When it comes to individuals there are various personal bankruptcy options. These personal bankruptcy options offer millions of people financial relief every year. It’s a powerful tool with long-term benefits in most cases. If you are considering filing bankruptcy, you must carefully consider your options, including the kind of bankruptcy case that best fits your situation. For most people, their options are Chapter 7, Chapter 13, or Chapter 11 bankruptcy. If you are considering personal bankruptcy, it’s important to understand the differences between these three most common types of cases.
Personal Bankruptcy Options – Chapter 7
As far as personal bankruptcy options go, Chapter 7 bankruptcy is the most common type. This is a liquidation bankruptcy where a Chapter 7 trustee is assigned to your personal bankruptcy case. This trustee has the power to sell any of your assets that are not protected by bankruptcy exemptions. In most Chapter 7 bankruptcy cases, people are able to discharge the majority of their general unsecured debts such as credit cards, loans, medical bills, and other debts which are not secured against property, and are not certain types of priority unsecured debts.
Individual and joint (married) debtors may qualify for a Chapter 7 bankruptcy case if they pass the “means test”. This is a calculation to determine if your income is more than the average income of a household of your same size in your county. If you do pass the “means test”, then you may choose Chapter 7 over other kinds of bankruptcy. However, if you have exposed equity in your assets, or are concerned that the Chapter 7 trustee assigned to your case will believe that you have exposed equity in your assets, then you may want to consider a reorganization bankruptcy under Chapter 13 or Chapter 11.
Aside from consideration of your eligibility under the “means test”, and aside from concerns about exposed equity in your assets, you must consider whether or not your debts are dischargeable in a Chapter 7. In a Chapter 13 case, you may be able to benefit from the “super discharge” provisions in that chapter, while these provisions are not available to you in a Chapter 7 case. In addition, if you have certain priority unsecured debts, or you are in arrears on secured debt such as mortgage or car payments, and you need time to pay them off, you may prefer a plan of reorganization under Chapter 13 or Chapter 11.
Chapter 11 Personal Bankruptcy
Chapter 11 bankruptcy is most often associated with businesses. This is because Chapter 11 is most often used by businesses seeking an orderly reorganization or liquidation of their operations and assets. However, Chapter 11 is also one of the more common personal bankruptcy options, is available to individuals and married couples, but may be the best type of bankruptcy for many people. Unlike Chapter 13, where individuals must start to immediately make payments on their plan of reorganization, payments under a Chapter 11 plan may not begin for months or even over 1 year after the Chapter 11 petition is filed with the bankruptcy court. This is because there is a somewhat complicated creditor voting process in the Chapter 11 confirmation process, where there is no voting in Chapter 13 confirmation process. Many individuals opt to file a Chapter 11 because they are about the Chapter 13 “debt limits”, which limit the amount of unsecured debt and secured debt that can be reorganized in a Chapter 13 case. These individuals must then use Chapter 11 to reorganize. Since 2020, individuals in Chapter 11 who have primarily business debts have the option of electing for Subchapter V, which is a streamlined process that offers advantages over a traditional Chapter 11 case. These advantages include no quarterly fees, and the assistance of a Subchapter V trustee. Chapter 11 can be extremely effective when used for personal bankruptcy, and offers certain flexibility not always available to people who opt for Chapter 13.
Chapter 13 Personal Bankruptcy
Reorganization under Chapter 13 is the most common type of reorganization for individuals. In fact, Chapter 13 is only available for individuals. Just like in Chapter 11, the goal of a Chapter 13 is for the bankruptcy court to confirm the person’s plan of reorganization. However, Chapter 13 is a very streamlined process, with somewhat less flexibility than a Chapter 11, and is limited to those individuals with debts under the Chapter 13 “debt limits”. Chapter 13 plans of reorganization can be 36 months long in some instances, and 60 months in other instances, depending on a number of factors including the amount of the debtor’s household income, and on the amount of certain debts that must be paid within the 36-60 month plan period.
