruptcy as they are usually recovered by the means of collateral offered in the initial agreement. Furthermore, non-exempt assets are all of those assets which do not fall under the state or the federal bankruptcy exemptions. There are also certain unsecured debts which cannot be written-off such as child support or student loan. The record of the bankruptcy stays on the credit history for 10 years and you can only apply for one at every 7-8 years, provided that you did not declare Chapter 13 bankruptcy within the last 6 years. The first thing to look at is the monthly income. If it is more than the state’s median monthly income, one will have to go through the means test. If the means test proves that the filer can pay a portion of the debt justified by the high income, then the Chapter 13 may be a better solution.
Chapter 13
Chapter 13 helps to preserve the assets and can be filed by those businesses (sole proprietorships only) or individuals who have the means of repaying their debts. The debt cannot be higher than ca. $385,000 for unsecured debts and $1,150,500 for secured debts and is subject to a change. The debtor is required to repay any debts over a certain period of time, namely three to five years. However, in order to be eligible, one has to prove that they are able to make payments on all of their debts including the secured and priority debts. An upside for the debtor in this chapter is that after the period designated for the repayment, they will only end up paying a portion of the unsecured debt without the interest rates. Chapter 13 can be filed at every 2-3 years provided that the filer hasn’t filed for Chapter 7 within the last four years.
Chapter 11
Chapter 11 is a costly way of repaying your debts and is by rule reserved for businesses owned by a company with limited liability or partnerships, as well as those who have debts higher than required for Chapter 13. A business gets a deadline of 300 days for a plan of action. While in Chapter 7 and Chapter 13 a trustee is appointed by rule, in Chapter 11 a trustee is appointed only in the case of mismanagement. Within this period a business is required to disclose all of their financial information to the trustee and submit monthly reports to the court for the sake of determination of whether the plan is actionable or not. After this, the creditors and the debtor are to agree on a repayment plan, the amount and the period. If the terms of the agreement are meant and the amount repaid in due time, the remaining debt is discharged. On the other hand, should the debtor fail to make the payments, the creditor has the right to sue them.
Chapter 7 vs Chapter 13
Chapter 7 is otherwise known as liquidation bankruptcy due to the seizure of the assets. As stated above, the unsecured debts are covered by the means of selling the non-exempt assets. The creditors are repaid in the order of priority and some of them end up not receiving anything in return. While this may be a good solution for individuals, most businesses cease to exist after the foreclosure of all of their assets. Also, in order to file for either of these two chapters, a business will have to go through the means test and prove that their income, value and, of course, debt are small enough to qualify for the two. Family law experts advise that Chapter 7 provides some security through assets exemption which is particularly beneficial to those who do not own a lot and have little to lose. Chapter 13 immediately protects all of the debtor’s assets against foreclosure provided that they act according to the terms agreed regarding the repayment of their debts under this chapter.
Chapter 13 vs Chapter 11
The two types of bankruptcy are suitable for businesses as they allow them to stay active. Chapter 11 is famously complex and costly to file. Even though Chapter 11 also includes the time period of between 36 to 60 months, the time period can be extended. In Chapter 13, a debtor can repay the full amount within the period shorter than outlined in the agreement, however, they cannot hope for an extension. On the other hand, when it comes to the total amount discharged, Chapter 13 takes the lead as there are more exemptions to discharge under Chapter 11 than there are under Chapter 13.
The bankruptcy law also includes chapters 9, 12 and 15 which are designed for more specific cases. The bottom line is that Chapter 7,11 and 13 can all be filed under by both Individuals and businesses, however due to the price and the complexity, individuals usually file under Chapters 7 and 13, while companies who hope to stay in business file under Chapters 11 and 13 which allow them to reorganize their strategies and repay their debts.