People file Chapter 13 for different reasons. Some individuals who would otherwise opt for a Chapter 7 case, but are over the “means test”, are essentially pushed into using a Chapter 13 case to obtain their discharge order. Other individuals who do qualify for Chapter 7 because they pass the “means test” may nonetheless choose Chapter 13 in order to repay missed mortgage or car payments, to protect exposed equity in their assets, to take advantage of the Chapter 13 “super discharge”, or for other strategic reasons. Finally, some other individuals opt to file Chapter 13 because they need to file for bankruptcy, but received a prior Chapter 7 discharge, and not enough time has passed since that Chapter 7 discharge. In those instances, individuals may opt for Chapter 13 because they are not eligible for another Chapter 7 discharge within the relevant time period.
The main benefit of Chapter 13, as in Chapter 11, is that the individual filing for bankruptcy remains in control of their own reorganization. These individuals are called a “debtor in possession” because they remain in possession of their assets and in control of their own reorganization. This is contrasted against a debtor in a Chapter 7 bankruptcy, where a Chapter 7 trustee is in control of the case, and in possession of the debtor’s assets until such time as the trustee “abandons” the assets back to the debtor, or sells those assets to third parties with the bankruptcy court’s approval.
Should I File Chapter 7, Chapter 11, or Chapter 13?
As there are several personal bankruptcy options, filing can be a complicated process. When making your decision, you should rely, first and foremost, upon the assistance of an experienced bankruptcy attorney. However, you should also have a working knowledge of the different types of bankruptcy so that you can make an informed decision in conjunction with your bankruptcy attorney. In the end, you must exercise your business judgment when deciding whether or not to file bankruptcy, and whether or not to file one type of bankruptcy case over other options.
Chapter 7 bankruptcy can be affordable and fast. However, it’s only a good option for individuals who own little or no property. Chapter 7 offers no ability to repay missed payments, such as mortgage arrears. Chapter 7 also does not have the “super discharge” benefit of a Chapter 13 case. Chapter 7 bankruptcy is for individuals who have fairly uncomplicated financial issues, and simply need to wipe away basic debts. The best example of a person who may benefit from Chapter 7 bankruptcy is an individual who rents their home, does not own their own business, does not owe any back taxes, is up to date on their car payment, and who receives a paycheck that keeps them under the “means test”.
Chapter 13 can also be affordable, but it is not fast, since it generally lasts between 36-60 months. Chapter 13 is a great option for individuals who have not passed the “means test”, and for those individuals who need 3 to 5 years to pay back missed payments or certain types of priority debts like taxes. Chapter 13 is also a good place for individuals to protect exposed equity in their assets with reduced risk of sale of the underlying asset. Also, in some instances, Chapter 13 is a great option for individuals who need the expanded benefits of the “super discharge”, which help individuals get rid of certain debts that would otherwise be non-dischargeable in Chapter 7 or Chapter 11.
Chapter 11 is usually the least affordable option, considering its complexity. Chapter 11 is also not necessarily faster than Chapter 13, although there is more flexibility when proposing a Chapter 11 plan. Chapter 11 is a great option for individuals who have more debt to reorganize than permitted under the Chapter 13 “debt limits”, because the process is similar to the Chapter 13 reorganization process. Chapter 11 also affords individuals with primarily business debt a Chapter 13-like experience if they elect to proceed under Subchapter V. Given the relative complexity of Chapter 11, it’s even more crucial that Chapter 11 debtors retain experienced bankruptcy counsel to represent them in that process.
Discussing Personal Bankruptcy Options with Middlebrooks Shapiro
Having to navigate the world of personal bankruptcy options is difficult enough. Having an experienced attorney to guide your course makes the bankruptcy process faster and easier. Middlebrooks Shapiro specializes in business bankruptcy and personal bankruptcy options. If you are ready for a fresh start, schedule a consultation with one of our dedicated bankruptcy attorneys.